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As filed with the Securities and Exchange Commission on October 15, 1999
Registration Nos. 33-73404
811-8236
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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. 27 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 29 [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
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(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 ____________________ 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
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NORTHERN FUNDS
MONEY MARKET FUNDS
- - Money Market Fund
- - U.S. Government Money Market Fund
- - U.S. Government Select Money Market Fund
- - Tax-Exempt Money Market Fund
- - Municipal Money Market Fund
- - California Municipal Money Market Fund
FIXED INCOME FUNDS
- - U.S. Government Fund
- - Short-Intermediate U.S. Government Fund
- - Intermediate Tax-Exempt Fund
- - California Intermediate Tax-Exempt Fund
- - Florida Intermediate Tax-Exempt Fund
- - Fixed Income Fund
- - Tax-Exempt Fund
- - Arizona Tax-Exempt Fund
- - California Tax-Exempt Fund
- - International Fixed Income Fund
- - High Yield Municipal Fund
- - High Yield Fixed Income Fund
EQUITY FUNDS
- - Income Equity Fund
- - Stock Index Fund
- - Growth Equity Fund
- - Select Equity Fund
- - MarketPower Fund
- - Mid Cap Growth Fund
- - Small Cap Index Fund
- - Small Cap Fund
- - Small Cap Growth Fund
- - International Growth Equity Fund
- - International Select Equity Fund
- - Technology Fund
PROSPECTUS DATED NOVEMBER 30, 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 each of the Money Market Funds seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Money Market Funds.
The California Municipal Money Market, California Intermediate Tax-Exempt,
Florida Intermediate Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt
Funds are not available in certain states. Please call 1-800-595-9111 to
determine the availability in your state.
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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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TABLE OF CONTENTS
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RISK/RETURN SUMMARY INTRODUCTION 6
Information about the objectives, principal - Definitions 6
strategies and risk characteristics of each Fund. - A Word About the Money Market Funds 6
MONEY MARKET FUNDS
- Money Market Fund 8
- U.S. Government Money Market Fund 9
- U.S. Government Select Money Market Fund 10
- Tax-Exempt Money Market Fund 11
- Municipal Money Market Fund 12
- California Municipal Money Market Fund 13
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FIXED INCOME FUNDS
- U.S. Government Fund 14
- Short-Intermediate U.S. Government Fund 15
- Intermediate Tax-Exempt Fund 16
- California Intermediate Tax-Exempt Fund 17
- Florida Intermediate Tax-Exempt Fund 18
- Fixed Income Fund 20
- Tax-Exempt Fund 21
- Arizona Tax-Exempt Fund 22
- California Tax-Exempt Fund 24
- International Fixed Income Fund 25
- High Yield Municipal Fund 26
- High Yield Fixed Income Fund 28
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EQUITY FUNDS
- Income Equity Fund 29
- Stock Index Fund 30
- Growth Equity Fund 31
- Select Equity Fund 32
- MarketPower Fund 32
- Mid Cap Growth Fund 33
- Small Cap Index Fund 34
- Small Cap Fund 35
- Small Cap Growth Fund 36
- International Growth Equity Fund 37
- International Select Equity Fund 38
- Technology Fund 39
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PRINCIPAL INVESTMENT RISKS 40
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FUND PERFORMANCE
- Money Market Fund 44
- U.S. Government Money Market Fund 45
- U.S. Government Select Money Market Fund 46
- Municipal Money Market Fund 47
- California Municipal Money Market Fund 48
- U.S. Government Fund 49
- Intermediate Tax-Exempt Fund 50
- Florida Intermediate Tax-Exempt Fund 51
- Fixed Income Fund 52
- Tax-Exempt Fund 53
- California Tax-Exempt Fund 54
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- International Fixed Income Fund 55
- Income Equity Fund 56
- Stock Index Fund 57
- Growth Equity Fund 58
- Select Equity Fund 59
- Small Cap Fund 60
- International Growth Equity Fund 61
- International Select Equity Fund 62
- Technology Fund 63
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BROAD-BASED SECURITIES INDICES DESCRIPTIONS 64
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FUND FEES AND EXPENSES 65
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MANAGEMENT OF THE FUNDS INVESTMENT ADVISERS 70
Details that apply to the Funds as a group -------------------------------------------------------
ADVISORY FEES 70
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FUND MANAGEMENT 71
- Fixed Income Funds 71
- Equity Funds 72
- Other Fund Management Information 73
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OTHER FUND SERVICES 73
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ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES 73
How to open, maintain and close an account. - Purchasing Shares 73
- Opening an Account 73
- Selling Shares 75
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ACCOUNT POLICIES AND OTHER INFORMATION 77
- Calculating Share Price 77
- Timing of Money Market Fund
Purchase Requests 77
- Timing of Non-Money Market Fund
Purchase Requests 78
- Social Security/Tax Identification
Number 78
- In-Kind Purchases and Redemptions 78
- Miscellaneous Purchase Information 78
- Timing of Redemption and Exchange
Requests 79
- Payment of Money Market Fund
Redemption Proceeds 79
- Payment of Non-Money Market Fund
Redemption Proceeds 79
- Miscellaneous Redemption Information 79
- Exchange Privileges 80
- Telephone Transactions 80
- Making Changes to Your Account
Information 80
- Signature Guarantees 80
- Business Day 80
- Early Closings 80
- Authorized Intermediaries 81
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- Service Organizations 81
- Shareholder Reports 82
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DIVIDENDS AND DISTRIBUTIONS 82
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TAX CONSIDERATIONS 83
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TAX TABLE 84
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YEAR 2000 ISSUES 85
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RISKS, SECURITIES, TECHNIQUES AND FINANCIAL RISKS, SECURITIES AND TECHNIQUES
INFORMATION - Additional Information on Principal
Investment Strategies and Related Risks 86
- Additional Description of Securities and
Common Investment Techniques 91
- Disclaimers 100
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FINANCIAL INFORMATION
- Fund Financial Highlights 103
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FOR MORE INFORMATION ANNUAL/SEMIANNUAL REPORT 115
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STATEMENT OF ADDITIONAL INFORMATION 115
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RISK/RETURN SUMMARY
INTRODUCTION
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.
The descriptions on the following pages may help you choose the fund or funds
that best fit your investment needs. Keep in mind, however, that no fund can
guarantee it will meet its investment objective, and no fund should be relied
upon as a complete investment program.
This Prospectus describes the six money market, twelve fixed income and twelve
equity funds (the "Funds") that make up the Northern Funds family.
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 "Risks,
Securities and Techniques" beginning on page __ of this Prospectus and the
Statement of Additional Information.
DEFINITIONS
CALIFORNIA FUNDS -- California Municipal Money Market Fund, California
Intermediate Tax-Exempt Fund and California Tax-Exempt Fund.
EQUITY FUNDS -- Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select
Equity Fund, MarketPower Fund, Mid Cap Growth Fund, Small Cap Index Fund, Small
Cap Fund, Small Cap Growth Fund, International Growth Equity Fund, International
Select Equity Fund and Technology Fund.
FIXED INCOME FUNDS -- U.S. Government Fund, Short-Intermediate U.S. Government
Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund,
Florida Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund,
Arizona Tax-Exempt Fund, California Tax-Exempt Fund, International Fixed Income
Fund, High Yield Municipal Fund and High Yield Fixed Income Fund.
INTERNATIONAL FUNDS -- International Fixed Income Fund, International Growth
Equity Fund and International Select Equity Fund.
MONEY MARKET FUNDS -- Money Market Fund, U.S. Government Money Market Fund, U.S.
Government Select Money Market Fund, Tax-Exempt Money Market Fund, Municipal
Money Market Fund and California Municipal Money Market Fund.
MUNICIPAL FUNDS -- Municipal Money Market Fund, California Municipal Money
Market Fund and High Yield Municipal Fund.
NON-MONEY MARKET FUNDS -- Fixed Income Funds and Equity Funds.
TAX-EXEMPT FUNDS -- Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund,
California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund,
Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund.
A WORD ABOUT THE MONEY MARKET FUNDS
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share. Consistent with this policy, each of the Money Market Funds:
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RISK/RETURN SUMMARY
- - 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 securities
collateralizing repurchase agreements); and
- - Invests only in U.S. dollar-denominated securities that represent
minimal credit risks.
In addition, each Money Market 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 a Money Market
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 Trustees. After its purchase, a portfolio security may
be assigned a lower rating or cease to be rated. If this occurs, a Fund may
continue to hold the issue if the Investment Adviser believes it is in the best
interest of the Fund and its shareholders. Securities in which the Money Market
Funds 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, each Money Market 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 California Municipal Money
Market Fund may invest up to 25% of its total assets in fewer than 5 issuers,
and the other Funds may invest up to 25% of their 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.
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RISK/RETURN SUMMARY
MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. The Fund seeks its objective by investing in a broad
range of government, bank and commercial obligations that are available in the
money markets, including:
- - U.S. dollar-denominated obligations of U.S. banks with total assets in
excess of $1 billion (including obligations of foreign branches of such
banks);
- - U.S. dollar-denominated obligations of foreign commercial banks where
such banks have total assets in excess of $5 billion;
- - High-quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers;
- - Corporate bonds, notes, paper and other instruments that are of
high-quality;
- - Asset-backed securities;
- - Securities issued or guaranteed as to principal and interest by the
U.S. government or by its agencies or instrumentalities and custodial
receipts with respect thereto;
- - U.S. dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or
instrumentalities;
- - Repurchase agreements relating to the above instruments; and
- - Municipal securities issued or guaranteed by state or local
governmental bodies.
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, credit, prepayment, debt extension, counterparty failure and
guarantor risks. See page __ for these risks and primary investment risks common
to all Funds.
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RISK/RETURN SUMMARY
U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. The Fund seeks its objective by investing in:
- Securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies or instrumentalities;
- Repurchase agreements relating to such securities; and
- Custodial receipts representing interests in U.S. government
securities.
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, prepayment, debt extension, U.S. government securities,
counterparty failure and guarantor risks. See page __ for these risks and
primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
U.S. GOVERNMENT SELECT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. The Fund seeks its objective by investing exclusively in
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities. Under normal market conditions,
the Fund will seek to acquire only those U.S. government securities the interest
upon which is generally exempt from state income taxation. These securities
include obligations issued by the U.S. Treasury and certain U.S. government
agencies and instrumentalities, such as the Federal Home Loan Bank and the
Federal Farm Credit Bank Funding Corp.
When appropriate securities that are exempt from state taxes are unavailable,
the Fund may also invest in non-exempt U.S. government securities and cash
equivalents including money market funds and time deposits with a maturity of
three months or less, and may hold uninvested cash.
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, prepayment, debt extension, U.S. government securities,
counterparty failure and guarantor risks. See page __ for these risks and
primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
TAX-EXEMPT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of income exempt from regular Federal
income tax, to the extent consistent with the preservation of capital, by
investing primarily in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing
primarily in high-quality short-term municipal instruments. The high level of
income sought by the Fund is relative to yields currently available in the
tax-exempt marketplace. 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, variable and floating rate notes and bonds;
- Asset-backed securities;
- 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 ("private activity bonds") 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. For shareholders
subject to AMT, some portion of the Fund's dividends may be subject to Federal
tax to the extent the Fund invests in AMT obligations.
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 held uninvested or invested in AMT obligations and taxable
instruments.
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, credit, prepayment, debt extension, guarantor, concentration and
tax risks. See page __ for these risks and primary investment risks common to
all Funds.
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RISK/RETURN SUMMARY
MUNICIPAL 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 AND RISKS
INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing
primarily in high-quality short-term municipal instruments. These may include:
- Fixed, variable and floating rate notes and bonds;
- Asset-backed securities;
- 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 circumstances, at least 80% of the Fund's annual gross income will
be derived from municipal instruments. Under normal market conditions,
investments in 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 held uninvested or invested in taxable
instruments.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds") the interest on which may be treated as
an item of tax preference to shareholders under the Federal alternative minimum
tax. For shareholders subject to AMT, some portion of the Fund's dividends may
be subject to Federal tax to the extent the Fund invests in AMT obligations.
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, credit, prepayment, debt extension, counterparty failure,
guarantor, concentration and tax risks. See page __ for these risks and primary
investment risks common to all Funds.
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RISK/RETURN SUMMARY
CALIFORNIA MUNICIPAL 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 and California state personal income tax.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing
primarily in high-quality short-term instruments, the interest on which is
exempt from regular Federal income tax and California state personal income tax.
These may include:
- Fixed, variable and floating rate notes and bonds;
- Asset-backed securities;
- 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 circumstances, at least 80% of the Fund's annual gross income will
be derived from municipal instruments and at least 65% of the Fund's total
assets will be invested in instruments the interest on which is exempt from
California state personal income tax ("California municipal instruments"). Under
normal market conditions, investments in 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 held uninvested
or invested in taxable instruments.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds") the interest on which may be treated as
an item of tax preference to shareholders under the Federal alternative minimum
tax. For shareholders subject to AMT, some portion of the Fund's dividends may
be subject to Federal tax to the extent the Fund invests in AMT obligations.
The Fund is "non-diversified" under the Investment Company Act of 1940, as
amended (the "1940 Act").
RISKS. These primary investment risks apply to the Fund: stable NAV, interest
rate/maturity, credit, prepayment, debt extension, counterparty failure,
guarantor, concentration and tax and non-diversification risks. See page __ for
these risks and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
U.S. GOVERNMENT FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking a high level of current income, the Fund will
invest, under normal market conditions, at least 65% of its total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements relating to such securities. These
may include:
- U.S. Treasury bills, notes and bonds;
- Obligations of U.S. government agencies and instrumentalities;
- Mortgage-related securities issued or guaranteed by U.S.
government agencies and instrumentalities;
- Stripped securities evidencing ownership of future interest or
principal payments on obligations of the U.S. government, its
agencies or instrumentalities; and
- Repurchase agreements relating to the above instruments.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between one and ten years.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
prepayment, debt extension, U.S. government securities, counterparty failure,
guarantor, derivatives and portfolio turnover risks and portfolio turnover. See
page __ for these risks and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income, the Fund will invest,
under normal market conditions, at least 65% of its total assets in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and repurchase agreements relating to such securities. These may include:
- U.S. Treasury bills, notes and bonds;
- Obligations of U.S. government agencies and instrumentalities;
- Mortgage-related securities issued or guaranteed by U.S.
government agencies and instrumentalities;
- Stripped securities evidencing ownership of future interest or
principal payments on obligations of the U.S. government, its
agencies or instrumentalities; and
- Repurchase agreements relating to the above instruments.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between two and five years.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
prepayment, debt extension, U.S. government securities, counterparty failure,
guarantor and derivatives risks. See page __ for these risks and primary
investment risks common to all Funds.
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RISK/RETURN SUMMARY
INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from regular
Federal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax, the Fund may invest in a broad range of municipal
instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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 purpose of determining whether the Fund meets this policy.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations.
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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration and tax risks. See page __ for these risks and
primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and California state personal income tax by investing in municipal
instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax and California state personal income tax, the Fund may invest
in a broad range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations. In
addition, under normal market conditions at least 65% of the Fund's total assets
will be invested in California municipal instruments.
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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years. The Fund is "non-diversified"
under the 1940 Act.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration, tax and non-diversification risks. See page __ for
these risks and primary investment risks common to all Funds.
Page 17
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RISK/RETURN SUMMARY
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax, the Fund may invest in a broad range of municipal
instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations. In
addition, under normal market conditions, at least 65% of the Fund's total
assets will be invested in municipal instruments issued by the state of Florida
and its municipalities, counties and other taxing districts, as well as other
securities exempt from the Florida intangibles tax ("Florida municipal
instruments").
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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years. The Fund is "non-diversified"
under the 1940 Act.
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RISK/RETURN SUMMARY
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration, tax and non-diversification risks. See page __ for
these risks and primary investment risks common to all Funds.
Page 19
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RISK/RETURN SUMMARY
FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income, the Fund will invest,
under normal market conditions, in a broad range of bonds and other fixed income
securities. These may include:
- Obligations of the U.S. government, its agencies or
instrumentalities;
- Obligations of state, local and foreign governments;
- Obligations of domestic and foreign banks and corporations;
- Zero coupon bonds, debentures, convertible debentures and
preferred stock;
- Mortgage and other asset-backed securities;
- Stripped securities evidencing ownership of future interest or
principal payments on debt obligations; and
- Repurchase agreements relating to the above instruments.
Although the Fund invests primarily in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization or of comparable quality
as determined by Northern Trust), it may invest to a limited extent in
obligations of foreign issuers and in securities that are below investment grade
("junk bonds").
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between seven and twelve years.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor and
derivatives risks. See page __ for these risks and primary investment risks
common to all Funds.
Page 20
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RISK/RETURN SUMMARY
TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from regular
Federal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax, the Fund may invest in a broad range of municipal
instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations.
Under normal market conditions, investment 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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration, tax and portfolio turnover risks. See page __ for
these risks and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
ARIZONA TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and Arizona state personal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax and Arizona state personal income tax, the Fund may invest,
under normal market conditions, at least 80% of its total assets in a broad
range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations. In
addition, under normal market conditions, at least 65% of the Fund's total
assets will be invested in instruments the interest on which is exempt from
Arizona state personal income tax ("Arizona municipal instruments").
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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years. The Fund is "non-diversified"
under the 1940 Act.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration, tax and non-diversification risks. See page __ for
these risks and primary investment risks common to all Funds.
Page 22
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RISK/RETURN SUMMARY
CALIFORNIA TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and California state personal income tax.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax and California state personal income tax, the Fund may invest
in a broad range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies, and other financial
institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds") 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.
For shareholders subject to AMT, some portion of the Fund's dividends may be
subject to Federal tax to the extent the Fund invests in AMT obligations. In
addition, under normal market conditions, at least 65% of the Fund's total
assets will be invested in California municipal instruments.
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 held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years. The Fund is "non-diversified"
under the 1940 Act.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, concentration, tax and non-diversification risks. See page __ for
these risks and primary investment risks common to all Funds.
Page 23
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RISK/RETURN SUMMARY
INTERNATIONAL FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking to maximize total return, the Fund will
invest, under normal market conditions, at least 65% of its total assets in
bonds and other fixed income securities of foreign issuers.
These may include:
- Obligations of foreign governments, their agencies or
instrumentalities;
- Obligations of supranational organizations (such as the World
Bank);
- Obligations of foreign corporations and banks;
- Zero coupon bonds, debentures, convertible debentures and
preferred stock of foreign issuers; and
- Mortgage and other asset-backed securities of foreign issuers.
The Fund will invest in the securities of issuers located in at least three
different foreign countries. Although the Fund primarily invests in mature
markets (such as Germany and Japan), it may also invest in emerging markets
(such as Argentina and China) depending upon the Fund management team's outlook
for the relative economic growth, expected inflation and other economic and
political prospects of each country or region. It is expected that during the
current fiscal year a substantial portion of the Fund's assets will be invested
in foreign governmental obligations because such obligations represent a
substantial portion of the non-U.S. fixed income market.
The Fund may also invest a portion of its assets in domestic obligations,
including obligations of the U.S. government, its agencies and instrumentalities
and repurchase agreements collateralized by such obligations. It may also invest
in the obligations of domestic banks and corporations, zero coupon bonds,
debentures and convertible debentures, and mortgage and other asset-backed
securities.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and eleven years. The Fund is "non-diversified"
under the 1940 Act.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
credit, prepayment, debt extension, counterparty failure, guarantor,
derivatives, non-diversification, currency, country, foreign regulatory and
concentration risks. See page __ for these risks and primary investment risks
common to all Funds.
Page 24
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RISK/RETURN SUMMARY
HIGH YIELD MUNICIPAL FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income exempt from regular Federal income
tax.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking high current income exempt from regular
Federal income tax, the Fund will invest, under normal market conditions, at
least 65% of its total assets in municipal securities that are of low, medium or
upper medium quality. These may include:
- General obligation bonds secured by the issuer's full faith,
credit and taxing power;
- Revenue obligation bonds payable from the revenues derived
from a particular facility or class of facilities;
- Industrial development bonds;
- Moral obligation bonds;
- Tax-exempt derivative instruments;
- Stand-by commitments; and
- Municipal instruments backed by letters of credit, insurance
or other forms of credit enhancement issued by domestic or
foreign banks, insurance companies and other financial
companies.
Upper medium quality securities are rated A by a Nationally Recognized
Statistical Rating Organization, and medium quality securities are rated BBB or
Baa by a Nationally Recognized Statistical Rating Organization. Lower quality
securities, also commonly referred to as "junk bonds," are rated BB, Ba or lower
by a Nationally Recognized Statistical Rating Organization. Unrated securities
will be of comparable quality.
Lower quality securities tend to offer higher yields than higher rated
securities with similar maturities. However, lower rated securities are
considered speculative and generally involve greater price volatility and
greater risk of loss than higher rated securities. Medium quality securities,
although considered investment grade, are also considered to have speculative
characteristics. There is no minimum rating for a municipal instrument purchased
or held by the Fund, and the Fund may purchase securities that are in default.
Although the Fund primarily invests in low, medium or upper medium quality
securities, it may invest a portion (or, during temporary defensive periods,
all) of its assets in securities of higher quality.
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from municipal securities. Under normal market conditions,
investments in 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 a Fund's assets may be held uninvested or invested in such
instruments. Taxable investments will consist exclusively of those instruments
that may be purchased by the High Yield Fixed Income Fund.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds") the interest on which may be treated as
an item of tax preference to shareholders under the Federal alternative minimum
tax. For shareholders subject to AMT, some portion of the Fund's dividends may
be subject to Federal tax to the extent the Fund invests in AMT obligations.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
Page 25
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RISK/RETURN SUMMARY
The Fund does not have any portfolio maturity limitation, and may invest its
assets from time to time primarily in instruments with short, medium or long
maturities. The instruments held by the Fund are considered speculative, and an
investment in the Fund presents substantial risks in relation to a fund that
invests only in grade instruments.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
prepayment, debt extension, counterparty failure, guarantor, derivatives,
non-investment grade and portfolio turnover risks. See page __ for these risks
and primary investment risks common to all Funds.
Page 26
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RISK/RETURN SUMMARY
HIGH YIELD FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income. In doing so, the Fund may also
consider the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund
will invest, under normal market conditions, at least 65% of its total assets in
rated and unrated lower quality securities. These may include:
- Obligations of U.S. and foreign corporations and banks;
- Obligations of foreign, state and local governments;
- Obligations of the U.S. government, its agencies or
instrumentalities;
- Senior and subordinated bonds and debentures;
- Mortgage and other asset-related securities;
- Zero coupon, pay-in-kind and capital appreciation bonds;
- Convertible securities, preferred stock, structured securities
and loan participations;
- Equity securities when the Fund holds debt or preferred stock
of the issuer; and
- Repurchase agreements relating to the above instruments.
Lower quality securities, also commonly referred to as "junk bonds," are rated
BB, Ba or lower by a Nationally Recognized Statistical Rating Organization.
Unrated securities will be determined to be of comparable quality by Northern
Trust.
Lower rated securities tend to offer higher yields than higher rated securities
with similar maturities. However, lower rated securities are considered
speculative and generally involve greater price volatility and greater risk of
loss than higher rated securities. There is no minimum rating for a security
purchased or held by the Fund, and the Fund may purchase securities that are in
default. Although the Fund invests primarily in lower quality fixed income
securities, it may invest a portion (or, during temporary defensive periods,
all) of its assets in securities of higher quality.
Although the Fund invests primarily in the debt obligations of domestic issuers,
it may invest to a limited extent in the obligations of foreign issuers.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund does not have any portfolio maturity limitation, and may invest its
assets from time to time primarily in instruments with short, medium or long
maturities. The instruments held by the Fund are considered speculative, and an
investment in the Fund presents substantial risks in relation to a fund that
invests only in investment grade instruments.
RISKS. These primary investment risks apply to the Fund: interest rate/maturity,
prepayment, debt extension, counterparty failure, guarantor, derivatives,
non-investment grade and portfolio turnover risks. See page __ for these risks
and primary investment risks common to all Funds.
Page 27
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RISK/RETURN SUMMARY
INCOME EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income with long-term capital
appreciation as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund
will, under normal market conditions, invest at least 65% of its total assets in
a mix of income-producing equity securities, including common and preferred
stocks and convertible securities.
Using fundamental research and quantitative analysis, the investment management
team selects securities based on factors such as:
- Current income;
- Prospects for growth; and
- Capital appreciation potential.
The Fund may also invest up to 35% of its total assets in a broad range of fixed
income securities that are permissible investments for the Fixed Income Fund.
Although the convertible securities and fixed income securities in which the
Fund may invest will generally be investment grade domestic securities (i.e.,
rated within the top four rating categories by a Nationally Recognized
Statistical Rating Organization or of comparable quality as determined by
Northern Trust), the Fund may invest up to 35% of its total assets in
convertible and fixed income securities that are below investment grade ("junk
bonds") and may invest to a limited extent in the securities of foreign issuers.
RISKS. This primary investment risk applies to the Fund: stock. See page __ for
this risk and primary investment risks common to all Funds.
Page 28
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RISK/RETURN SUMMARY
STOCK INDEX FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide investment results approximating the aggregate price
and dividend performance of the securities included in the Standard & Poor's
("S&P") 500 Composite Stock Price Index ("S&P 500(R) Index").
The S&P 500(R) Index is an unmanaged index which includes 500 companies
operating across a broad spectrum of the U.S. economy, and its performance is
widely considered representative of the U.S. stock market as a whole.
The companies chosen for inclusion in the Index tend to be leaders in important
industries within the U.S. economy. However, companies are not selected by S&P
for inclusion because they are expected to have superior stock price performance
relative to the market in general or other stocks in particular.
S&P does not endorse any stock in the Index. It is not a sponsor of the Stock
Index Fund and is not affiliated with the Fund in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. Under normal market conditions, the Fund will invest at
least 65% of its total assets in the equity securities of the companies that
make up the S&P 500(R) Index, in approximately the same proportions as they are
represented in the Index.
The Fund is passively managed, which means it tries to duplicate the investment
composition and performance of the S&P 500(R) Index using sophisticated computer
programs and statistical procedures. As a result, the investment management team
does not use traditional methods of fund investment management for this Fund,
such as selecting securities on the basis of economic, financial and market
analysis. Because the Fund will have fees and transaction expenses (while the
Index has none), returns are likely to be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Fund will be within a .95 correlation with the S&P 500(R) Index, before
expenses.
RISKS. This primary investment risk applies to the Fund: stock. See page __ for
this risk and primary investment risks common to all Funds.
Page 29
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RISK/RETURN SUMMARY
GROWTH EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
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 a broad mix of companies. Such companies generally will
have market capitalizations in excess of $750 million. Although the Fund
primarily invests in the common, preferred and convertible stocks of U.S.
companies, it may invest to a limited extent in the stocks of foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team selects stocks believed to have favorable growth characteristics. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
- Sales and earnings growth;
- Return on equity;
- Financial condition (such as debt to equity ratio); and
- Market share and product leadership.
RISKS. This primary investment risk applies to the Fund: stock. See page __ for
this risk and primary investment risks common to all Funds.
Page 30
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RISK/RETURN SUMMARY
SELECT EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
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 a select mix of companies. Such companies generally will
have market capitalizations in excess of $750 million. Although the Fund
primarily invests in the common, preferred and convertible stocks of U.S.
companies, it may invest to a limited extent in the securities of foreign
issuers.
Using fundamental research and quantitative analysis, the investment management
team selects stocks believed to have favorable growth characteristics. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
- Sales and earnings growth;
- Return on equity; and
- Financial condition (such as debt to equity ratio).
The Fund may from time to time, emphasize particular companies or market
segments in attempting to achieve its investment objective. Many of the
companies in which the Fund invests retain their earnings to finance current and
future growth. These companies generally pay little or no dividends.
RISKS. This primary investment risk applies to the Fund: stock. See page __ for
this risk and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
MARKETPOWER FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will,
under normal market conditions, invest primarily in the equity securities of a
concentrated group of companies believed to have significant "market power,"
that is, companies possessing dominant market share and other characteristics,
including patents, strong brand names and economies of scale, which allow these
companies to protect that share. The Fund will normally concentrate its
investments in the equity securities of 20 to 40 such companies with market
capitalization in excess of $300 million.
Using fundamental research and quantitative analysis, the investment management
team first screens a broad universe of companies in order to identify a group of
firms with "market power" characteristics. From this group, the management team
then employs further analysis to select a narrower group of companies expected
to achieve superior returns but whose stock is deemed to be undervalued relative
to the market. Once a company's stock is selected for inclusion, the investment
management team monitors its continued appropriateness for the Fund. The
management team might decide to sell, for example, in the event of a strategic
shift by a company from its core earnings strength, the erosion of a firm's
market power, the identification of a more attractive investment opportunity, or
the determination that a firm's full valuation has been achieved.
Although the Fund invests primarily in the securities of U.S. companies, it may
invest to a limited extent in the stocks of foreign issuers. The Fund is
"non-diversified" under the 1940 Act.
RISKS. These primary investment risks apply to the Fund: stock and
non-diversification. See page __ for these risks and primary investment risks
common to all Funds.
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RISK/RETURN SUMMARY
MID 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 AND RISKS
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, at the time of
purchase, that are within the range of the Standard & Poor's MidCap 400 Stock
Index.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of mid-sized companies that it believes have demonstrated
above average sales, 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 (such as debt to equity ratio);
- Market share and product leadership;
- Earnings growth relative to relevant competitors;
- Market valuation in comparison to securities of other mid cap
companies and the stock's own historical norms; and
- Price trends.
As of __________, 1999, the approximate market capitalization range of the
companies included in the S&P MidCap 400 Index was between $____ million and
$____ billion. However, the Fund is not limited to the stocks included in the
S&P MidCap 400 Index and may invest in other stocks that meet the Investment
Adviser's criteria discussed above.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
S&P does not endorse any stock in the Index. It is not a sponsor of the Mid Cap
Growth Fund and is not affiliated with the Fund in any way.
RISKS. These primary investment risks apply to the Fund: stock, mid cap stock
and portfolio turnover risks. See page __ for these risks and primary investment
risks common to all Funds.
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RISK/RETURN SUMMARY
SMALL CAP INDEX FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide investment results approximating the aggregate price
and dividend performance of the securities included in the Russell 2000 Index.
The Russell 2000 Index is a market value-weighted index which includes stocks of
the smallest 2,000 companies in the Russell 3000 Index. The Russell 3000 Index
consists of stocks of the 3,000 largest U.S. companies based on market
capitalization. The Russell 2000 Index is widely considered representative of
smaller company stock performance as a whole. The companies in the Russell 2000
Index are selected according to their total market capitalization. However,
companies are not selected by Frank Russell & Company ("Russell") for inclusion
in the Index because they are expected to have superior stock price performance
relative to the stock market in general or other stocks in particular.
Russell does not endorse any stock in the Index. It is not a sponsor of the
Small Cap Index Fund and is not affiliated with the Fund in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. Under normal market conditions, the Fund will invest at
least 65% of its total assets in the securities included in the Russell 2000
Index. These will be selected on the basis of such factors as market
capitalization and liquidity.
Although the Fund attempts to mirror the aggregate investment characteristics of
the Russell 2000 Index as a whole, the number of issues held by the Fund will be
determined by the Fund's liquidity and size.
The Fund is passively managed, which means it tries to duplicate the investment
composition and performance of the Russell 2000 Index by using sophisticated
computer programs and statistical procedures. As a result, the investment
management team does not use traditional methods of fund investment management
for the Fund, such as selecting securities on the basis of economic, financial
and market analysis. Because the Fund will have fees and transaction expenses
(while the Index has none), returns are likely to be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Fund will be within a .95 correlation with the Russell 2000 Index, before
expenses.
RISKS. These primary investment risks apply to the Fund: stock and small cap
stock risks. See page __ for these risks and primary investment risks common to
all Funds.
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RISK/RETURN SUMMARY
SMALL CAP FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
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 small companies. At the time of purchase, these companies
will have market capitalizations that are at or below the median capitalization
of stocks listed on the New York Stock Exchange.
Using fundamental research and quantitative analysis, the investment management
team selects small capitalization stocks of companies which it believes are
worth more than is indicated by current market prices. In determining whether a
stock is attractively priced, the investment management team analyzes factors
such as:
- The relationship between price, book value, earnings and
sales;
- Trading volume; and
- Bid-ask spreads.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
RISKS. These primary investment risks apply to the Fund: stock and small cap
stock risks. See page __ for these risks and primary investment risks common to
all Funds.
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RISK/RETURN SUMMARY
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 AND RISKS
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 Index.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of small companies that it believes have demonstrated above
average sales, 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 (such as debt to equity ratio);
- Market share and product leadership;
- Earnings growth relative to relevant competitors;
- Market valuation in comparison to securities of other small
cap companies and the stock's own historical norms; and
- Price trends.
As of __________, 1999, the approximate market capitalization range of the
companies included in the Russell 2000 Index was between $____ million and $____
billion. However, the Fund is not limited to the stocks included in the Russell
2000 Index and may invest in other stocks that meet the Investment Adviser's
criteria discussed above.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest to a limited extent 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.
RISKS. These primary investment risks apply to the Fund: stock, small cap stock
and portfolio turnover risks. See page __ for these risks and primary investment
risks common to all Funds.
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RISK/RETURN SUMMARY
INTERNATIONAL GROWTH EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
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 a broad mix of foreign companies. Such companies generally
will have market capitalizations in excess of $750 million.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of foreign companies believed to have favorable growth
characteristics, low debt ratios and above-average returns and equity. In doing
so, the investment management team analyzes factors such as:
- Sales and earnings growth;
- Return on equity;
- Financial condition (such as debt to equity ratio); and
- Market share and product leadership.
The Fund will invest in equity securities of issuers located in at least three
different foreign countries. The Fund may invest in mature markets (such as
Germany and Japan) and it may also invest in emerging markets (such as Argentina
and China). In determining whether to invest in a particular country or region,
the investment management team looks at a number of factors, including a
country's (or region's):
- Prospects for growth;
- Expected level of inflation;
- Government policies influencing business conditions;
- Outlook for currency relationships; and
- Range of investment opportunities available to international
investors.
RISKS. These primary investment risks apply to the Fund: stock, currency,
country, foreign regulatory, concentration and portfolio turnover risks. See
page __ for these risks and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
INTERNATIONAL SELECT EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
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 a select mix of foreign companies. Such companies generally
will have market capitalizations in excess of $750 million.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of foreign companies believed to have favorable growth
characteristics. In doing so, the investment management team analyzes factors
such as:
- Sales and earnings growth;
- Return on equity;
- Financial condition (such as debt to equity ratio); and Market
share and product leadership.
The Fund will invest in equity securities of issuers located in at least three
different foreign countries. The Fund may invest in mature markets (such as
Germany and Japan) and it may also invest in emerging markets (such as Argentina
and China). In determining whether to invest in a particular country or region,
the investment management team looks at a number of factors, including a
country's (or region's):
- Prospects for economic growth;
- Expected level of inflation;
- Government policies influencing business conditions;
- Outlook for currency relationships; and
- Range of investment opportunities available to international
investors.
The Fund may, from time to time, emphasize particular companies or market
segments in attempting to achieve its investment objective. Many of the
companies in which the Fund invests retain their earnings to finance current and
future growth. These companies pay little or no dividends.
RISKS. These primary investment risks apply to the Fund: stock, currency,
country, foreign regulatory, concentration and portfolio turnover risks. See
page __ for these risks and primary investment risks common to all Funds.
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RISK/RETURN SUMMARY
TECHNOLOGY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation by investing
principally in equity securities and securities of companies that develop,
produce or distribute products and services related to technology.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund
will invest, under normal market conditions, at least 65% of its total assets in
securities of companies principally engaged in technology business activities.
In considering whether an issuer is principally engaged in technology business
activities, Northern Trust may consider, among other things, whether it is
listed on the Morgan Stanley High-Technology 35 Index (the "Morgan Stanley
Index"), the Hambrecht and Quist Technology Index (the "H&Q Index"), the
SoundView Technology Index (the "SoundView Index"), the technology grouping of
the S&P 500(R) Index or any other comparable technology index.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of technology companies believed to have the potential to
outperform the technology sector over the next one- to two-year period. In doing
so, the investment management team selects investments based on factors such as:
- Financial condition (such as debt to equity ratio);
- Market share;
- Product leadership or market niches;
- Earnings growth rates compared with relevant competitors;
- Market valuation compared to securities of other
technology-related companies and the stock's own historical
norms; and
- Price trends.
Companies in which the Fund may invest include businesses related to the
following products and services: industrial and business machines;
communications; computers, software and peripheral products; electronics;
electronic media; environmental services; internet; office equipment and
supplies; television and video equipment and services; and satellite technology
and equipment. It is expected that more than 25% of the Fund's total assets will
normally be invested in technology companies which develop or sell computers,
software and peripheral products. The Fund may invest in both small and large
technology companies, without regard to their size.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
RISKS. These primary investment risks apply to the Fund: stock, small cap stock
and technology stock risks. See page __ for these risks and primary investment
risks common to all Funds.
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RISK/RETURN SUMMARY
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 EACH OF THE FUNDS 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 MONEY MARKET FUNDS SEEK TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUNDS.
The following summarizes the principal risks that apply to the Funds and may
result in a loss of your investment.
RISKS THAT APPLY TO ALL 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 __.)
RISK THAT APPLIES TO THE MONEY MARKET FUNDS
- - STABLE NAV RISK is the risk that the Money Market Funds will not be
able to maintain a net asset value per share of $1.00 at all times.
RISKS THAT APPLY PRIMARILY TO THE MONEY MARKET AND FIXED INCOME FUNDS
- - INTEREST RATE/MATURITY RISK is the risk that during periods of rising
interest rates, a 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, a Fund's yield (and the market value of its
securities) will tend to be higher. The magnitude of these changes will
often be greater for longer-term fixed income securities (which are
more likely to be held by the Fixed Income Funds) than shorter-term
securities.
- - CREDIT (OR DEFAULT) RISK is the risk that an issuer of fixed income
securities held by a Fund may default on its obligation to pay interest
and repay principal. Generally, the lower the credit rating of a
security, the greater the risk that the issuer of the security will
default on its obligation. High quality and investment grade securities
are generally believed to have relatively low degrees 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 a Fund (such as an
asset-backed security) earlier than expected. This may happen during a
period of declining interest rates. Under these circumstances, a Fund
may be unable to recoup all of its initial investment and will suffer
from having to reinvest in lower yielding securities. The loss of
higher yielding securities and the reinvestment at lower interest rates
can reduce the Fund's income, total return and share price.
- - DEBT EXTENSION RISK is the risk that an issuer will exercise its right
to pay principal on an obligation held by a Fund (such as an
asset-backed security) later than expected. This may happen during a
period of rising interest
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RISK/RETURN SUMMARY
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.
- - U.S. GOVERNMENT SECURITIES RISK is the risk that the U.S. government
will not provide financial support to U.S. government agencies,
instrumentalities or sponsored enterprises if it is not obligated to do
so by law.
- - COUNTERPARTY FAILURE RISK is the risk that an issuer of a security, or
a bank or other financial institution that has entered into a
repurchase agreement, may default on its payment obligations.
- - GUARANTOR (OR 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 a Fund's investments in securities
backed by guarantees, letters of credit, insurance or other credit
enhancements issued by such bank or institution to decline in value.
RISK THAT APPLIES PRIMARILY TO THE FIXED INCOME FUNDS
- - DERIVATIVES RISK is the risk that loss may result from a Fund's
investments in options, futures, swaps, structured securities and other
derivative instruments, which may be leveraged.
RISKS THAT APPLY PRIMARILY TO THE TAX-EXEMPT AND MUNICIPAL FUNDS
- - CONCENTRATION RISK is the risk that a 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 a Fund to pay
tax-exempt dividends.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL FIXED INCOME FUND, THE
CALIFORNIA FUNDS, THE FLORIDA INTERMEDIATE TAX-EXEMPT FUND, THE ARIZONA
TAX-EXEMPT FUND AND THE MARKETPOWER FUND
- - NON-DIVERSIFICATION RISK is the risk that a non-diversified Fund may be
more susceptible to adverse developments affecting any single issuer,
and more susceptible to greater losses because of these developments.
RISK THAT APPLIES PRIMARILY TO THE HIGH YIELD MUNICIPAL AND HIGH YIELD FIXED
INCOME FUNDS
- - NON-INVESTMENT GRADE (OR "JUNK BOND") RISK may impact the value of
non-investment grade securities held by a Fund. Generally, these
securities, commonly known as "junk bonds," are subject to greater
credit risk, price volatility and risk of loss than investment grade
securities. In addition, there may be less of a market for them, which
could make it harder to sell them at an acceptable price. These and
related risks mean that a Fund may not achieve the expected income from
non-investment grade securities and that its share price may be
adversely affected by declines in the value of these securities.
RISK THAT APPLIES PRIMARILY TO THE EQUITY FUNDS
- - 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.
RISK THAT APPLIES PRIMARILY TO THE SMALL CAP INDEX, SMALL CAP, SMALL CAP GROWTH
AND TECHNOLOGY FUNDS
- - 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
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RISK/RETURN SUMMARY
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.
RISK THAT APPLIES PRIMARILY TO THE MID CAP GROWTH FUND
- - MID CAP STOCK RISK is the risk that stocks of mid-sized companies may
be subject to more abrupt or erratic market movements than stocks of
larger, more established companies. Mid-sized companies may have
limited product lines or financial resources, and may be dependent upon
a particular niche of the market.
RISK THAT APPLIES PRIMARILY TO THE TECHNOLOGY FUND
- - TECHNOLOGY STOCK RISK is the risk that stocks of technology companies
may be subject to greater price volatility than stocks of companies in
other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Technology
securities may experience significant price movements caused by
disproportionate investor optimism or pessimism.
RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL FUNDS
While foreign securities may offer special investment opportunities, they also
involve special risks not typically associated with investments in U.S.
companies or issuers. These risks normally will be greatest when a Fund invests
in emerging markets. These risks include:
- - CURRENCY RISK is the potential for price fluctuations in the dollar
value of foreign securities because of changing currency exchange
rates.
- - COUNTRY RISK is the potential for price fluctuations in foreign
securities because of political, financial and economic events in
foreign countries.
- - FOREIGN REGULATORY RISK is the risk that a foreign security could lose
value because of less stringent foreign securities regulations and
accounting and disclosure standards.
- - CONCENTRATION RISK is the risk that investment of more than 25% of a
Fund's total assets in securities of issuers located in one country
will subject the Fund to increased country risk with respect to the
particular country.
OTHER RISKS
- - PORTFOLIO TURNOVER RISK is the risk that high portfolio turnover is
likely to result in increased Fund expenses and higher short-term
capital gains taxable to shareholders. For the last fiscal year, the
annual portfolio turnover rates of the U.S. Government Fund, Tax-Exempt
Fund, Mid Cap Growth Fund, International Growth Equity Fund and
International Select Equity Fund exceeded 100%. It is expected that the
annual portfolio turnover rates of the High Yield Municipal Fund, High
Yield Fixed-Income Fund and Small Cap Growth Fund may also exceed 100%.
More information about the risks of investing in the Funds is provided in
"Risks, Securities and Techniques" beginning on page __ of this Prospectus. You
should carefully consider the risks discussed in this section and "Risks,
Securities and Techniques" before investing in a Fund.
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RISK/RETURN SUMMARY
FUND PERFORMANCE
The bar charts and tables below provide an indication of the risks of investing
in a Fund by showing: (a) changes in the performance of a Fund from year to
year; and (b) how the average annual returns of a Fund compare to those of a
broad-based securities market index. For a description of each broad-based
securities market index please see page __.
The bar charts and tables assume reinvestment of dividends and distributions. A
Fund's past performance is not necessarily an indication of how the Fund will
perform in the future. Performance reflects expense limitations that were in
effect during the periods presented. If expense limitations were not in place, a
Fund's performance would have been reduced. The Mid Cap Growth, High Yield
Municipal, High Yield Fixed Income and Small Cap Index Funds commenced
operations on March 31, 1998, December 31, 1998, December 31, 1998 and September
3, 1999, respectively. The Short-Intermediate U.S. Government, California
Intermediate Tax-Exempt, Arizona Tax-Exempt and Small Cap Growth Funds commenced
operations on October 1, 1999. The Tax-Exempt Money Market and MarketPower Funds
had not commenced operations as of the date of this Prospectus. The bar chart
and performance table have been omitted for these Funds because the Funds have
been in operation for less than one calendar year.
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RISK/RETURN SUMMARY
MONEY MARKET FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 5.71%
1996: 5.08%
1997: 5.25%
1998: 5.19%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 `95 1.44%
Worst Quarter Return: Q2 `96 1.22%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
MONEY MARKET FUND (Inception 4/11/94) 5.19% 5.15%
</TABLE>
The 7-day yield for the Fund as of December 31, 1998: 4.81%. You may call
1-800-595-9111 to obtain the current 7-day yield.
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RISK/RETURN SUMMARY
U.S. GOVERNMENT MONEY MARKET FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 5.62%
1996: 4.96%
1997: 5.14%
1998: 5.11%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 `95 1.42%
Worst Quarter Return: Q4 `98 1.18%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
U.S. GOVERNMENT MONEY
MARKET FUND (Inception 4/11/94) 5.11% 5.05%
</TABLE>
The 7-day yield for the Fund as of December 31, 1998: 4.56%. You may call
1-800-595-9111 to obtain the current 7-day yield.
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RISK/RETURN SUMMARY
U.S. GOVERNMENT SELECT MONEY MARKET FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 5.75%
1996: 5.09%
1997: 5.21%
1998: 5.03%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 `95 1.45%
Worst Quarter Return: Q4 `98 1.17%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
U.S. GOVERNMENT SELECT MONEY MARKET FUND
(Inception 12/12/94) 5.03% 5.27%
</TABLE>
The 7-day yield for the Fund as of December 31, 1998: 4.50%. You may call
1-800-595-9111 to obtain the current 7-day yield.
Page 46
<PAGE> 48
RISK/RETURN SUMMARY
MUNICIPAL MONEY MARKET FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 3.64%
1996: 3.18%
1997: 3.27%
1998: 3.09%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 `95 0.95%
Worst Quarter Return: Q1 `98 0.73%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
MUNICIPAL MONEY MARKET FUND (Inception 4/11/94) 3.09% 3.21%
</TABLE>
The 7-day yield for the Fund as of December 31, 1998: 3.21%. You may call
1-800-595-9111 to obtain the current 7-day yield.
Page 47
<PAGE> 49
RISK/RETURN SUMMARY
CALIFORNIA MUNICIPAL MONEY MARKET FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 3.77%
1996: 3.20%
1997: 3.28%
1998: 2.85%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 `95 0.98%
Worst Quarter Return: Q3 `98 0.68%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
CALIFORNIA MUNICIPAL MONEY MARKET FUND
(Inception 11/29/94) 2.85% 3.29%
</TABLE>
The 7-day yield for the Fund as of December 31, 1998: 2.98%. You may call
1-800-595-9111 to obtain the current 7-day yield.
Page 48
<PAGE> 50
RISK/RETURN SUMMARY
U.S. GOVERNMENT FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 12.59%
1996: 3.05%
1997: 7.24%
1998: 7.53%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q3 '98 4.46%
Worst Quarter Return: Q1 '96 (1.07)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
U.S. GOVERNMENT FUND (Inception 4/1/94) 7.53% 6.32%
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX 8.49% 7.22%
</TABLE>
Page 49
<PAGE> 51
RISK/RETURN SUMMARY
INTERMEDIATE TAX-EXEMPT FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 11.91%
1996: 3.36%
1997: 5.84%
1998: 5.15%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q1 '95 4.51%
Worst Quarter Return: Q1 '96 (0.25)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERMEDIATE TAX-EXEMPT FUND (Inception 4/1/94) 5.15% 5.43%
LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX 5.84% 6.20%
</TABLE>
Page 50
<PAGE> 52
RISK/RETURN SUMMARY
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1997: 7.64%
1998: 5.68%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q3 '98 3.22%
Worst Quarter Return: Q1 '97 (0.12)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
(Inception 8/15/96) 5.68% 6.78%
LEHMAN BROTHERS MUTUAL FUND FLORIDA INTERMEDIATE
TAX-EXEMPT INDEX 6.44% 6.67%
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE
MUNICIPAL INDEX 6.30% 6.97%
</TABLE>
Page 51
<PAGE> 53
RISK/RETURN SUMMARY
FIXED INCOME FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 18.80%
1996: 2.61%
1997: 9.24%
1998: 8.00%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q2 '95 6.62%
Worst Quarter Return: Q1 '96 (2.85)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
FIXED INCOME FUND (Inception 4/1/94) 8.00% 8.02%
LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX 9.47% 8.42%
</TABLE>
Page 52
<PAGE> 54
RISK/RETURN SUMMARY
TAX-EXEMPT FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 17.37%
1996: 2.83%
1997: 8.71%
1998: 5.84%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q1 '95 6.59%
Worst Quarter Return: Q1 '96 (2.11)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
TAX-EXEMPT FUND (Inception 4/1/94) 5.84% 6.98%
LEHMAN BROTHERS MUNICIPAL BOND INDEX 6.48% 7.84%
</TABLE>
Page 53
<PAGE> 55
RISK/RETURN SUMMARY
CALIFORNIA TAX-EXEMPT FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1998: 6.42%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q3 '98 4.40%
Worst Quarter Return: Q4 '98 (0.16)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
CALIFORNIA TAX-EXEMPT FUND
(Inception 4/8/97) 6.42% 10.00%
LEHMAN BROTHERS CALIFORNIA EXEMPT
MUNICIPAL INDEX 6.93% 9.83%
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE
MUNICIPAL INDEX 6.30% 8.27%
</TABLE>
Page 54
<PAGE> 56
RISK/RETURN SUMMARY
INTERNATIONAL FIXED INCOME FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 19.70%
1996: 5.53%
1997: (2.51)%
1998: 17.09%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q1 '95 11.04%
Worst Quarter Return: Q1 '97 (5.67)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL FIXED INCOME FUND (Inception 4/1/94) 17.09% 8.35%
J.P. MORGAN INTERNATIONAL GOVERNMENT BOND INDEX 18.31% 8.98%
</TABLE>
Page 55
<PAGE> 57
RISK/RETURN SUMMARY
INCOME EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 18.92%
1996: 19.99%
1997: 20.84%
1998: 9.17%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 10.98%
Worst Quarter Return: Q3 '98 (9.30)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INCOME EQUITY FUND (Inception 4/1/94) 9.17% 13.62%
MERRILL LYNCH INVESTMENT GRADE CONVERTIBLE BOND INDEX 11.36% 14.02%
</TABLE>
Page 56
<PAGE> 58
RISK/RETURN SUMMARY
STOCK INDEX FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1997: 32.71%
1998: 27.88%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 21.18%
Worst Quarter Return: Q3 '98 (10.05)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
STOCK INDEX FUND (Inception 10/7/96) 27.88% 29.73%
S&P 500(R)INDEX 28.61% 30.61%
</TABLE>
Page 57
<PAGE> 59
RISK/RETURN SUMMARY
GROWTH EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 26.15%
1996: 17.82%
1997: 30.13%
1998: 33.14%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 24.82%
Worst Quarter Return: Q3 '98 (11.30)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
GROWTH EQUITY FUND (Inception 4/1/94) 33.14% 22.44%
S&P 500(R)INDEX 28.61% 26.49%
</TABLE>
Page 58
<PAGE> 60
RISK/RETURN SUMMARY
SELECT EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 28.88%
1996: 21.53%
1997: 31.78%
1998: 35.13%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 27.46%
Worst Quarter Return: Q3 '98 (10.70)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
SELECT EQUITY FUND (Inception 4/6/94) 35.13% 24.43%
S&P 500(R)INDEX 28.61% 26.42%
</TABLE>
Page 59
<PAGE> 61
RISK/RETURN SUMMARY
SMALL CAP FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 22.54%
1996: 18.95%
1997: 29.77%
1998: (5.94)%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q3 '97 16.95%
Worst Quarter Return: Q3 '98 (20.46)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
SMALL CAP FUND (4/1/94) (5.94)% 12.02%
RUSSELL 2000 INDEX (2.44)% 13.05%
</TABLE>
Page 60
<PAGE> 62
RISK/RETURN SUMMARY
INTERNATIONAL GROWTH EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: 2.04%
1996: 5.02%
1997: 6.26%
1998: 23.98%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 18.84%
Worst Quarter Return: Q3 '98 (13.72)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL GROWTH EQUITY FUND (Inception 4/1/94) 23.98% 7.86%
MSCI EAFE INDEX 19.97% 8.89%
</TABLE>
Page 61
<PAGE> 63
RISK/RETURN SUMMARY
INTERNATIONAL SELECT EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1995: (0.79)%
1996: 2.89%
1997: 9.08%
1998: 22.36%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 16.27%
Worst Quarter Return: Q3 '98 (11.80)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL SELECT EQUITY FUND (Inception 4/5/94) 22.36% 7.26%
MSCI EAFE INDEX BLENDED WITH EMERGING MARKETS FREE INDEX 15.24% 7.62%
</TABLE>
Page 62
<PAGE> 64
RISK/RETURN SUMMARY
TECHNOLOGY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1997: 16.76%
1998: 83.01%
</TABLE>
Year to date total return for the nine months ended
September 30, 1999: %
BEST AND WORST QUARTERLY PERFORMANCE:
(for the periods ended December 31, 1998)
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 50.19%
Worst Quarter Return: Q4 '97 (13.23)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
TECHNOLOGY FUND (Inception 4/1/96) 83.01% 45.93%
MORGAN STANLEY HIGH-TECHNOLOGY 35 INDEX 95.70% 44.94%
S&P 500(R)INDEX 28.61% 28.66%
</TABLE>
Page 63
<PAGE> 65
RISK/RETURN SUMMARY
BROAD-BASED SECURITIES MARKET INDICES DESCRIPTIONS
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX is an unmanaged index
including all public obligations of the U.S. Treasury and all publicly issued
debt of U.S. government agencies with maturities of up to 10 years.
The Index figures do no reflect any fees or expenses.
THE LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX is an unmanaged index of
investment grade (Baa or better) tax-exempt bonds with maturities of 4 to 6
years. The Index figures do not reflect any fees or expenses.
THE LEHMAN BROTHERS MUTUAL FUND FLORIDA INTERMEDIATE TAX-EXEMPT INDEX is an
unmanaged index of investment grade (Baa or better) tax-exempt Florida bonds
with a remaining maturity of at least one year. The index figures do not reflect
any fees or expenses.
THE LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE MUNICIPAL INDEX is an unmanaged
index of investment grade (Baa or better) tax-exempt bonds with maturities of
five to ten years. The figures do not reflect any fees or expenses.
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is an unmanaged index of
prices of U.S. government and corporate bonds with not less than one year to
maturity. The Index figures do not reflect any fees or expenses.
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged index of investment
grade (Baa or better) tax-exempt bonds with a remaining maturity of at least one
year. The Index figures do not reflect any fees or expenses.
THE LEHMAN BROTHERS CALIFORNIA EXEMPT MUNICIPAL INDEX is an unmanaged index of
investment grade (Baa or better) tax-exempt California bonds with a remaining
maturity of at least one year. The Index figures do not reflect any fees or
expenses.
THE J.P. MORGAN INTERNATIONAL GOVERNMENT BOND INDEX is an unmanaged index of
non-U.S. government bonds with maturities of one to thirty years. The Index
figures do not reflect any fees or expenses.
THE MERRILL LYNCH INVESTMENT GRADE CONVERTIBLE BOND INDEX is an unmanaged index
consisting of investment grade (BBB or better) convertible bonds and preferred
stocks. The Index figures do not reflect any fees or expenses.
THE S&P 500(R) INDEX is the Standard and Poor's Composite Index of 500 stocks, a
widely recognized, unmanaged index of common stock prices. The Index figures do
not reflect any fees or expenses.
THE RUSSELL 2000 INDEX is an unmanaged index which tracks the performance of the
2,000 smallest of the 3,000 largest U.S. companies, based on market
capitalization. The Index figures do not reflect any fees or expenses.
THE MSCI EAFE INDEX is the Morgan Stanley Capital International Europe,
Australasia and Far East Index, an unmanaged index which tracks the performance
of selected equity securities in Europe, Australia, Asia and the Far East. The
Index figures do not reflect any fees or expenses.
THE MSCI EAFE INDEX BLENDED WITH EMERGING MARKETS FREE INDEX is an unmanaged
index comprised of companies representative of developed European and Pacific
Basin countries as well as emerging market countries. The Index figures do not
reflect any fees or expenses.
THE MORGAN STANLEY HIGH-TECHNOLOGY 35 INDEX is an unmanaged index which tracks
the performance of stocks within the technology sector. The Index figures do not
reflect any fees or expenses.
Page 64
<PAGE> 66
RISK/RETURN SUMMARY
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>
SHAREHOLDER FEES
(fees paid directly from your investment)
-------------------------------------------------------------------------
SALES
SALES CHARGE
CHARGE DEFERRED (LOAD)
(LOAD) SALES IMPOSED ON
IMPOSED ON CHARGE REINVESTED REDEMPTION EXCHANGE
FUND PURCHASES (LOAD) DISTRIBUTIONS FEES(1) FEES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market None None None None None
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market None None None None None
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market(4) None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Municipal Money Market None None None None None
- ----------------------------------------------------------------------------------------------------------------------
California Municipal Money Market None None None None None
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Short-Intermediate U.S. Government None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
California Intermediate Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Fixed Income None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
Arizona Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
California Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------
International Fixed Income None None None None None
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 65
<PAGE> 67
RISK/RETURN SUMMARY
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND
MANAGEMENT (12a-1) OTHER OPERATING
FEES FEES(2) EXPENSES(3) EXPENSE(5)
- ------------------------------------------------------------------
<S> <C> <C> <C>
0.60% 0.00% 0.29% 0.89%
- ------------------------------------------------------------------
0.60% 0.00% 0.31% 0.91%
- ------------------------------------------------------------------
0.60% 0.00% 0.31% 0.91%
- ------------------------------------------------------------------
0.60% 0.00% 0.32% 0.92%
- ------------------------------------------------------------------
0.60% 0.00% 0.29% 0.89%
- ------------------------------------------------------------------
0.60% 0.00% 0.31% 0.91%
- ------------------------------------------------------------------
0.75% 0.00% 0.32% 1.07%
- ------------------------------------------------------------------
0.75% 0.00% 0.52% 1.27%
- ------------------------------------------------------------------
0.75% 0.00% 0.31% 1.06%
- ------------------------------------------------------------------
0.75% 0.00% 0.46% 1.21%
- ------------------------------------------------------------------
0.75% 0.00% 0.54% 1.29%
- ------------------------------------------------------------------
0.75% 0.00% 0.33% 1.08%
- ------------------------------------------------------------------
0.75% 0.00% 0.33% 1.08%
- ------------------------------------------------------------------
0.75% 0.00% 0.55% 1.30%
- ------------------------------------------------------------------
0.75% 0.00% 0.42% 1.17%
- ------------------------------------------------------------------
0.90% 0.00% 1.06% 1.96%
- ------------------------------------------------------------------
</TABLE>
Page 66
<PAGE> 68
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment)
-------------------------------------------------------------------------------------------
SALES
SALES CHARGE
CHARGE DEFERRED (LOAD)
(LOAD) SALES IMPOSED ON
IMPOSED ON CHARGE REINVESTED REDEMPTION EXCHANGE
FUND PURCHASES (LOAD) DISTRIBUTIONS FEES(1) FEES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Yield Municipal None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
High Yield Fixed Income None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Income Equity None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Stock Index None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Growth Equity None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Select Equity None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
MarketPower(4) None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Index None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
International Growth Equity None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
International Select Equity None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Technology None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 67
<PAGE> 69
RISK/RETURN SUMMARY
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION FUND
(12d-1) OTHER OPERATING
MANAGEMENT FEES FEES(2) EXPENSES(3) EXPENSES(5)
- ------------------------------------------------------------
<S> <C> <C> <C>
0.75% 0.00% 0.97% 1.72%
- ------------------------------------------------------------
0.75% 0.00% 0.45% 1.20%
- ------------------------------------------------------------
1.00% 0.00% 0.35% 1.35%
- ------------------------------------------------------------
0.60% 0.00% 0.40% 1.00%
- ------------------------------------------------------------
1.00% 0.00% 0.30% 1.30%
- ------------------------------------------------------------
1.20% 0.00% 0.34% 1.54%
- ------------------------------------------------------------
1.20% 0.00% 0.33% 1.53%
- ------------------------------------------------------------
1.00% 0.00% 0.65% 1.65%
- ------------------------------------------------------------
0.65% 0.00% 0.57% 1.22%
- ------------------------------------------------------------
1.20% 0.00% 0.32% 1.52%
- ------------------------------------------------------------
1.20% 0.00% 0.68% 1.88%
- ------------------------------------------------------------
1.20% 0.00% 0.42% 1.62%
- ------------------------------------------------------------
1.20% 0.00% 0.46% 1.66%
- ------------------------------------------------------------
1.20% 0.00% 0.33% 1.53%
- ------------------------------------------------------------
</TABLE>
Page 68
<PAGE> 70
RISK/RETURN SUMMARY
Footnotes
1. A fee of $15.00 may be applicable for each wire redemption.
2. During the last fiscal year the Funds did not pay any 12b-1 fees. 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 co-administration
expenses as well as other customary Fund expenses. The
co-administrators are entitled to a co-administration fee of 0.15%, of
which 0.09% is currently being waived voluntarily. Such waiver may be
terminated at any time. The High Yield Municipal, High Yield Fixed
Income and Small Cap Index Funds commenced operations on December 31,
1998, December 31, 1998 and September 3, 1999, respectively. The
Short-Intermediate U.S. Government, California Intermediate Tax-Exempt,
Arizona Tax-Exempt and Small Cap Growth Funds commenced operations on
October 1, 1999. As a result, "Other Expenses" for those Funds are
based on estimates for the current fiscal year.
4. Since the Tax-Exempt Money Market and MarketPower Funds had not
commenced operations as of the date of this Prospectus, "Other
Expenses" is based on estimated amounts the Funds expect to pay during
the current fiscal year.
5. As a result of 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>
TOTAL ANNUAL
MANAGEMENT DISTRIBUTION OTHER FUND OPERATING
FUND FEES (12b-1) FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 0.40% 0.00% 0.15% 0.55%
U.S. Government Money Market 0.40% 0.00% 0.15% 0.55%
U.S. Government Select Money Market 0.40% 0.00% 0.15% 0.55%
Tax-Exempt Money Market 0.40% 0.00% 0.15% 0.55%
Municipal Money Market 0.40% 0.00% 0.15% 0.55%
California Municipal Money Market 0.40% 0.00% 0.15% 0.55%
U.S. Government 0.75% 0.00% 0.15% 0.90%
Short-Intermediate U.S. Government 0.75% 0.00% 0.15% 0.90%
Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85%
California Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85%
Florida Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85%
Fixed Income 0.75% 0.00% 0.15% 0.90%
Tax-Exempt 0.70% 0.00% 0.15% 0.85%
Arizona Tax-Exempt 0.70% 0.00% 0.15% 0.85%
California Tax-Exempt 0.70% 0.00% 0.15% 0.85%
International Fixed Income 0.90% 0.00% 0.25% 1.15%
High Yield Municipal 0.70% 0.00% 0.15% 0.85%
High Yield Fixed Income 0.75% 0.00% 0.15% 0.90%
Income Equity 0.85% 0.00% 0.15% 1.00%
Stock Index 0.40% 0.00% 0.15% 0.55%
Growth Equity 0.85% 0.00% 0.15% 1.00%
Select Equity 0.85% 0.00% 0.15% 1.00%
MarketPower 1.00% 0.00% 0.23% 1.23%
Mid Cap Growth 0.85% 0.00% 0.15% 1.00%
Small Cap Index 0.50% 0.00% 0.15% 0.65%
Small Cap 0.85% 0.00% 0.15% 1.00%
Small Cap Growth 1.00% 0.00% 0.25% 1.25%
International Growth Equity 1.00% 0.00% 0.25% 1.25%
International Select Equity 1.00% 0.00% 0.25% 1.25%
Technology 1.00% 0.00% 0.23% 1.23%
</TABLE>
Page 69
<PAGE> 71
ABOUT YOUR ACCOUNT
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>
FUND ONE YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market $ 91 $ 284 $ 493 $ 1,096
- ---------------------------------------------------------------------------------------------------------
U.S. Government Money Market 93 290 504 1,120
- ---------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market 93 290 504 1,120
- ---------------------------------------------------------------------------------------------------------
Tax-Exempt Money Market 94 295 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Municipal Money Market 91 284 493 1,096
- ---------------------------------------------------------------------------------------------------------
California Municipal Money Market 93 290 504 1,120
- ---------------------------------------------------------------------------------------------------------
U.S. Government 109 340 590 1,306
- ---------------------------------------------------------------------------------------------------------
Short-Intermediate U.S. Government 119 372 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt 108 337 585 1,294
- ---------------------------------------------------------------------------------------------------------
California Intermediate Tax-Exempt 114 356 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt 131 409 708 1,556
- ---------------------------------------------------------------------------------------------------------
Fixed Income 110 343 595 1,317
- ---------------------------------------------------------------------------------------------------------
Tax-Exempt 110 343 595 1,317
- ---------------------------------------------------------------------------------------------------------
Arizona Tax-Exempt 127 397 N/A N/A
- ---------------------------------------------------------------------------------------------------------
California Tax-Exempt 119 372 644 1,420
- ---------------------------------------------------------------------------------------------------------
International Fixed Income 199 615 1,057 2,285
- ---------------------------------------------------------------------------------------------------------
High Yield Municipal 175 542 933 2,030
- ---------------------------------------------------------------------------------------------------------
High Yield Fixed Income 122 381 660 1,455
- ---------------------------------------------------------------------------------------------------------
Income Equity 137 428 739 1,624
- ---------------------------------------------------------------------------------------------------------
Stock Index 102 318 552 1,225
- ---------------------------------------------------------------------------------------------------------
Growth Equity 132 412 713 1,568
- ---------------------------------------------------------------------------------------------------------
Select Equity 157 486 839 1,834
- ---------------------------------------------------------------------------------------------------------
MarketPower 156 483 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Mid Cap Growth 168 520 897 1,955
- ---------------------------------------------------------------------------------------------------------
Small Cap Index 103 322 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Small Cap 155 480 829 1,813
- ---------------------------------------------------------------------------------------------------------
Small Cap Growth 193 596 N/A N/A
- ---------------------------------------------------------------------------------------------------------
International Growth Equity 165 511 881 1,922
- ---------------------------------------------------------------------------------------------------------
International Select Equity 169 523 902 1,965
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Page 70
<PAGE> 72
ABOUT YOUR ACCOUNT
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Technology 156 483 834 1,824
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Page 71
<PAGE> 73
ABOUT YOUR ACCOUNT
INVESTMENT ADVISERS
The Northern Trust Company ("Northern Trust"), an Illinois state-chartered bank
and member of the Federal Reserve System, serves as investment adviser for all
Funds except the Stock Index, Small Cap Index and Small Cap Funds. Northern
Trust Quantitative Advisors, Inc. ("NTQA"), an Illinois state-chartered trust
company, serves as investment adviser for the Stock Index, Small Cap Index and
Small Cap Funds. Prior to April 1, 1998 Northern Trust served as investment
adviser to the Stock Index, Small Cap Index and Small Cap Funds pursuant to
advisory agreements substantially identical as those currently in effect for
such Funds.
Northern Trust and NTQA are referred to as the "Investment Advisers." The
Investment Advisers are located at 50 S. LaSalle Street, Chicago, IL 60675 and
are wholly-owned subsidiaries of Northern Trust Corporation, a bank holding
company. As of __________, 1999, Northern Trust Corporation and its subsidiaries
had approximately $____ billion in assets, $____ billion in deposits and
employed over ______ persons.
Northern Trust and its affiliates administered in various capacities (including
as master trustee, investment manager or custodian) approximately $____ trillion
of assets as of __________, 1999, including approximately $____ billion of
assets for which Northern Trust and its affiliates had investment management
responsibility.
Under its Advisory Agreement with Northern Funds, each 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, each 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). The table also
reflects the advisory fees (after voluntary fee waivers) paid by the Funds for
the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
ADVISORY FEE PAID
CONTRACTUAL FOR FISCAL YEAR
FUND RATE ENDED 3/31/99
- ---- ----------- -----------------
<S> <C> <C>
Money Market 0.60% 0.40%
U.S. Government Money Market 0.60% 0.40%
U.S. Government Select Money Market 0.60% 0.40%
Tax-Exempt Money Market 0.60% N/A
Municipal Money Market 0.60% 0.40%
California Municipal Money Market 0.60% 0.40%
U.S. Government 0.75% 0.75%
Short-Intermediate U.S. Government 0.75% N/A
Intermediate Tax-Exempt 0.75% 0.70%
California Intermediate Tax-Exempt 0.75% N/A
Florida Intermediate Tax-Exempt 0.75% 0.70%
Fixed Income 0.75% 0.75%
Tax-Exempt 0.75% 0.70%
Arizona Tax-Exempt 0.75% N/A
California Tax-Exempt 0.75% 0.70%
International Fixed Income 0.90% 0.90%
High Yield Municipal 0.75% 0.70%
High Yield Fixed Income 0.75% 0.75%
Income Equity 1.00% 0.85%
Stock Index 0.60% 0.40%
Growth Equity 1.00% 0.85%
Select Equity 1.20% 0.85%
MarketPower 1.20% N/A
Mid Cap Growth 1.00% 0.85%
Small Cap Index 0.65% N/A
Small Cap 1.20% 0.85%
Small Cap Growth 1.20% N/A
</TABLE>
Page 72
<PAGE> 74
ABOUT YOUR ACCOUNT
<TABLE>
<CAPTION>
ADVISORY FEE PAID
CONTRACTUAL FOR FISCAL YEAR
FUND RATE ENDED 3/31/99
- ---- ----------- -----------------
<S> <C> <C>
International Growth Equity 1.20% 1.00%
International Select Equity 1.20% 1.00%
Technology 1.20% 1.00%
</TABLE>
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Funds reflects that the Investment Advisers did not
charge the full amount of the advisory fees to which they were entitled. The
Investment Advisers may discontinue or modify their voluntary limitations in the
future at their discretion.
FUND MANAGEMENT
The Investment Advisers employ 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 and Chairman and Chief Executive Officer of NTQA. Below is information
regarding the management of the Funds other than the Money Market Funds and the
Stock Index and Small Cap Index Funds.
FIXED INCOME FUNDS
The management team leaders for the U.S. Government Fund are Mark J. Wirth,
Senior Vice President of Northern Trust and Monty M. Memler, Vice President of
Northern Trust. Mr. Wirth has had such responsibility for the Fund since July
1998. Mr. Memler has had such responsibility for the Fund since November 1994.
Messrs. Wirth and Memler joined Northern Trust in 1986 and during the past five
years have managed various fixed income portfolios. Mr. Memler joined Northern
Trust in 1986 and during the past five years have managed various fixed income
portfolios.
Mr. Wirth and Peter Marchese, Second Vice President of Northern Trust will be
the management team leaders for the Short-Intermediate U.S. Government Fund
after it commences operations. Mr. Marchese joined Northern Trust in 1990 and
during the past five years has managed various fixed income portfolios.
The management team leaders for the Intermediate Tax-Exempt Fund are M. Jane
McCart, Senior Vice President of Northern Trust, and Joel F. Silva, Vice
President of Northern Trust. Ms. McCart and Mr. Silva have had such
responsibility for the Fund since September 1999. Ms. McCart joined Northern
Trust in 1998. From 1983 to December 1998, Ms. McCart was with Stein Roe &
Farnham Incorporated where she had been the portfolio manager of various
municipal bond portfolios. Mr. Silva joined Northern Trust in 1999. From 1989 to
1999, Mr. Silva was with American Century where he managed various municipal
bond portfolios.
Eric V. Boeckmann, Vice President of Northern Trust and Joel F. Silva will be
the management team leaders for the California Intermediate Tax-Exempt and
Arizona Tax-Exempt Funds after they commence operations. Mr. Boeckmann joined
Northern Trust in 1985 and during the past five years has managed various
municipal bond portfolios, including common trust funds invested in municipal
securities.
The management team leaders for the Florida Intermediate Tax-Exempt Fund are Ms.
McCart and Gregory A. Bell, Second Vice President of Northern Trust. Ms McCart
has had such responsibility for the Fund since September 1999. Mr. Bell has had
such responsibility for the Fund since November 1998. Mr. Bell joined Northern
Trust in 1984 and during the past five years has managed various municipal bond
portfolios.
The management team leaders for the Fixed Income Fund are Mr. Wirth and Steven
M. Schafer, Vice President of Northern Trust. Mr. Wirth has had such
responsibility for the Fund since July 1998 and Mr. Schafer has had such
responsibility since the fund commenced operations in December 1998. Mr. Schafer
joined Northern Trust in 1988 and during the past five years has managed various
fixed income portfolios and served as credit analyst following both industrial
and utility companies.
Page 73
<PAGE> 75
ABOUT YOUR ACCOUNT
The management team leaders for the Tax-Exempt Fund are Ms. McCart and Timothy
T. A. McGregor, Second Vice President of Northern Trust. Ms. McCart has had such
responsibility for the Fund since September 1999. Mr. McGregor has had such
responsibility for the Fund since November 1998. Mr. McGregor joined Northern
Trust in 1989 and during the past five years has managed various municipal bond
portfolios.
The management team leaders for the California Tax-Exempt Fund are Messrs.
Boeckmann and Silva. Mr. Boeckmann has had such responsibility for the Fund
since April 1998. Mr. Silva has had such responsibility for the Fund since
September 1999.
The management team leaders for the International Fixed Income Fund are Mr.
Schafer and Guy Williams, Vice President of Northern Trust. Mr. Schafer has had
such responsibility for the Fund since July 1998. Mr. Williams has had such
responsibility for the Fund since September 1999. Mr. Williams joined Northern
Trust in 1999. From 1992 to 1999, he was a global fixed income manager for
Paribas Asset Management.
The management team leader for the High Yield Municipal Fund is Ms. McCart. Ms.
McCart has had such responsibility since the fund commenced operations in
December 1998.
The management team leader for the High Yield Fixed Income Fund is Eric
Misenheimer, Vice President of Northern Trust. Mr. Misenheimer has had such
responsibility since July 1999. Mr. Misenheimer joined Northern Trust in 1999.
From April 1998 to May 1999, Mr. Misenheimer was with Stein Roe & Farnham
Incorporated where he had been a senior research analyst and assisted with
portfolio management of various high yield bond portfolios. From 1993 to 1998,
he was a research analyst with Falcon Asset Management.
EQUITY FUNDS
Theodore T. Southworth, Vice President of Northern Trust, has led the management
team for the Income Equity Fund since 1995. He joined Northern Trust in 1984 and
during the past five years has managed various equity portfolios.
Jon D. Brorson, Senior Vice President of Northern Trust, and John J. Zielinski,
Vice President of Northern Trust, are the management team leaders for the Growth
Equity Fund. Mr. Brorson has had such responsibility since July 1998 and Mr.
Zielinski has had such responsibility since April 1998. Mr. Brorson has managed
equity portfolios with Northern Trust since 1996, and from 1990 to 1996, he was
with Hartline Investment Corp., where his primary responsibilities included
portfolio management, investment research, sales, and trading. Mr. Zielinski
joined Northern Trust in 1980 and during the past five years has managed various
equity portfolios.
Robert N. Streed, Vice President of Northern Trust, is the management team
leader for the Select Equity Fund. Mr. Streed has had such responsibility for
the Fund since it commenced operations in April 1994. Mr. Streed joined Northern
Trust in 1990 and during the past five years has managed various equity
portfolios.
The management team leaders for the MarketPower Fund will be R. Randall Canent
and Robert G. Mitchell, Vice Presidents of Northern Trust, after it commences
operations. Mr. Canent joined Northern Trust in 1992 and during the past five
years has managed various equity portfolios. Mr. Mitchell joined Northern Trust
in 1988 and during the past five years has managed investment portfolios for
institutional clients.
Theodore Breckel, Senior Vice President of Northern Trust, is the management
team leader for the Mid Cap Growth Fund. Mr. Breckel has had such responsibility
for the Fund since March 1998. Mr. Breckel has been with Northern Trust since
1968. During the past five years he has managed various equity portfolios.
Susan J. French is the management team leader for the Small Cap Fund. Ms. French
serves as Vice President of Northern Trust and, since 1998, NTQA. Ms. French has
had such responsibility for the Fund since it commenced operations in April
1994. Ms. French joined Northern Trust in 1986 and during the past five years
has managed various short-term investment and equity index portfolios.
Page 74
<PAGE> 76
ABOUT YOUR ACCOUNT
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. Mr. Burshtan joined Northern
Trust in 1999. From 1995 to 1999, Mr. Burshtan was a Portfolio Manager for
various small cap mutual funds with Scudder Kemper Investments, Inc. From 1993
to 1995, Mr. Burshtan held a variety of analyst and portfolio management
positions with Northern Trust.
The management team leader for the International Growth Equity Fund and the
International Select Equity Fund is Robert A. LaFleur, Senior Vice President of
Northern Trust. Mr. LaFleur has had such responsibility for the Fund since 1994.
Mr. LaFleur joined Northern Trust in 1982 and during the past five years has
managed various international equity portfolios.
The management team leaders for the Technology Fund are John B. Leo, Senior Vice
President of Northern Trust, George J. Gilbert, Senior Vice President of
Northern Trust and Kevin J. Spoor, Vice President of Northern Trust. Mr. Leo has
had such responsibility since the Fund commenced operations in April 1996. Mr.
Gilbert has had such responsibility since July 1997. Mr. Spoor has had such
responsibility since September 1999. Mr. Leo joined Northern Trust in 1984.
During the past five years, Mr. Leo has managed various equity and bond
portfolios. Mr. Gilbert joined Northern Trust in 1980 and during the past five
years has managed various technology portfolios and served as a research
analyst. Mr. Spoor joined Northern Trust in 1999. From 1995 to 1998, Mr. Spoor
was a senior semi-conductor analyst with Salomon Smith Barney. Prior thereto,
Mr. Spoor pursued his MBA from the University of Rochester, which he received in
June 1995.
OTHER FUND SERVICES
OTHER FUND MANAGEMENT INFORMATION
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. Northern Trust and First
Data Investor Services Group, Inc. ("Investor Services Group") act as
co-administrators for Northern Funds. The fee that Northern Trust and Investor
Services Group receives for their co-administrative services is described on
page __ under "Fund Fees and Expenses."
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.
As of the date of this Prospectus, shares of the Tax-Exempt Money Market and
MarketPower Funds are not being offered. These Funds are expected to commence
operations during the next twelve months. Please call 1-800-595-9111 before
investing to determine availability.
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
Page 75
<PAGE> 77
ABOUT YOUR ACCOUNT
reinvestments of distributions for which there is no minimum). The Funds reserve
the right to waive these minimums.
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:
Page 76
<PAGE> 78
ABOUT YOUR ACCOUNT
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
- The minimum periodic investment for direct deposit is $50
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."
BY INTERNET
You may initiate transactions between Northern Trust banking and
Northern Funds accounts by using Northern Trust Private Passport. For
details and to sign up for this service, go to
www.northerntrust.com/privatepassport or contact your relationship
manager.
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.
Page 77
<PAGE> 79
ABOUT YOUR ACCOUNT
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
- 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 Money Market Funds 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:
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<PAGE> 80
ABOUT YOUR ACCOUNT
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
- 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"
BY INTERNET
You may initiate transactions between Northern Trust banking and
Northern Funds accounts by using Northern Trust Private Passport. For
details and to sign up for this service, go to
www.northerntrust.com/privatepassport or contact your relationship
manager.
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 each
Non-Money Market Fund and as of 1:00 p.m., Chicago time, for each 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 Money Market Funds seek to maintain an NAV of $1.00 per share by valuing the
obligations held by the Funds at amortized cost in accordance with SEC
regulations. Amortized cost will normally approximate market value.
U.S. and foreign securities held by the Non-Money Market Funds generally are
valued at their market prices. Shares of an investment company held by the
Non-Money Market Funds are valued at their NAV. Any securities, including
restricted securities, for which market prices are not readily available are
valued at fair value as
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ABOUT YOUR ACCOUNT
determined by the Investment Advisers. Short-term obligations held by a Fund are
valued at their amortized cost which, according to the Investment Advisers,
approximates market value.
A 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 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.
TIMING OF NON-MONEY MARKET 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.
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ABOUT YOUR ACCOUNT
- - Northern Funds reserves the right to reject any purchase order. The
Funds also reserve the right to change or discontinue any of their
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:
[email protected].
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 Non-Money Market
Funds, or by 1:00 p.m., Chicago time, with respect to the Money Market Funds,
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
- 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 online, 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 MONEY MARKET FUND REDEMPTION PROCEEDS. If a money market 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 Funds 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.
PAYMENT OF NON-MONEY MARKET FUND REDEMPTION PROCEEDS. The Non-Money Market Funds
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 Funds 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.
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ABOUT YOUR ACCOUNT
- - 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 web site at
www.northerntrust.com/privatepassport or contact your relationship
manager.
- - Northern Funds reserves the right to change or discontinue any of its
redemption procedures.
- - 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.
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 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 Funds 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.
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ABOUT YOUR ACCOUNT
BUSINESS DAY. A "Business Day" with respect to the Non-Money Market Funds is
each Monday through Friday when the New York Stock Exchange (the "Exchange") is
open for business. A "Business Day" with respect to the Money Market Funds is
each Monday through Friday when Northern Trust or the New York Stock Exchange is
open for business. In 1999 the Funds will be closed on the following holidays:
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. These financial intermediaries 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.
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 and NTQA 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 and NTQA as Investment Advisers (after adjustments). This
additional compensation will be paid by Northern Trust, NTQA or their affiliates
and will not represent an additional expense to Northern Funds or their
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 Organizations 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
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ABOUT YOUR ACCOUNT
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 on 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].
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.
MONEY MARKET FUNDS. Each 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 Money Market Funds do 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 in Federal or other immediately available
funds is received.
NON-MONEY MARKET FUNDS. The following table summarizes the general distribution
policies for each of the Non-Money Market Funds. A Fund with an annual dividend
or distribution policy may, in some years, make additional dividends or
distributions to the extent necessary for the Fund to avoid incurring
unnecessary tax liabilities or for other reasons.
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ABOUT YOUR ACCOUNT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS, IF ANY, CAPITAL GAINS, IF ANY,
FUND DECLARED AND PAID DECLARED AND PAID
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Short-Intermediate U.S. Government Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
California Intermediate Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Fixed Income Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
Arizona Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Declared daily, paid monthly* Annually
- ----------------------------------------------------------------------------------------------------------------------
International Fixed Income Quarterly Annually
- ----------------------------------------------------------------------------------------------------------------------
High Yield Municipal Monthly Annually
- ----------------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Monthly Annually
- ----------------------------------------------------------------------------------------------------------------------
Income Equity Monthly Annually
- ----------------------------------------------------------------------------------------------------------------------
Stock Index Quarterly Annually
- ----------------------------------------------------------------------------------------------------------------------
Growth Equity Quarterly Annually
- ----------------------------------------------------------------------------------------------------------------------
Select Equity Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
Marketpower Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Quarterly Annually
- ----------------------------------------------------------------------------------------------------------------------
Small Cap Index Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
Small Cap Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
Small Cap Growth Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
International Growth Equity Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
International Select Equity Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
Technology Annually Annually
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Shares of these Funds are entitled to the dividends declared by a Fund
beginning on the next Business Day after the purchase order is
executed.
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.
For any Fund other than a Money Market 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.
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ABOUT YOUR ACCOUNT
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.
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 AND MUNICIPAL FUNDS. The Tax-Exempt Funds and Municipal Funds
expect 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 Funds may be, and a portion of the dividends paid by the
Municipal Funds generally will 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.
Except as stated below, 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.
The California Funds and the Arizona Tax-Exempt Fund expect to pay dividends
that are generally exempt from personal income tax in those respective states.
This exemption will apply, however, only to dividends that are derived from
interest paid on California or Arizona municipal instruments, respectively, or
on certain Federal obligations. In addition, dividends paid by these Funds will
be subject to state franchise and corporate income taxes, if applicable. The
Florida Intermediate Tax-Exempt Fund intends, but cannot guarantee, that its
shares will qualify for the exemption from the Florida intangibles tax.
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 Funds and Municipal Funds generally will not be deductible for
Federal income tax purposes.
THE INTERNATIONAL FUNDS. It is expected that the International Funds will be
subject to foreign withholding taxes with respect to dividends or interest
received from sources in foreign countries. The International Funds may make an
election to treat a proportionate amount of such taxes as constituting a
distribution to each shareholder, which would allow each shareholder either (1)
to credit such proportionate amount of taxes against Federal income tax
liability or (2) to take such amount as an itemized deduction.
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.
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ABOUT YOUR ACCOUNT
TAX TABLE
You may find it particularly useful to compare the tax-free yields of
the Tax-Exempt Funds and the Municipal Funds to the equivalent yields from
taxable investments. For an investor in a low tax bracket, it may not be helpful
to invest in a tax-exempt investment if a higher after-tax yield can be achieved
from a taxable instrument.
The table below illustrates the difference between hypothetical
tax-free yields and tax-equivalent yields for different tax brackets. You should
be aware, however, that tax brackets can change over time and that your tax
adviser should be consulted for specific yield calculations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FEDERAL
MARGINAL TAX-EXEMPT YIELDS
TAXABLE INCOME TAX RATE 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- --------------------------------------------------------------------------------------------------------------------------------
SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 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 $283,051 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. In addition, the brackets
do not take into consideration the California or Arizona state personal income
tax or the Florida intangibles tax or any other state tax.
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 testing with outside parties.
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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ABOUT YOUR ACCOUNT
Efforts in foreign countries to remediate potential Year 2000 problems are not
as extensive as those in the United States. As a result, the operations of
foreign markets, foreign issuers and foreign governments may be disrupted by the
Year 2000 problem and the investment portfolio of a Fund may be adversely
affected.
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RISKS, SECURITIES AND TECHNIQUES
ADDITIONAL INFORMATION ON FUND STRATEGIES, RISKS,
SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE FUNDS' PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS. IT ALSO EXPLORES THE VARIOUS INVESTMENT SECURITIES
AND TECHNIQUES THAT THE INVESTMENT MANAGEMENT TEAM MAY 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.
ADDITIONAL INFORMATION ON PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
DERIVATIVES. 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. Derivatives include futures contracts, options, interest rate and
currency swaps, 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, including leveraged "inverse floaters").
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. The Funds may use derivatives for
hedging purposes to offset a potential loss in one position by
establishing an interest in an opposite position. Certain Funds 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.
FOREIGN INVESTMENTS. 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 International Funds intend to invest a
substantial portion of their total assets in foreign securities. The
Fixed Income, High Yield Fixed Income, Income Equity, Growth Equity,
Select Equity, Marketpower, Mid Cap Growth, Small Cap, Small Cap Growth
and Technology Funds may invest up to 25% of their total assets in
foreign securities including ADRs, EDRs and GDRs. These Funds may also
invest in foreign time deposits and other short-term instruments.
The Money Market Fund may invest in the U.S. dollar-denominated
obligations issued or guaranteed by one or more foreign governments or
any of their political subdivisions, agencies or instrumentalities,
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foreign commercial banks and foreign branches of U.S. banks. It may
also invest in U.S. dollar-denominated commercial paper and other
obligations of foreign issuers. Investments by the Money Market Fund in
foreign issuer obligations will not exceed 50% of the Fund's total
assets measured at the time of purchase.
The International Growth Equity, International Select Equity and
International Fixed Income Funds may invest more than 25% of their
total assets in the securities of issuers located in countries with
securities markets that are highly developed, liquid and subject to
extensive regulation. Such countries may include, but are not limited
to Japan, the United Kingdom, France, Germany and Switzerland.
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 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, Central 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 Funds.
While the Funds' investments may, if permitted, be denominated in
foreign currencies, the portfolio securities and other assets held by
the Funds are valued in U.S. dollars. Currency exchange rates may
fluctuate significantly over short periods of time causing a 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 a Fund is invested in foreign securities while also maintaining
currency positions, it may be exposed to greater combined risk. The
Funds' respective net currency positions may expose them to risks
independent of their securities positions.
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the euro; the establishment and
maintenance of exchange rates for currencies being converted into the
euro; the
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fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2001 and beyond;
whether the interest rate, tax and labor regimes of European countries
participating in the euro will converge over time; and whether the
conversion of the currencies of other countries in the European Union
("EU"), such as the United Kingdom and Denmark, into the euro and the
admission of other non-EU countries such as Poland, Latvia and
Lithuania as members of the EU may have an impact on the euro. These or
other factors, including political and economic risks, could cause
market disruptions, and could adversely affect the value of securities
held by the Funds. Because of the number of countries using this single
currency, a significant portion of the assets of the International
Funds may be denominated in the euro.
INVESTMENT GRADE SECURITIES. A security is considered investment grade if, at
the time of purchase, it is rated:
- BBB or higher by Standard and Poor's Ratings Services ("S&P");
- Baa or higher by Moody's Investors Service, Inc. ("Moody's");
- BBB or higher by Duff & Phelps Credit Rating Co. ("Duff"); or
- BBB or higher by Fitch IBCA Inc. ("Fitch").
A security will be considered investment grade if it receives one of the above
ratings, even if it receives a lower rating from other rating organizations.
INVESTMENT STRATEGY. Except as stated in the next section, fixed income
and convertible securities purchased by the Funds will generally be
rated investment grade. The Funds may also invest in unrated securities
if the Investment Adviser believes they are comparable in quality.
SPECIAL RISKS. Although securities rated BBB by S&P, Duff or Fitch, or
Baa by Moody's are considered investment grade, they have certain
speculative characteristics. Therefore, they may be subject to a higher
risk of default than obligations with higher ratings. Subsequent to its
purchase by a Fund, a rated security may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by
the Fund. The Investment Adviser will consider such an event in
determining whether the Fund should continue to hold the security.
NON-INVESTMENT GRADE SECURITIES. Non-investment grade fixed income and
convertible securities are generally rated BB or below by S&P, Duff or Fitch, or
Ba by Moody's.
INVESTMENT STRATEGY. The High Yield Municipal Fund and the High Yield
Fixed Income Fund may invest without limitation in non-investment grade
securities, including convertible securities. The other Fixed Income
Funds (with the exception of the U.S. Government Fund and the
Short-Intermediate U.S. Government Fund) and the Equity Funds (with the
exception of the Stock Index Fund and Small Cap Index Fund ) may invest
up to 15% (35% in the case of the Income Equity Fund) 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 Funds' investment objectives and portfolio
mix.
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 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 recovery on defaulted securities.
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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 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.
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.
SMALL CAP INVESTMENTS. 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 drop 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 capitalization
companies may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
TEMPORARY INVESTMENTS. 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. Each Non-Money Market 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 (except
for the Stock Index and Small Cap Index Funds which generally will not
invest in these securities as part of a temporary defensive strategy to
protect against potential stock market declines).
SPECIAL RISKS. A Non-Money Market Fund may not achieve its investment
objective when its assets are invested in short-term obligations.
MATURITY RISK. Each Fixed Income Fund will normally maintain the dollar-weighted
average maturity of its Fund within a specified range. However, the maturities
of certain instruments, such as variable and floating rate instruments, are
subject to estimation. In addition, in calculating average weighted maturities,
the maturity of mortgage and other asset-backed securities will be based on
estimates of average life. As a result, the Funds cannot guarantee that these
estimates will, in fact, be accurate or that their average maturities will
remain within their specified limits.
PORTFOLIO TURNOVER. 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) is likely to involve higher
brokerage commissions and other transactions costs, which could reduce a Fund's
return. It may also result in higher short-term capital gains that are taxable
to shareholders. See "Financial Highlights" for the Funds' historical portfolio
turnover rates. Northern Funds expects that the annual portfolio turnover rate
of each of the Short-Intermediate U.S. Government Fund, the California
Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the California
Tax-Exempt Fund, The Marketpower Fund and the Small Cap Index Fund will
generally not exceed
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100%; the annual portfolio turnover rate of the High Yield Municipal Fund, High
Yield Fixed Income Fund and Small Cap Growth Fund will generally not exceed
200%.
TRACKING RISK. The Stock Index and Small Cap Index Funds (the "Index Funds")
seek to track the performance of their respective benchmarks indices.
INVESTMENT STRATEGY. Under normal market conditions, the Investment
Adviser expects the quarterly performance of the Index Funds to be
within a .95 correlation with their respective benchmarks, before
expenses.
SPECIAL RISKS. The Index Funds are subject to the risk of tracking
variance. Tracking variance may result from share purchases and
redemptions, transaction costs, expenses and other factors. These may
prevent a Fund from achieving its investment objective.
SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE CALIFORNIA FUNDS, FLORIDA
INTERMEDIATE TAX-EXEMPT FUND AND THE ARIZONA TAX-EXEMPT FUND. The investments of
the California Funds in California municipal instruments, the Florida
Intermediate Tax-Exempt Fund in Florida municipal instruments and the Arizona
Tax-Exempt Fund in Arizona municipal instruments raise additional
considerations. Payment of the interest on and the principal of these
instruments is dependent upon the continuing ability of issuers in these states
to meet their obligations.
INVESTMENT STRATEGY. Under normal market conditions, at least 65% of
the value of the California Funds' total assets will be invested in
California municipal instruments, at least 65% of the value of the
Florida Intermediate Tax-Exempt Fund's total assets will be invested in
Florida municipal instruments, and at least 65% of the value of the
Arizona Tax-Exempt Fund's total assets will be invested in Arizona
municipal instruments. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California, Florida and
Arizona municipal instruments, and may be riskier than comparable funds
that do not emphasize these issuers to this degree.
SPECIAL RISKS. The California Funds' investments will be affected by
political and economic developments within the State of California (the
"State"), and by the financial condition of the State, its public
authorities and political subdivisions. After suffering a severe
recession in the early 1990's which caused the State to experience
financial difficulties, California's economy entered a sustained
recovery since late 1993 and the State's budget has been returned to a
positive balance. California's long-term credit rating has been raised
after being reduced during the recession. To respond to its own revenue
shortfalls during the recession, the State reduced assistance to its
public authorities and political subdivisions. Cutbacks in state aid
could further adversely affect the financial condition of cities,
counties and education districts which are subject to their own fiscal
constraints. California voters in the past have passed amendments to
the California Constitution and other measures that limit the taxing
and spending authority of California governmental entities, and future
voter initiatives could result in adverse consequences affecting
California municipal instruments. Also, the ultimate fiscal effect of
federally-mandated reform of welfare programs on the State and its
local governments is still to be resolved. These factors, among others
(including the outcome of related pending litigation), could reduce the
credit standing of certain issuers of California municipal instruments.
Similarly, if Florida or Arizona or any of their respective political
subdivisions should suffer serious financial difficulties to the extent
their ability to pay their obligations might be jeopardized, the
ability of such entities to market their securities, and the value of
the Florida Intermediate Tax-Exempt Fund or the Arizona Tax-Exempt
Fund, could be adversely affected.
In addition to the risk of nonpayment of California, Florida or Arizona
municipal instruments, if these obligations decline in quality and are
downgraded by an NRSRO, they may become ineligible for purchase by the
Funds. Since there are large numbers of buyers of these instruments,
the supply of California, Florida or Arizona municipal instruments that
are eligible for purchase by the Funds could become inadequate at
certain times.
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A more detailed description of special factors affecting investments in
California, Florida and Arizona municipal instruments is provided in
the Statement of Additional Information.
SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE TECHNOLOGY FUND. The
Technology Fund's concentration in technology securities presents special risk
considerations.
INVESTMENT STRATEGY. The Technology Fund invests principally in
companies that develop, produce or distribute products and services
related to advances in technology.
SPECIAL RISKS. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Competitive
pressures in the technology industry may affect negatively the
financial condition of technology companies, and the Fund's
concentration in technology securities may subject it to more volatile
price movements than a more diversified securities portfolio. In
certain instances, technology securities may experience significant
price movements caused by disproportionate investor optimism or
pessimism with little or no basis in fundamental economic conditions.
As a result of these and other reasons, investments in the technology
industry can experience sudden and rapid appreciation and depreciation.
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(R) Index.
In addition, the Fund's investments may be concentrated in companies
that develop or sell computers, software and peripheral products, which
present the following additional risks. These companies are often
dependent on the existence and health of other products or industries
and face highly competitive pressures, product licensing, trademark and
patent uncertainties and rapid technological changes which may have a
significant effect on their financial condition. For example, an
increasing number of companies and new product offerings can lead to
price cuts and slower selling cycles, and many of these companies may
be dependent on the success of a principal product, may rely on sole
source providers and third-party manufacturers, and may experience
difficulties in managing growth.
A more detailed description of special factors affecting investments in
California, Florida and Arizona municipal instruments is provided in the
Statement of Additional Information.
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 U.S. Government Money Market Fund, the U.S.
Government Select Money Market Fund, the U.S. Government Fund and the
Short-Intermediate U.S. Government Fund may purchase securities that
are secured or backed by mortgages and that are issued or guaranteed by
the U.S. government, its agencies or instrumentalities. The other Funds
may purchase these and other types of asset-backed securities. The
Funds 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. They may also invest in unrated
mortgage-backed securities which the Investment Adviser believes are of
comparable quality. These rating and comparable quality limitations do
not apply to the High Yield Municipal and High Yield Fixed Income
Funds. In addition, asset-backed securities purchased by the Money
Market Funds must meet the quality restrictions imposed by the SEC.
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
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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 emergency
purposes or to meet redemption requests. The Funds (other than the
Municipal Money Market, U.S. Government Select Money Market, Tax-Exempt
Money Market, California Municipal Money Market, Income Equity, Growth
Equity, Select Equity and Small Cap Funds) 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 the Funds decline in value while
these transactions are outstanding, the net asset value of the Funds'
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 Funds 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 Equity Funds (other than the Stock Index and
Small Cap Index Funds), the Fixed Income Fund, High Yield Fixed Income
Fund and the International Fixed Income Fund may each acquire
convertible securities. These securities are subject to the same rating
requirements as fixed income securities held by a 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, other than the U.S. Government Select
Money Market Fund, may invest a portion of their total assets in
custodial receipts. Investments by the U.S. Government Money Market
Fund, U.S. Government Fund and Short-Intermediate U.S. Government Fund
in custodial receipts will not exceed 35% of the value of such Funds'
total assets.
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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 Equity Funds 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, a
Fund may suffer a loss if the counterparty defaults.
EXCHANGE RATE-RELATED SECURITIES. Exchange rate-related securities represent
certain foreign debt obligations whose principal values are linked to a foreign
currency but which are repaid in U.S. dollars.
INVESTMENT STRATEGY. The Fixed Income, International Fixed Income, High
Yield Fixed Income and Income Equity Funds may invest in exchange
rate-related securities.
SPECIAL RISKS. The principal payable on an exchange rate-related
security is subject to currency risk. In addition, the potential
illiquidity and high volatility of the foreign exchange market may make
exchange rate-related securities difficult to sell prior to maturity at
an appropriate price.
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 Equity Funds (other than the Stock Index and
Small Cap Index Funds), the International Funds, the Fixed Income Fund
and the High Yield Fixed Income 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.
The International Funds and the High Yield Fixed Income Fund may also
enter into these contracts for speculative purposes (i.e., to increase
total return) or for cross-hedging purposes. Foreign currency exchange
contracts will be used at the discretion of the investment management
team, and no Fund is 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 a 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 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.
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Risks, Securities, Techniques and Financial Information
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, each Fund (other than the Money Market Funds) 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 a Fund's futures contacts may equal up to 100% of its
total assets. However, a 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. Each Fund may invest up to 15% (10% in the case of
the Money Market Funds) of its 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 Advisers determine, under guidelines
approved by the 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 Money Market Fund and Fixed Income Fund may
invest in IFAs issued by insurance companies that meet quality and
credit standards established by the Investment Adviser. The High Yield
Fixed Income Fund may invest in IFAs without regard to a minimum rating
criteria.
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, the transfer of IFAs may
be restricted and an active secondary market in IFAs does not currently
exist. This means that it may be difficult or impossible to sell an IFA
at an appropriate price.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. Interest rate and
currency swaps are contracts that obligate a Fund and another party to exchange
their rights to pay or receive interest or specified amounts of currency,
respectively. Interest rate floors entitle the purchasers to receive interest
payments if a specified index
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Risks, Securities, Techniques and Financial Information
falls below a predetermined interest rate. Interest rate caps entitle the
purchasers to receive interest payments if a specified index exceeds a
predetermined interest rate.
INVESTMENT STRATEGY. The Fixed Income Funds and the Income Equity Fund
may enter into interest rate swaps and the U.S. Government,
Short-Intermediate U.S. Government, Fixed Income, International Fixed
Income, High Yield Municipal and High Yield Fixed Income Funds may
purchase interest rate floors or caps to protect against interest rate
fluctuations and fluctuations in the floating rate market. The
International Funds, the Fixed Income, High Yield Fixed Income, Income
Equity, Growth Equity, Select Equity, Marketpower, Mid Cap Growth,
Small Cap, Small Cap Growth and Technology Funds may also enter into
currency swaps to protect against currency fluctuations.
SPECIAL RISKS. If the other party to an interest rate swap defaults, a
Fund's risk of loss consists of the amount of interest payments that
the Fund is entitled to receive. In contrast, currency swaps usually
involve the delivery of the entire principal value of one currency in
exchange for the other currency. Therefore, the entire principal value
of a currency swap is subject to the risk that the other party will
default on its delivery obligations. Like other derivative securities,
swaps, floors and caps can be highly volatile. As a result, they may
not always be successful hedges and they could lower a Fund's total
return.
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, 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.
LOAN PARTICIPATIONS. A loan participation is an interest in a loan to a U.S. or
foreign company or other borrower which is administered and sold by a financial
intermediary.
INVESTMENT STRATEGY. The High Yield Fixed Income Fund may invest in
loan participations in the form of a direct or co-lending relationship
with the corporate borrower, an assignment of an interest in the loan
by a co-lender or another participant, or a participation in a seller's
share of the loan.
SPECIAL RISKS. Like other debt obligations, loan participations may be
subject to credit risk if the borrower defaults on making interest
payments and repaying the principal. In the case where the Fund
purchases a loan assignment or participation from another lender, the
Fund is also subject to delays, expenses and risks greater than would
have been involved if the Fund had purchased a direct obligation of the
borrower.
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. Some municipal
instruments, known as private activity bonds, are issued to finance projects for
private companies. Private activity bonds are usually revenue obligations since
they are typically payable by the user of the facilities financed by the bonds.
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Risks, Securities, Techniques and Financial Information
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and custodial receipts. Moral obligation banks 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 represent interests in
municipal instruments held by a trustee.
The Tax-Exempt Funds (other than the Tax-Exempt Money Market Fund) and the High
Yield Municipal Fund may also hold tax-exempt derivative instruments that have
interest rates that reset inversely to changing short-term rates and/or have
imbedded interest rate floors and caps that require the issuer to pay an
adjusted interest rate if market rates fall below or rise above a specified
rate. Because some of these instruments represent relatively recent innovations
in the municipal bond markets, and the trading market for these instruments is
less developed than the markets for traditional types of municipal instruments,
it is uncertain how these instruments will perform under different economic and
interest-rate scenarios. Also, because these instruments may be leveraged, their
market values may be more volatile than other types of municipal instruments and
may present greater potential for capital gain or loss. The possibility of
default by the issuer or the issuer's credit provider may be greater for these
derivative instruments than for other types of instruments. In some cases it may
be difficult to determine the fair value of a derivative instrument because of a
lack of reliable objective information and an established secondary market for
some instruments may not exist. In many cases, the Internal Revenue Service has
not ruled on whether the interest received on a tax-exempt derivative instrument
is tax-exempt and, accordingly, purchases of such instruments are based on the
opinion of counsel to the sponsors of the instruments.
Each Tax-Exempt Fund and Municipal Fund may acquire "stand-by commitments"
relating to the municipal instruments it holds. Under a stand-by commitment, a
dealer agrees to purchase, at the Fund's option, specified municipal instruments
at a specified price. A stand-by commitment may increase the cost, and thereby
reduce the yield, of the municipal instruments to which the commitment relates.
The Funds will acquire stand-by commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights for trading purposes.
INVESTMENT STRATEGY. Although it is not their current policy to do so
on a regular basis, in connection with their investments in municipal
instruments, the Tax-Exempt Funds and Municipal Funds may invest more
than 25% of their total assets in municipal instruments the interest
upon which is paid solely by governmental issuers from revenues of
similar projects. However, the Tax-Exempt Funds and Municipal Funds do
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.
The Florida Intermediate Tax-Exempt Fund expects to invest principally
in Florida municipal instruments, the California Funds expect to invest
principally in California municipal instruments and the Arizona
Tax-Exempt Fund expects to invest principally in Arizona municipal
instruments. The other Tax-Exempt Funds and Municipal Funds may also
invest from time to time more than 25% of the value of their total
assets in municipal instruments whose issuers are in the same state.
Funds in addition to the Tax-Exempt Funds and Municipal Funds may
invest from time to time in municipal instruments or other securities
issued by state and local governmental bodies. Generally, this will
occur when the yield of municipal instruments, on a pre-tax basis, is
comparable to that of other permitted short-term taxable investments.
Dividends paid by the Funds other than the Tax-Exempt Funds and
Municipal Funds on such investments will be taxable to shareholders.
SPECIAL RISKS. Municipal instruments purchased by the Tax-Exempt Funds
and Municipal Funds may be backed by letters of credit, insurance or
other forms of credit enhancement issued by foreign (as well as
domestic) banks, insurance companies 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 86 under
"Foreign Investments."
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
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Risks, Securities, Techniques and Financial Information
related, there is a possibility that an economic, business or political
development affecting one instrument would likewise affect the related
instrument.
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, each Fund (other than the Money Market Funds) may write
(sell) covered call options, buy put options, buy call options and
write secured put options for hedging (or, with respect to the
International Funds, cross-hedging) purposes or to earn additional
income. Options may relate to particular securities, foreign or
domestic securities indices, financial instruments, foreign currencies
or (in the case of the International Fixed Income Fund and High Yield
Fixed Income Fund) the yield differential between two securities. A
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 a
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. A
Fund may "cover" a call option by owning the security underlying the
option or through other means. Put options written by a 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.
Each Fund will invest and trade in unlisted over-the-counter options
only with firms deemed creditworthy by the Investment Advisers.
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 High Yield Fixed Income, Income Equity, Small
Cap Index, Small Cap and Small Cap Growth Funds 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. A 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 Advisers. 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
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Risks, Securities, Techniques and Financial Information
bankruptcy, a Fund could suffer additional losses if a court determines
that the Fund's interest in the collateral is unenforceable.
SECURITIES LENDING. In order to generate additional income, the Funds may lend
securities on a short-term basis to banks, broker-dealers or other qualified
institutions. In exchange, the Funds will receive collateral equal to at least
100% of the value of the securities loaned.
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 depress the price of certain
stripped securities and adversely affect a Fund's total return.
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.
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Risks, Securities, Techniques and Financial Information
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
credit support. 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 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. 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 variable amount master demand notes, 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 and (other than the Money Market Funds)
leveraged inverse floating rate instruments ("inverse floaters"). An inverse
floater is leveraged to the extent that its interest rate varies by an amount
that exceeds the amount of the variation in the index rate of interest.
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 Advisers to be of comparable
quality to rated instruments eligible for purchase by the Fund.
SPECIAL RISKS. 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. Each Equity Fund (other than the Stock Index and
Small Cap Index Funds) and the High Yield Fixed Income Fund may invest
up to 5% of its net assets at the time of purchase in warrants and
similar rights. A 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.
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Risks, Securities, Techniques and Financial Information
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.
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.
DISCLAIMERS
The Stock Index Fund is not sponsored, endorsed, sold or promoted by S&P, nor
does S&P guarantee the accuracy and/or completeness of the S&P 500(R) Index or
any data included therein. S&P makes no warranty, express or implied, as to the
results to be obtained by the Fund, owners of the Fund, any person or any entity
from the use of the S&P 500(R) Index or any data included therein. S&P makes no
express or implied warranties and expressly disclaims all such warranties of
merchantability or fitness for a particular purpose for use with respect to the
S&P 500(R) Index or any data included therein.
The Small Cap Index Fund is not sponsored, endorsed, sold or promoted by
Russell, nor does Russell guarantee the accuracy and/or completeness of the
Russell 2000 Index or any data included therein. Russell makes no warranty,
express or implied, as to the results to be obtained by the Fund, owners of the
Fund, any person or any entity from the use of the Russell 2000 Index or any
data included therein. Russell makes no express or implied warranties and
expressly disclaims all such warranties of merchantability or fitness for a
particular purpose for use with respect to the Russell 2000 Index or any data
included therein.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
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FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND A FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS (OR, IF SHORTER, THE PERIOD OF THE
FUND'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE
FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR
WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN A FUND (ASSUMING REINVESTMENT OF
ALL DIVIDENDS AND DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY ARTHUR
ANDERSEN LLP, WHOSE REPORT IS INCLUDED IN THE FUNDS' ANNUAL REPORT ALONG WITH
THE FUNDS' FINANCIAL STATEMENTS. THE ANNUAL REPORT IS AVAILABLE UPON REQUEST AND
WITHOUT CHARGE.
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FINANCIAL HIGHLIGHTS
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
MONEY MARKET FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1997 1996 1995(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
Income ................. 0.05 0.05 0.05 0.05 0.04
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income ................. (0.05) (0.05) (0.05) (0.05) (0.04)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) ............. 5.04% 5.31% 5.05% 5.57% 4.55%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $ 4,886,098 $ 3,296,030 $ 1,607,187 $ 1,061,813 $ 894,279
Ratio to average net assets
of:(4)
Expenses, net of
Waivers and
Reimbursements ........... 0.55% 0.55% 0.55% 0.49% 0.45%
Expenses, before
Waivers and
Reimbursements ........... 0.89% 0.90% 0.90% 0.91% 0.96%
Net investment income,
net of waivers and
reimbursements ........... 4.91% 5.19% 4.94% 5.42% 4.94%
Net investment income,
Before waivers and
Reimbursements ........... 4.57% 4.84% 4.59% 5.00% 4.43%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1997 1996 1995(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
Income ................. 0.05 0.05 0.05 0.05 0.04
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income ................. (0.05) (0.05) (0.05) (0.05) (0.04)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) ............. 4.94% 5.22% 4.93% 5.46% 4.47%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $ 469,866 $ 417,042 $ 314,259 $ 207,105 $ 227,543
Ratio to average net assets
of:(4)
Expenses, net of
Waivers and
Reimbursements ........... 0.55% 0.55% 0.55% 0.49% 0.45%
Expenses, before
Waivers and
Reimbursements ........... 0.91% 0.93% 0.96% 0.94% 1.01%
Net investment income,
net of waivers and
reimbursements ........... 4.82% 5.10% 4.82% 5.33% 4.93%
Net investment income,
Before waivers and
Reimbursements ........... 4.46% 4.72% 4.41% 4.88% 4.37%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT SELECT MONEY MARKET FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1997 1996 1995(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
Income ................. 0.05 0.05 0.05 0.05 0.02
- ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income ................. (0.05) (0.05) (0.05) (0.05) (0.02)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(3) ............. 4.87% 5.24% 5.07% 5.55% 1.75%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $ 416,527 $ 306,425 $ 168,128 $ 85,400 $ 82,162
Ratio to average net assets
of:(4)
Expenses, net of
Waivers and
Reimbursements ........... 0.55% 0.46% 0.40% 0.33% 0.30%
Expenses, before
Waivers and
Reimbursements ........... 0.91% 0.93% 0.97% 1.00% 1.32%
Net investment income,
net of waivers and
reimbursements ........... 4.73% 5.13% 4.95% 5.43% 5.84%
Net investment income,
Before waivers and
Reimbursements ........... 4.37% 4.66% 4.38% 4.76% 4.82%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period April 11, 1994 (commencement of operations) through
March 31, 1995.
(2) For the period December 12, 1994 (commencement of operations) through
March 31, 1995.
(3) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the year.
Total return is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
Page 105
<PAGE> 107
FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
Income.................. 0.03 0.03 0.03 0.03 0.03
- --------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income.................. (0.03) (0.03) (0.03) (0.03) (0.03)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN(3).............. 2.98% 3.27% 3.14% 3.54% 2.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year............... $ 2,384,030 $ 1,814,343 $ 1,420,041 $ 1,102,789 $ 927,747
Ratio to average net assets
of:(4)
Expenses, net of waivers
and reimbursements........ 0.55% 0.55% 0.55% 0.49% 0.45%
Expenses, before waivers
and reimbursements........ 0.89% 0.89% 0.90% 0.91% 0.95%
Net investment income,
net of waivers and
reimbursements............ 2.90% 3.20% 3.08% 3.46% 3.10%
Net investment income,
Before waivers and
Reimbursements............ 2.56% 2.86% 2.73% 3.04% 2.60%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA MUNICIPAL MONEY MARKET FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31
1999 1998 1997 1996 1995(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
Income.................. 0.03 0.03 0.03 0.04 0.01
- ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income.................. (0.03) (0.03) (0.03) (0.04) (0.01)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(3).............. 2.75% 3.20% 3.19% 3.63% 1.27%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year............... $ 363,050 $ 224,843 $ 200,989 $ 165,087 $ 161,316
Ratio to average net assets
of:(4)
Expenses, net of waivers
and reimbursements........ 0.55% 0.49% 0.45% 0.39% 0.35%
Expenses, before waivers
and reimbursements........ 0.91% 0.94% 0.94% 0.94% 1.07%
Net investment income,
net of waivers and
reimbursements............ 2.68% 3.14% 3.13% 3.55% 3.78%
Net investment income,
Before waivers and
Reimbursements............ 2.32% 2.69% 2.64% 3.00% 3.06%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period April 11, 1994 (commencement of operations) through
March 31, 1995.
(2) For the period November 29, 1994 (commencement of operations) through
March 31, 1995.
(3) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the year.
Total return is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
Page 106
<PAGE> 108
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND
------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.20 $ 9.88 $ 10.06 $ 9.84 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.50 0.54 0.51 0.51 0.50
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.10 0.32 (0.11) 0.29 (0.16)
---------- ---------- ---------- ---------- ----------
Total Income from
Investment Operations ........ 0.60 0.86 0.40 0.80 0.34
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.49) (0.53) (0.51) (0.51) (0.50)
From net realized gains ... (0.26) (0.01) (0.05) (0.07) --
In excess of net
investment income ........ -- -- -- -- --
In excess of net
realized gains ........... -- -- (0.02) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions Paid ..... (0.75) (0.54) (0.58) (0.58) (0.50)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE,
END OF YEAR ................ $ 10.05 $ 10.20 $ 9.88 $ 10.06 $ 9.84
---------- ---------- ---------- ---------- ----------
TOTAL RETURN(2) .............. 6.01% 8.90% 3.98% 7.65% 3.49%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $ 268,242 $ 229,352 $ 181,921 $ 149,062 $ 116,443
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.90% 0.90% 0.90% 0.90% 0.90%
Expenses, before waivers
and reimbursements ........ 1.07% 1.07% 1.09% 1.10% 1.12%
Net investment income,
net of waivers and
reimbursements ............ 4.73% 5.24% 5.19% 5.07% 5.20%
Net investment income,
before waivers and
reimbursements ............ 4.56% 5.07% 5.00% 4.87% 4.98%
PORTFOLIO TURNOVER
RATE ...................... 123.75% 47.41% 83.41% 112.00% 42.29%
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE TAX-EXEMPT FUND
-------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.36 $ 10.07 $ 10.22 $ 10.03 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.39 0.40 0.40 0.41 0.40
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.11 0.29 (0.06) 0.26 0.03
----------- ----------- ----------- ----------- -----------
Total Income from
Investment Operations ........ 0.50 0.69 0.34 0.67 0.43
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.39) (0.40) (0.40) (0.41) (0.40)
From net realized gains ... (0.11) -- (0.07) (0.07) --
In excess of net
investment income ........ -- -- -- -- --
In excess of net
realized gains ........... -- -- (0.02) -- --
----------- ----------- ----------- ----------- -----------
Total Distributions Paid ..... (0.50) (0.40) (0.49) (0.48) (0.40)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE,
END OF YEAR ................ $ 10.36 $ 10.36 $ 10.07 $ 10.22 $ 10.03
----------- ----------- ----------- ----------- -----------
TOTAL RETURN(2) .............. 4.88% 6.95% 3.39% 6.81% 4.38%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $ 344,789 $ 298,529 $ 264,630 $ 244,139 $ 221,251
----------- ----------- ----------- ----------- -----------
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.85% 0.85% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ........ 1.06% 1.07% 1.07% 1.08% 1.09%
Net investment income,
net of waivers and
reimbursements ............ 3.76% 3.84% 3.90% 4.01% 4.09%
Net investment income,
before waivers and
reimbursements ............ 3.55% 3.62% 3.68% 3.78% 3.85%
PORTFOLIO TURNOVER
RATE ...................... 54.03% 61.83% 61.39% 137.85% 78.87%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
--------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997(1)
---------- ---------- ----------
<S> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.47 $ 10.03 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.39 0.40 0.24
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.16 0.44 0.03
---------- ---------- ----------
Total Income from
Investment Operations ........ 0.55 0.84 0.27
---------- ---------- ----------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.39) (0.40) (0.24)
From net realized gains ... (0.16) -- --
In excess of net
investment income ........ -- -- --
In excess of net
realized gains ........... -- -- --
---------- ---------- ----------
Total Distributions Paid ..... (0.55) (0.40) (0.24)
---------- ---------- ----------
NET ASSET VALUE,
END OF YEAR ................ $ 10.47 $ 10.47 $ 10.03
---------- ---------- ----------
TOTAL RETURN(2) .............. 5.38% 8.51% 2.63%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $ 37,121 $ 25,329 $ 14,807
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ........ 1.29% 1.41% 2.31%
Net investment income,
net of waivers and
reimbursements ............ 3.67% 3.86% 3.84%
Net investment income,
before waivers and
reimbursements ............ 3.23% 3.30% 2.38%
PORTFOLIO TURNOVER
RATE ...................... 57.98% 46.12% 50.77%
---------- ---------- ----------
</TABLE>
Page 107
<PAGE> 109
(1) For the period August 15, 1996 (commencement of operations) through
March 31, 1997.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the year.
Total return is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 108
<PAGE> 110
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
FIXED INCOME FUND
----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.42 $ 9.86 $ 10.10 $ 9.78 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.54 0.59 0.57 0.58 0.62
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... -- 0.56 (0.12) 0.50 (0.22)
-------- -------- -------- -------- --------
Total Income from
Investment Operations ........ 0.54 1.15 0.45 1.08 0.40
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.54) (0.58) (0.56) (0.59) (0.62)
From net realized gains ... (0.27) (0.01) (0.10) (0.17) --
In excess of net
investment income ........ -- -- (0.01) -- --
In excess of net
realized gains ........... -- -- (0.02) -- --
-------- -------- -------- -------- --------
Total Distributions Paid ..... (0.81) (0.59) (0.69) (0.76) (0.62)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ................ $ 10.15 $ 10.42 $ 9.86 $ 10.10 $ 9.78
-------- -------- -------- -------- --------
TOTAL RETURN(2) .............. 5.18% 11.90% 4.59% 11.18% 4.16%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $275,108 $181,917 $122,444 $101,339 $ 65,929
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.90% 0.90% 0.90% 0.90% 0.90%
Expenses, before waivers
and reimbursements ........ 1.08% 1.09% 1.12% 1.14% 1.18%
Net investment income,
net of waivers and
reimbursements ............ 5.15% 5.71% 5.69% 5.79% 6.48%
Net investment income,
before waivers and
reimbursements ............ 4.97% 5.52% 5.47% 5.55% 6.20%
PORTFOLIO TURNOVER
RATE ...................... 84.85% 33.55% 87.64% 116.22% 55.27%
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TAX-EXEMPT FUND
-----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.73 $ 10.24 $ 10.35 $ 10.08 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.45 0.47 0.50 0.48 0.48
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.13 0.57 (0.06) 0.29 0.08
-------- -------- -------- -------- --------
Total Income from
Investment Operations ........ 0.58 1.04 0.44 0.77 0.56
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.45) (0.47) (0.47) (0.48) (0.48)
From net realized gains ... (0.23) (0.08) (0.05) (0.02) --
In excess of net
investment income ........ -- -- (0.03) -- --
In excess of net
realized gains ........... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions Paid ..... (0.68) (0.55) (0.55) (0.50) (0.48)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF YEAR ................ $ 10.63 $ 10.73 $ 10.24 $ 10.35 $ 10.08
-------- -------- -------- -------- --------
TOTAL RETURN(2) .............. 5.47% 10.39% 4.32% 7.80% 5.78%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $227,823 $167,220 $136,372 $125,113 $118,690
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.85% 0.85% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ........ 1.08% 1.09% 1.10% 1.10% 1.11%
Net investment income,
net of waivers and
reimbursements ............ 4.13% 4.42% 4.61% 4.62% 4.95%
Net investment income,
before waivers and
reimbursements ............ 3.90% 4.18% 4.36% 4.37% 4.69%
PORTFOLIO TURNOVER
RATE ...................... 140.39% 74.32% 8.10% 60.50% 54.94%
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT FUND
---------------------------
YEAR YEAR
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $ 10.76 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.43 0.41
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.23 0.76
------- -------
Total Income from
Investment Operations ........ 0.66 1.17
------- -------
LESS DISTRIBUTIONS PAID:
From net investment
income .................. (0.43) (0.41)
From net realized gains ... (0.10) --
In excess of net
investment income ........ -- --
In excess of net
realized gains ........... -- --
------- -------
Total Distributions Paid ..... (0.53) (0.41)
------- -------
NET ASSET VALUE,
END OF YEAR ................ $ 10.89 $ 10.76
------- -------
TOTAL RETURN(2) .............. 6.20% 11.86%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $77,249 $39,943
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 0.85% 0.85%
Expenses, before waivers
and reimbursements ........ 1.17% 1.60%
Net investment income,
net of waivers and
reimbursements ............ 3.87% 4.01%
Net investment income,
before waivers and
reimbursements ............ 3.55% 3.26%
PORTFOLIO TURNOVER
RATE ...................... 62.55% 22.22%
------- -------
</TABLE>
Page 109
<PAGE> 111
(1) For the period August 8, 1997 (commencement of operations) through
March 31, 1998.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the year.
Total return is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 110
<PAGE> 112
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
MUNICIPAL FIXED INCOME
INTERNATIONAL FIXED INCOME FUND FUND FUND
--------------------------------------------------------- ---------- ------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999(1) 1999(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ......... $9.85 $10.08 $10.62 $10.64 $10.00 $10.00 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ..... 0.38 0.43 0.56 0.78 0.58 0.05 0.11
Net realized and unrealized
gains (losses) on
investments, forward
foreign currency
contracts and foreign
currency transactions ... 0.58 0.02 (0.40) (0.16) 0.64 -- 0.08
- ---------------------------------------------------------------------------------------------------------------------
Total Income from
Investment Operations ........ 0.96 0.45 0.16 0.62 1.22 0.05 0.19
- ---------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
Income .................. (0.32) (0.59) (0.58) (0.62) (0.56) (0.04) (0.09)
From net realized gains ... (0.07) (0.09) (0.11) (0.02) -- -- --
In excess of net
investment income ........ -- -- -- -- (0.02) -- --
In excess of net
realized gains ........... (0.04) -- (0.01) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions Paid ..... (0.43) (0.68) (0.70) (0.64) (0.58) (0.04) (0.09)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ................ $10.38 $9.85 $10.08 $10.62 $10.64 $10.01 $10.10
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) .............. 9.68% 4.61% 1.39% 5.84% 12.77% 0.57% 2.06%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ............... $14,285 $13,675 $16,426 $15,665 $13,028 $10,033 $40,864
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ........ 1.15% 1.15% 1.15% 1.15% 1.15% 0.85% 0.90%
Expenses, before waivers
and reimbursements ........ 1.96% 1.87% 1.96% 2.00% 2.42% 5.60% 2.18%
Net investment income,
net of waivers and
reimbursements ............ 4.69% 4.98% 5.49% 5.75% 5.96% 2.92% 6.78%
Net investment income,
before waivers and
reimbursements ............ 3.88% 4.26% 4.68% 4.90% 4.69% (1.83)% 5.50%
PORTFOLIO TURNOVER RATE ...... 16.49% 30.26% 37.76% 52.05% 43.24% 0.00% 0.00%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 111
<PAGE> 113
(1) Commenced investment operations after the close of business on December 31,
1998.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return is
not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 112
<PAGE> 114
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INCOME EQUITY FUND STOCK INDEX FUND
--------------------------------------------------------- ---------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999 1998 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $13.81 $11.81 $11.59 $9.95 $10.00 $15.03 $10.74 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.46 0.45 0.44 0.34 0.29 0.16 0.15 0.08
Net realized and
unrealized Gains
(losses) on
investments, options,
futures contracts
and foreign currency
transactions ........... (0.41) 3.02 1.19 1.66 (0.08) 2.49 4.80 0.74
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 0.05 3.47 1.63 2.00 0.21 2.65 4.95 0.82
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................... (0.48) (0.44) (0.44) (0.36) (0.26) (0.17) (0.15) (0.07)
From net realized gains .. (0.65) (1.03) (0.97) -- -- (0.17) (0.51) (0.01)
In excess of net
investment income ....... -- -- -- -- -- -- -- --
In excess of accumulated
net realized gains on
investment transaction . -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (1.13) (1.47) (1.41) (0.36) (0.26) (0.34) (0.66) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $12.73 $13.81 $11.81 $11.59 $9.95 $17.34 $15.03 $10.74
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 0.67% 31.00% 14.42% 20.41% 2.21% 17.78% 47.11% 8.21%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $118,414 $117,562 $77,102 $55,919 $38,954 $169,062 $93,907 $35,840
Ratio to average net assets
of:(7)
Expenses, net of waivers
and reimbursements ........ 1.00% 1.00% 1.00% 1.00% 1.00% 0.55% 0.55% 0.55%
Expenses, before waivers
and reimbursements ........ 1.35% 1.37% 1.42% 1.48% 1.55% 1.00% 1.18% 2.23%
Net investment income (loss),
net of waivers and
reimbursements ............ 3.54% 3.53% 3.71% 3.17% 3.08% 1.10% 1.23% 1.92%
Net investment income
(loss), before waivers
and reimbursements ....... 3.19% 3.16% 3.29% 2.69% 2.53% 0.65% 0.60% 0.24%
PORTFOLIO TURNOVER RATE ..... 79.95% 81.24% 72.04% 67.32% 45.68% 2.46% 32.06% 64.94%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
---------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $18.62 $13.93 $13.15 $10.61 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.02 0.03 0.08 0.08 0.08
Net realized and
unrealized Gains
(losses) on
investments, options,
futures contracts
and foreign currency
transactions ........... 4.51 6.36 1.49 2.59 0.60
- -----------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 4.53 6.39 1.57 2.67 0.68
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.02) (0.03) (0.08) (0.08) (0.07)
From net realized gains .. (1.19) (1.67) (0.71) (0.05) --
In excess of net
investment income ....... -- -- -- -- --
In excess of accumulated
net realized gains on
investment transaction . -- -- -- -- --
- -----------------------------------------------------------------------------------------
Total Distributions Paid .... (1.21) (1.70) (0.79) (0.13) (0.07)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $21.94 $18.62 $13.93 $13.15 $10.61
- -----------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 24.72% 48.06% 11.72% 25.13% 6.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $640,948 $479,782 $302,605 $224,571 $113,185
Ratio to average net assets
of:(7)
Expenses, net of waivers
and reimbursements ........ 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ........ 1.30% 1.30% 1.33% 1.36% 1.40%
Net investment income (loss),
net of waivers and
reimbursements ............ 0.08% 0.18% 0.56% 0.70% 0.86%
Net investment income
(loss), before waivers
and reimbursements ....... (0.22)% (0.12)% 0.23% 0.34% 0.46%
PORTFOLIO TURNOVER RATE ..... 49.67% 73.85% 67.34% 73.20% 82.90%
- -----------------------------------------------------------------------------------------
</TABLE>
Page 113
<PAGE> 115
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
SELECT EQUITY FUND
-------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 19.16 $ 14.55 $ 13.12 $ 10.77 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... -- 0.02 0.02 0.02 0.06
Net realized and
unrealized
gains (losses) on
investments,
options, futures
contracts and foreign
currency transactions .. 5.40 6.81 2.05 2.73 0.75
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 5.40 6.83 2.07 2.75 0.81
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.01) (0.02) (0.02) (0.03) (0.04)
From net realized gains .. (1.22) (2.20) (0.62) (0.37) --
In excess of net
investment income ....... -- -- -- -- --
In excess of accumulated
net realized gain on
investment transactions . -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (1.23) (2.22) (0.64) (0.40) (0.04)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 23.33 $ 19.16 $ 14.55 $ 13.12 $ 10.77
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 28.79% 49.71% 15.64% 25.70% 8.18%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $198,530 $126,536 $63,677 $33,842 $15,123
Ratio to average net assets
of:(7)
Expenses, net of waivers
and reimbursements ....... 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ....... 1.54% 1.58% 1.67% 1.91% 2.61%
Net investment income
(loss), net of waivers
and reimbursements ....... (0.15)% 0.15% 0.21% 0.22% 0.82%
Net investment income
(loss) before waivers
and reimbursements ....... (0.69)% (0.43)% (0.46)% (0.69)% (0.79)%
PORTFOLIO TURNOVER
RATE ..................... 87.73% 148.55% 72.68% 137.99% 48.88%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MID CAP
GROWTH FUND SMALL CAP FUND
----------- -------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999(3) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 10.00 $ 16.76 $ 12.31 $ 11.58 $ 9.98 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... -- 0.04 0.03 0.07 0.05 0.11
Net realized and
unrealized
gains (losses) on
investments,
options, futures
contracts and foreign
currency transactions .. 1.72 (3.93) 5.14 1.37 2.29 (0.05)
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 1.72 (3.89) 5.17 1.44 2.34 0.06
- ------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. -- (0.01) (0.04) (0.06) (0.07) (0.08)
From net realized gains .. -- (0.54) (0.68) (0.65) (0.67) --
In excess of net
investment income ....... -- -- -- -- -- --
In excess of accumulated
net realized gain on
investment transactions . -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... -- (0.55) (0.72) (0.71) (0.74) (0.08)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 11.72 $ 12.32 $ 16.76 $ 12.31 $ 11.58 $ 9.98
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 17.19% (23.46)% 42.71% 12.48% 24.09% 0.57%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $77,378 $264,434 $368,579 $197,113 $155,238 $76,627
Ratio to average net assets
of:(7)
Expenses, net of waivers
and reimbursements ....... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ....... 1.65% 1.52% 1.53% 1.54% 1.61% 1.76%
Net investment income
(loss), net of waivers
and reimbursements ....... (0.51)% 0.25% 0.28% 0.54% 0.65% 1.36%
Net investment income
(loss) before waivers
and reimbursements ....... (1.16)% (0.27)% (0.25)% 0.00% 0.04% 0.60%
PORTFOLIO TURNOVER
RATE ..................... 173.39% 18.74% 18.59% 18.92% 46.59% 82.46%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- Page 114 -
<PAGE> 116
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH EQUITY
FUND
---------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 11.66 $ 10.05 $ 10.23 $ 9.61 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.13 0.09 0.09 0.17 0.04
Net realized and
unrealized gains
(losses) on
investments, options,
futures contracts and
foreign currency
transactions ........... 1.36 1.98 0.18 0.65 (0.31)
- ---------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 1.49 2.07 0.27 0.82 (0.27)
- ---------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. -- (0.07) (0.09) (0.11) (0.03)
From net realized gains .. (0.46) (0.29) (0.23) -- --
In excess of net
investment income ....... (0.12) (0.10) -- (0.09) --
In excess of
accumulated net
realized gains on
investment transactions . -- -- (0.13) -- (0.09)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (0.58) (0.46) (0.45) (0.20) (0.12)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 12.57 $ 11.66 $ 10.05 $ 10.23 $ 9.61
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 13.04% 21.34% 2.61% 8.61% (2.65)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $215,656 $178,210 $165,892 $181,237 $114,673
Ratio to average net assets
of: (7)
Expenses, net of waivers
and reimbursements ....... 1.25% 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers
and reimbursements ....... 1.62% 1.62% 1.63% 1.65% 1.71%
Net investment income
(loss), net of waivers
and reimbursements ....... 0.52% 0.79% 0.78% 0.92% 0.47%
Net investment income
(loss), before waivers
and reimbursements ....... 0.15% 0.42% 0.40% 0.52% 0.01%
PORTFOLIO TURNOVER
RATE ..................... 177.89% 145.02% 190.94% 216.86% 158.31%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
SELECT EQUITY
FUND
----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(4)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 12.52 $ 10.37 $ 10.73 $ 9.78 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.04 0.22 0.04 0.01 0.04
Net realized and
unrealized gains
(losses) on
investments, options,
futures contracts and
foreign currency
transactions ........... 1.08 2.19 (0.25) 0.99 (0.23)
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 1.12 2.41 (0.21) 1.00 (0.19)
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. -- (0.16) (0.03) (0.02) (0.03)
From net realized gains .. (0.65) -- -- -- --
In excess of net
investment income ....... (0.01) (0.10) (0.04) (0.03) --
In excess of
accumulated net
realized gains on
investment transactions . -- -- (0.08) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (0.66) (0.26) (0.15) (0.05) (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 12.98 $ 12.52 $ 10.37 $ 10.73 $ 9.78
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 9.16% 23.74% (1.95)% 10.20% (1.95)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $124,513 $117,618 $108,944 $102,719 $71,958
Ratio to average net assets
of: (7)
Expenses, net of waivers
and reimbursements ....... 1.25% 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers
and reimbursements ....... 1.66% 1.64% 1.66% 1.71% 1.75%
Net investment income
(loss), net of waivers
and reimbursements ....... 0.38% 0.29% 0.47% 0.12% 0.47%
Net investment income
(loss), before waivers
and reimbursements ....... (0.03)% (0.10)% 0.06% (0.34)% (0.03)%
PORTFOLIO TURNOVER
RATE ..................... 168.19% 98.22% 97.60% 176.71% 97.69%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TECHNOLOGY
FUND
----------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997(5)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 17.11 $ 11.95 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... -- -- --
Net realized and
unrealized gains
(losses) on
investments, options,
futures contracts and
foreign currency
transactions ........... 13.55 6.06 2.10
- -------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .... 13.55 6.06 2.10
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. -- -- --
From net realized gains .. (0.67) (0.90) (0.15)
In excess of net
investment income ....... -- -- --
In excess of
accumulated net
realized gains on
investment transactions . -- -- --
- -------------------------------------------------------------------------------
Total Distributions Paid .... (0.67) (0.90) (0.15)
- -------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 29.99 $ 17.11 $ 11.95
- -------------------------------------------------------------------------------
TOTAL RETURN(6) ............. 79.97% 52.62% 20.82%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $343,709 $104,389 $43,754
Ratio to average net assets
of: (7)
Expenses, net of waivers
and reimbursements ....... 1.23% 1.25% 1.25%
Expenses, before waivers
and reimbursements ....... 1.53% 1.59% 2.02%
Net investment income
(loss), net of waivers
and reimbursements ....... (0.87)% (0.96)% (0.75)%
Net investment income
(loss), before waivers
and reimbursements ....... (1.17)% (1.30)% (1.52)%
PORTFOLIO TURNOVER
RATE ..................... 61.01% 74.75% 67.89%
- -------------------------------------------------------------------------------
</TABLE>
- Page 115 -
<PAGE> 117
- ---------------------------------
(1) For the period October 7, 1996 (commencement of operations) through March
31, 1997.
(2) For the period April 6, 1994 (commencement of operations) through March 31,
1995.
(3) Commenced investment operations after the close of business on March 31,
1998.
(4) For the period April 5, 1994 (commencement of operations) through March 31,
1995.
(5) Commenced investment operations on April 1, 1996.
(6) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return is
not annualized for periods less than one year.
(7) Annualized for periods less than a full year.
- Page 116 -
<PAGE> 118
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT
Additional information about the Funds' investments is 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
- Page 117 -
<PAGE> 119
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
INTERMEDIATE TAX-EXEMPT FUND
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
FIXED INCOME FUND
TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
INTERNATIONAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL FUND
HIGH YIELD FIXED INCOME FUND
INCOME EQUITY FUND
STOCK INDEX FUND
GROWTH EQUITY FUND
SELECT EQUITY FUND
MARKETPOWER FUND
MID CAP GROWTH FUND
SMALL CAP INDEX FUND
SMALL CAP FUND
SMALL CAP GROWTH FUND
INTERNATIONAL GROWTH EQUITY FUND
INTERNATIONAL SELECT EQUITY FUND
TECHNOLOGY FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated November 30, 1999 (the
"Additional Statement") is not a prospectus. This Additional Statement should be
read in conjunction with
-1-
<PAGE> 120
the Prospectus dated November 30, 1999, as amended or supplemented from time to
time, for the Money Market Fund, U.S. Government Money Market Fund, U.S.
Government Select Money Market Fund, Tax-Exempt Money Market Fund, Municipal
Money Market Fund, California Municipal Money Market Fund (collectively, the
"Money Market Funds"), U.S. Government Fund, Short-Intermediate U.S. Government
Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund,
Florida Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund,
Arizona Tax-Exempt Fund, California Tax-Exempt Fund, High Yield Municipal Fund,
High Yield Fixed Income Fund, International Fixed Income Fund, Income Equity
Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund, MarketPower
Fund, Mid Cap Growth Fund, Small Cap Index Fund, Small Cap Fund, Small Cap
Growth Fund, International Growth Equity Fund, International Select Equity Fund
and Technology Fund (collectively, the "Non-Money Market Funds," and together
with the Money Market Funds, the "Funds") of Northern Funds (the "Prospectus").
Copies of the Prospectus may be obtained without charge from the Transfer Agent
by writing to the Northern Funds Center, P.O. Box 75986, Chicago, Illinois
60690-9069 or by calling 1-800-595-9111. Capitalized terms not otherwise defined
have the same meaning as in the Prospectus.
The audited financial statements and related report of Arthur Andersen
LLP, independent accountants, contained in the annual report to shareholders for
the fiscal year ended March 31, 1999 are incorporated herein by reference in the
section entitled "Financial Statements." No other part of the annual report is
incorporated by reference herein. Copies of the annual report may be obtained,
upon request and without charge by calling The Northern Trust Company at
1-800-595-9111.
----------
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 of principal. Although each of the Money Market Funds seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose money by
investing in the Funds.
-2-
<PAGE> 121
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION ..................................... 4
Investment Objectives and Policies .................................... 4
Special Risk Factors and Considerations Relating to California
Municipal Instruments, Florida Municipal Instruments and
Arizona Municipal Instruments ................................... 35
California Municipal Instruments ...................................... 35
Florida Municipal Instruments ......................................... 46
Arizona Municipal Instruments ......................................... 50
Investment Restrictions ............................................... 53
ADDITIONAL TRUST INFORMATION .......................................... 58
Classification and History ............................................ 58
Trustees and Officers ................................................. 58
Investment Adviser, Transfer Agent and Custodian ...................... 63
Co-Administrators and Distributor ..................................... 77
Service Organizations ................................................. 81
Counsel and Auditors .................................................. 83
In-Kind Purchases and Redemptions ..................................... 83
Automatic Investing Plan .............................................. 83
Directed Reinvestments ................................................ 84
Redemptions and Exchanges ............................................. 84
Retirement Plans ...................................................... 85
Expenses .............................................................. 85
PERFORMANCE INFORMATION ............................................... 85
Money Market Funds .................................................... 85
Non-Money Market Funds ................................................ 88
General Information ................................................... 93
NET ASSET VALUE ....................................................... 95
TAXES 91
Federal - General Information ......................................... 97
Federal - Tax-Exempt Information ...................................... 99
Taxation of Certain Financial Instruments ............................. 101
Special State Tax Considerations Pertaining to the California
Funds ........................................................... 101
Special State Tax Considerations Pertaining to the Florida
Intermediate Tax-Exempt Fund .................................... 103
Special State Tax Considerations Pertaining to the Arizona
Tax-Exempt Fund ................................................. 103
DESCRIPTION OF SHARES ................................................. 104
FINANCIAL STATEMENTS .................................................. 107
OTHER INFORMATION ..................................................... 107
APPENDIX A ............................................................ A-1
APPENDIX B ............................................................ B-1
</TABLE>
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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. The investment objective of each
Fund may be changed without the vote of the majority of the Fund's outstanding
shares. Except as expressly noted below, each Fund's investment 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 Advisers to be substantially
similar to those of any other investment otherwise permitted by the Funds'
investment policies.
MONEY MARKET FUNDS
Money Market Fund seeks to maximize current income to the
extent consistent with the preservation of capital and
maintenance of liquidity by investing only in high-quality
money market instruments.
U.S. Government Money Market Fund has the same
objective as the Money Market Fund but invests
primarily in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities
and related repurchase agreements.
U.S. Government Select Money Market Fund seeks to maximize
current income to the extent consistent with the preservation
of capital and maintenance of liquidity by investing
exclusively in high quality money market instruments.
Tax-Exempt Money Market Fund seeks to provide a high level of
income exempt from regular Federal income tax, to the extent
consistent with the preservation of capital, by investing
primarily in municipal instruments.
Municipal Money Market Fund seeks high current income exempt
from regular federal tax to the extent consistent with
preserving capital by investing mainly in short-term municipal
instruments.
California Municipal Money Market Fund seeks to provide its
shareholders to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of
income exempt from regular federal income tax and California
state personal income tax.
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FIXED INCOME FUNDS
U.S. Government Fund seeks high current income from U.S.
Government securities. The Fund's dollar-weighted average
maturity is anticipated to range between one and ten years. It
is designed for investors who seek greater principal stability
than is generally available from higher yielding corporate
bonds.
Short-Intermediate U.S. Government Fund seeks high current
income from a broad range of U.S. Government securities. The
Fund's dollar-weighted average maturity is anticipated to
range between two and five years. It is designed for investors
who seek greater principal stability than is generally
available from higher yielding corporate bonds.
Fixed Income Fund seeks high current income from a broad range
of bonds and other fixed income securities. The Fund's average
maturity is anticipated to range between seven and twelve
years. This Fund generally presents greater risk and reward
potential than the U.S. Government Fund and the
Short-Intermediate U.S. Government Fund.
International Fixed Income Fund seeks to maximize total return
consistent with reasonable risk while investing in foreign
securities markets. Total return is comprised of current
income and value fluctuations from investing in bonds and
other fixed income securities of foreign issuers.
High Yield Municipal Fund seeks a high level of current income
exempt from regular federal income tax.
High Yield Fixed Income Fund seeks a high level of current
income. In seeking current income, the Fund may also consider
the potential for capital appreciation. In pursuing its
investment objective, the Fund invests in high yield fixed
income instruments.
TAX-EXEMPT FIXED INCOME FUNDS
Intermediate Tax-Exempt Fund seeks high current income exempt
from regular federal income tax by investing in a broad range
of municipal instruments with an expected average maturity of
three to ten years.
California Intermediate Tax-Exempt Fund seeks high current
income exempt from regular federal income tax and California
state personal income tax by investing in municipal
instruments with an expected average maturity of three to ten
years.
Florida Intermediate Tax-Exempt Fund seeks high current income
exempt from regular federal income tax by investing in
municipal instruments
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with an expected average maturity of three to ten years. The
Fund intends, but cannot guarantee, that its shares will
qualify for exemption from the Florida intangibles tax.
Tax-Exempt Fund seeks high current income exempt from regular
federal income tax by investing in municipal instruments with
an expected average maturity of ten to thirty years.
Arizona Tax-Exempt Fund seeks high current income exempt from
regular federal income tax and Arizona state personal income
tax by investing in municipal instruments with an expected
average maturity of ten to thirty years.
California Tax-Exempt Fund seeks high current income exempt
from regular federal income tax and California state personal
income tax by investing in municipal instruments with an
expected average maturity of ten and thirty years.
EQUITY FUNDS
Income Equity Fund seeks to achieve high current income and,
as a secondary objective, longer-term capital appreciation.
The Fund invests in convertible and other equity securities.
Because it emphasizes high current income, this Fund is likely
to have the least price fluctuation of Northern Funds' equity
funds.
Stock Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance of
the securities included in the S&P 500 Index.
Growth Equity Fund seeks long-term capital appreciation by
investing mainly in the equity securities of growth companies.
It is designed for investors willing to accept above-average
price volatility in search of long-term reward.
Select Equity Fund is also for the more aggressive investor,
seeking long-term capital appreciation by investing
principally in common stocks of companies the adviser believes
to have superior growth characteristics. Any income is
incidental to this objective.
MarketPower Fund seeks to provide long-term capital
appreciation by investing primarily in the equity securities
of a concentrated group of companies believed to have
significant "market power." Any income received is incidental
to this objective.
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Mid 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 Standard & Poor's MidCap 400 Stock Index at the
time of investment.
Small Cap Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance of
the securities included in the Russell 2000 Index.
Small Cap Fund seeks long-term capital appreciation; any
income is incidental to this objective. Because it invests
principally in the equity securities of smaller companies,
this Fund is likely to have more price volatility than the
Growth Equity and Select Equity Funds.
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.
International Growth Equity Fund offers the potential benefits
of international diversification to investors willing to
accept above-average price volatility while seeking long-term
capital appreciation. While subject to additional risks such
as currency fluctuations and the higher volatility of foreign
securities, this Fund uses diversification, in an effort to
control risk.
International Select Equity Fund seeks long-term growth by
investing principally in common stock of foreign issuers that
the adviser believes are growing faster than their markets.
Because fewer countries and securities are generally
represented in this Fund than in the International Growth
Equity Fund, it is likely to experience more price volatility.
Technology Fund seeks long-term capital appreciation by
investing principally in equity securities and securities
convertible into common stock of companies that develop,
produce or distribute products and services related to
advances in technology. The Fund will, under normal market
conditions, invest at least 65% of the value of its total
assets in securities of companies principally engaged in
technology business activities. An issuer is considered
principally engaged in technology business activities if such
issuer is listed on the Morgan Stanley High-Technology 35
Index (the "Morgan Stanley Index"), the Hambrecht and Quist
Technology Index (the "H&Q Index"), the SoundView Technology
Index, the technology grouping of the S&P 500 Index or any
other comparable index.
The Morgan Stanley Index is an equal dollar weighted index of
35 stocks drawn from nine technology subsectors: computer
services, design
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software, server software, PC software and new media,
networking and telecom equipment, server hardware, PC hardware
and peripherals, specialized systems and semi-conductors. The
SoundView Technology Index is an equal dollar weighted index
designed to measure the performance of the technology
industry. It is comprised of 100 major technology companies
chosen by SoundView Financial Group. The H&Q Index is
comprised of publicly traded stocks of approximately 250
technology companies. The H&Q Index includes companies in the
electronics, services and related technologies industries and
is a market capitalization weighted index. Changes in the
indices may occur when Morgan Stanley, SoundView or H&Q choose
to modify their indices or as mergers, acquisitions and
failures dictate. Such changes may happen with fair regularity
owing to the fast-changing nature of the technology
industries.
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 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.
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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. The Money Market Fund and Fixed Income Fund will only purchase
highly rated IFAs. The High Yield Fixed Income Fund is not subject to any
minimum rating criteria. 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 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.
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LOAN PARTICIPATIONS. The High Yield Fixed Income Fund may invest in loan
participations. Such loans must be to issuers in whose obligations the High
Yield Fixed Income Fund may invest. A loan participation is an interest in a
loan to a U.S. or foreign company or other borrower which is administered and
sold by a financial intermediary. In a typical corporate loan syndication, a
number of lenders, usually banks (co-lenders), lend a corporate borrower a
specified sum pursuant to the terms and conditions of a loan agreement. One of
the co-lenders usually agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fixed Income Fund may
take the form of a direct or co-lending relationship with the corporate
borrower, an assignment of an interest in the loan by a co-lender or another
participant, or a participation in the seller's share of the loan. When the High
Yield Fixed Income Fund acts as co-lender in connection with a participation
interest or when the High Yield Fixed Income Fund acquires certain participation
interests, the High Yield Fixed Income Fund will have direct recourse against
the borrower if the borrower fails to pay scheduled principal and interest. In
cases where the High Yield Fixed Income Fund lacks direct recourse, it will look
to the agent bank to enforce appropriate credit remedies against the borrower.
In these cases, the High Yield Fixed Income Fund may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Fund had purchased a direct obligation (such as commercial paper) of such
borrower. For example, in the event of the bankruptcy or insolvency of the
corporate borrower, a loan participation may be subject to certain defenses by
the borrower as a result of improper conduct by the agent bank. Moreover, under
the terms of the loan participation, the High Yield Fixed Income Fund may be
regarded as a creditor of the agent bank (rather than of the underlying
corporate borrower), so that the High Yield Fixed Income Fund may also be
subject to the risk that the agent bank may become insolvent. The secondary
market, if any, for these loan participations is limited and any loan
participations purchased by the High Yield Fixed Income Fund will be regarded as
illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fixed Income Fund's portfolio investments, the
issuer of a loan participation will be the underlying borrower. However, in
cases where the High Yield Fixed Income Fund does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the High Yield Fixed Income Fund and the borrower will be
deemed issuers of a loan participation.
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
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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 Advisers 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.
Variable and floating rate instruments eligible for purchase by the Funds
include variable amount master demand notes, which permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate, and (except for the Money Market Funds) leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage interest in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. 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. Unrated variable and floating rate instruments will
be determined by the Investment Advisers 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.
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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 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
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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, other than the U.S. Government Select Money Market
Fund, may acquire U.S. Government obligations and their unmatured interest
coupons that have been separated ("stripped") by their holder, typically a
custodian bank or investment brokerage firm. Having separated the interest
coupons from the underlying principal of the U.S. Government obligations, the
holder will resell the stripped securities in custodial receipt programs with a
number of different names, including "Treasury Income Growth Receipts" ("TIGRs")
and "Certificate of Accrual on Treasury Securities" ("CATS"). The stripped
coupons are sold separately from the underlying principal, which is usually sold
at a deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. Northern Funds
is unaware of any binding legislative, judicial or administrative authority on
this issue.
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 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 financial
assets. Asset-backed securities represent interests in "pools" of assets in
which payments of both interest and principal on the securities
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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 "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
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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. Municipal instruments are generally issued to
finance public works, such as airports, bridges, highways, housing,
health-related entities, transportation-related projects, educational programs,
water and pollution control and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses and to
make loans to other public institutions and for other facilities. Municipal
instruments include private activity bonds issued by or on behalf of public
authorities. Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
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
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of the facility being financed. Private activity bonds are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of a private activity bond is usually directly
related to the credit standing of the private user of the facility involved.
The Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund (the "Tax-Exempt
Funds") and the Municipal Money Market Fund, California Municipal Money Market
Fund and High Yield Municipal Fund (the "Municipal Funds") may also invest in
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund (if
such a fund has been established), the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
The Tax-Exempt Money Market, Municipal Money Market and California
Municipal Money Market Funds may invest in fixed and variable rate notes and
similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's,
SP-2 or A-2 or higher by S&P, D-2 or higher by D&P or F-2 or higher by Fitch
IBCA and tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moody's, A-2 or higher by S&P, D-2 or higher by D&P or F-2 or
higher by Fitch IBCA. The Tax-Exempt Money Market, Municipal Money Market and
California Municipal Money Market Funds may also invest in rated and unrated
municipal bonds, notes, paper or other instruments that are of comparable
quality to the tax-exempt commercial paper permitted to be purchased by the
Funds.
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. Municipal leases
(and participations in such leases) present the risk that a municipality will
not appropriate funds for the lease payments. Northern Trust, under the
supervision of Northern Funds' Board of Trustees, will determine the credit
quality of any unrated municipal leases on an ongoing basis, including an
assessment of the likelihood that the leases will not be cancelled.
There are, of course, variations in the quality of municipal instruments,
both within a particular category and between categories, and the yields on
municipal instruments depend upon a variety of factors, including general market
conditions, the financial condition of the issuer,
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general conditions of the municipal bond market, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. The
ratings of an NRSRO, such as Moody's, S&P and Fitch IBCA described in Appendix A
hereto, represent such NRSRO's opinion as to the quality of municipal
instruments. It should be emphasized that these ratings are general and are not
absolute standards of quality. Municipal instruments with the same maturity,
interest rate and rating may have different yields. Municipal instruments of the
same maturity and interest rate with different ratings may have the same yield.
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 and Municipal Funds and
the Funds' liquidity and value. In such an event the Board of Trustees would
reevaluate the Funds' investment objectives and policies and consider changes in
their structure or possible dissolution.
Certain of the municipal instruments held by a Fund may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the municipal instrument at the time of its
original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. A
Fund may invest more than 25% of its total assets in municipal instruments
covered by insurance policies.
In addition, municipal instruments may be backed by letters of credit or
guarantees issued by domestic or foreign banks or other financial institutions
which are not subject to federal deposit insurance. Adverse developments
affecting the banking industry generally or a particular bank or financial
institution that has provided its credit or guarantee with respect to a
municipal instrument held by a Fund, including a change in the credit quality of
any such bank or financial institution, could result in a loss to the Fund and
adversely affect the value of its shares. As described below under "Foreign
Securities," letters of credit and guarantees issued by foreign
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banks and financial institutions involve certain risks in addition to those of
similar instruments issued by domestic banks and financial institutions.
Interest earned by the Tax-Exempt Money Market Fund, Intermediate
Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund or California
Tax-Exempt Fund on private activity bonds (if any) that is treated as a specific
tax preference item under the federal alternative minimum tax will not be deemed
to have been derived from municipal instruments for purposes of determining
whether that Fund meets its fundamental policy that at least 80% of its annual
gross income be derived from municipal instruments.
The Tax-Exempt Funds and the Municipal Funds may invest in municipal
leases, which may be considered liquid under guidelines established by Northern
Funds' Board of Trustees. The guidelines will provide for determination of the
liquidity 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.
Opinions relating to the validity of municipal instruments (including
California, Florida and Arizona 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.
Currently, it is not the intention of the Tax-Exempt Funds and the
Municipal Funds (other than the Florida Intermediate Tax-Exempt Fund, the
California Funds and the Arizona Tax-Exempt Fund) to invest more than 25% of
their total assets in municipal instruments whose issuers are in the same state.
STANDBY COMMITMENTS. The Tax-Exempt Funds and Municipal Funds may enter
into standby commitments with respect to municipal instruments held by them.
Under a standby commitment, a dealer agrees to purchase at a Fund's option a
specified municipal instrument. Standby commitments may be exercisable by a Fund
at any time before the maturity of the underlying municipal instruments and may
be sold, transferred or assigned only with the instruments involved.
The Funds expect that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds may pay for a standby commitment either
separately in cash or by paying a higher price for municipal instruments which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding standby commitments held by a Fund will not exceed 1/2 of
1% of the value of the Fund's total assets calculated immediately after each
standby commitment is acquired.
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The Funds intend to enter into standby commitments only with dealers,
banks and broker-dealers which, in Northern Trust's opinion, present minimal
credit risks. The Funds will acquire standby commitments solely to facilitate
portfolio liquidity and do 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 a Fund
pays directly or indirectly for a standby commitment, its cost will be reflected
as an unrealized loss for the period during which the commitment is held by the
Fund and will be reflected in realized gain or loss when the commitment is
exercised or expires.
WARRANTS. The Income Equity, Growth Equity, Select Equity, MarketPower,
Mid Cap Growth, Small Cap, Small Cap Growth, International Growth Equity,
International Select Equity, Technology and High Yield Fixed Income Funds may
purchase warrants and similar rights, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. The 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 International Funds intend to invest primarily in
the securities of foreign issuers. In addition, each Equity Fund, the Fixed
Income Fund and the High Yield Fixed Income Fund may invest a portion of their
assets in such securities, including (except with respect to the Fixed Income
Fund) 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. The Money
Market Fund may also invest in dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, as well as other foreign issuers.
These obligations may be issued by supranational entities, including
international organizations (such as the European Coal and Steel Community)
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies.
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
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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.
The Money Market Fund, the Fixed Income Fund, the High Yield Fixed Income
Fund, each Equity Fund and each International 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 their investment objectives, the Funds 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 Europe, Japan and in the Asia\Pacific regional context can be
expected to produce continuing effects on securities and currency markets.
In addition, the International Funds and High Yield Fixed Income Fund may
invest their assets in countries with emerging economies or securities markets.
These countries are located
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in the Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many of these countries may be undergoing
significant evolution and rapid development, and these countries may lack the
social, political and economic stability characteristics of more developed
countries. Some of these countries may have in the past failed to recognize
private property rights and may have at times nationalized or expropriated the
assets of private companies. In general, the securities markets of these
countries are less liquid, subject to greater price volatility, have smaller
market capitalizations and have problems with securities registration and
custody. As a result, the risks presented by investments in these countries are
heightened. Additionally, settlement procedures in emerging countries are
frequently less developed and reliable than those in the United States and may
involve a Fund's delivery of securities before receipt of payment for their
sale. Settlement or registration problems may make it more difficult for a Fund
to value its portfolio securities and could cause the Fund to miss attractive
investment opportunities, to have a portion of its assets uninvested or to incur
losses due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations.
Although a Fund (other than the Money Market 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, a
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 a 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. In addition, through the use of forward
currency exchange contracts and with other instruments, the respective net
currency positions of the International Funds may expose them to risks
independent of their securities positions. Although the net long and short
foreign currency exposure of the International Funds will not exceed their
respective total asset values, to the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater risk than it would have if it did not maintain the currency
positions. The Funds are also subject to the possible imposition of exchange
control regulations or freezes on the convertibility of currency.
Investors should understand that the expense ratios of the International
Funds can be expected to be higher than those of Funds investing primarily in
domestic securities. The costs attributable to investing abroad are usually
higher for several reasons, such as the higher cost of investment research,
higher costs of custody of foreign securities, higher commissions paid on
comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Dividends and interest payable on a 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."
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AMERICAN DEPOSITORY RECEIPTS. Each Equity Fund and each International Fund
can invest in ADRs. ADRs are receipts typically issued by a United States bank
or trust company evidencing ownership of the underlying foreign securities and
are denominated in U.S. dollars. Some institutions issuing ADRs may not be
sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangement with the issuer.
EUROPEAN DEPOSITORY RECEIPTS. Each Equity Fund and each International 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 Fixed Income, International Fixed Income, High Yield
Fixed Income, Income Equity, Growth Equity, Select Equity, MarketPower, Mid Cap
Growth, Small Cap, Small Cap Growth, International Growth Equity, International
Select Equity and Technology Funds are authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather may allow a Fund to establish a rate of exchange
for a future point in time.
When entering into a contract for the purchase or sale of a security, a
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 an 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, a Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the securities held by a Fund create a
short position in a foreign currency, a Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. A 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
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costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
In addition, Northern Trust may purchase or sell forward currency exchange
contracts for the International Fixed Income Fund, International Growth Equity
Fund and International Select Equity Fund (collectively, the "International
Funds") and the High Yield Fixed Income Fund to seek to increase total return
when Northern Trust anticipates that the foreign currency will appreciate or
depreciate in value. The International Funds and the High Yield Fixed Income
Fund may engage in cross-hedging by using forward contracts in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if Northern Trust believes that there is a pattern of correlation
between the two currencies.
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 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. Each Non-Money Market Fund may buy put options and buy call
options and write covered call and secured put options. Such options may relate
to particular securities, foreign and domestic securities indices, financial
instruments, foreign currencies or (in the case of the International Fixed
Income Fund and the High Yield Fixed Income Fund) the yield differential between
two securities ("yield curve options"), and may or may not be listed on a
domestic or foreign securities exchange 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.
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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 Funds will write call options only if they are "covered." In the case
of a call option on a security or currency, the option is "covered" if a Fund
owns the instrument underlying the call or has an absolute and immediate right
to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, 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 Funds 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.
With respect to yield curve options, a call (or put) option is covered if
the International Fixed Income Fund or High Yield Fixed Income Fund holds
another call (or put) option on the spread between the same two securities and
maintains in a segregated account liquid assets sufficient to cover the Fund's
net liability under the two options. Therefore, the Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
A Fund's obligation to sell an instrument subject to a covered call option
written by it, or to purchase an instrument subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
instrument, exercise price and expiration date) as the option previously
written. Such a purchase does not result in the ownership of an option. A
closing purchase transaction will ordinarily be effected to realize a profit on
an outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated 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.
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When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on an exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities or currencies; unusual or unforeseen circumstances may interrupt
normal operations on an exchange; the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
value; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money
Market Funds) may purchase and sell futures contracts and may purchase and sell
call and put options on futures contracts for hedging purposes, for speculative
purposes (to seek to increase total return), or for liquidity management
purposes. When used as a hedge, a 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. A 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, a Fund may purchase a futures
contract as a hedge in anticipation of purchases of securities. In addition, a
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.
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Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, 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 a 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 Funds from registration as a "commodity
pool operator."
REAL ESTATE INVESTMENT TRUSTS. The High Yield Fixed Income Fund, Income
Equity Fund, Small Cap Index Fund, Small Cap Fund and 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 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 (except for the U.S. Government Money
Market Fund, U.S. Government Select
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Money Market Fund, U.S. Government Fund and Short-Intermediate U.S. Government
Fund) irrevocable bank letters of credit (or any combination thereof). The
borrower of securities will be required to maintain the market value of the
collateral at not less than the market value of the loaned securities, and such
value will be monitored on a daily basis. When a Fund lends its securities, it
continues to receive dividends and interest on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans will be called so that the securities may be voted by a
Fund if a material event affecting the investment is to occur.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The U.S.
Government, Short-Intermediate U.S. Government, Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed
Income, Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt, International
Fixed Income, High Yield Municipal, High Yield Fixed Income and Income Equity
Funds may enter into interest rate swaps for hedging purposes and not for
speculation. The U.S. Government, Short-Intermediate U.S. Government, Fixed
Income, International Fixed Income, High Yield Municipal and High Yield Fixed
Income Funds may also purchase interest rate floors or caps for hedging purposes
and not for speculation. A Fund will typically use interest rate swaps to
preserve a return on a particular investment or portion of its portfolio or to
shorten the effective duration of its portfolio investments. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. The purchase of an interest rate floor or
cap entitles the purchaser to receive payments of interest on a notional
principal amount from the seller, to the extent the specified index falls below
(floor) or exceeds (cap) a predetermined interest rate. The International Funds
and the High Yield Fixed Income Fund may also enter into currency swaps, which
involve the exchange of the rights of a Fund and another party to make or
receive payments in specific currencies.
A Fund will only enter into interest rate swaps or interest rate floor or
cap transactions on a net basis, i.e. the two payment streams are netted out,
with a Fund receiving or paying, as the case may be, only the net amount of the
two payments. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for the other
designated currency. Inasmuch as these transactions are entered into for good
faith hedging purposes, the Funds and the Investment Advisers believe that such
obligations do not constitute senior securities as defined in the 1940 Act and,
accordingly, will not treat them as being subject to the Funds' borrowing
restrictions.
The net amount of the excess, if any, of the Funds' obligations over their
entitlements with respect to each interest rate or currency swap will be accrued
on a daily basis, and an amount of liquid assets having an aggregate net asset
value at least equal to such accrued excess, will be segregated by the Funds.
Except for the High Yield Fixed Income Fund (which is not subject to any
minimum rating criteria), a Fund will not enter into a currency or interest rate
swap or interest rate floor or cap transaction unless the unsecured commercial
paper, senior debt or the claims-paying ability of the other party thereto is
rated either A or A-1 or better by S&P, Duff or Fitch IBCA, or A or P-1 or
better by Moody's. If there is a default by the other party to such transaction,
a Fund will
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have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with markets for other similar
instruments which are traded in the Interbank market.
EQUITY SWAPS. Each Equity 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).
A 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 a Fund is contractually obligated to make. If
the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such 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 Funds' potential
exposure, the Funds and their Investment Advisers believe that transactions do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to a Fund's borrowing restrictions.
The Funds 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, a 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 Advisers are incorrect in
their forecasts of market values, the
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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 Advisers 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.
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
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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 Advisers
believe 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 Index, Small Cap and Small
Cap Growth Funds' primary investments, and stocks of recently organized
companies, in which the Small Cap Index, Small Cap and Small Cap Growth Funds
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 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
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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.
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.
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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 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 IBCA 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
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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 Advisers determine such retention is warranted.
STOCK INDICES. The Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index") is a market value-weighted index consisting of 500 common
stocks which are traded on the New York Stock Exchange, American Stock Exchange
and the Nasdaq National Market System and selected by Standard & Poor's
Corporation ("Standard & Poor's") through a detailed screening process starting
on a macro-economic level and working toward a micro-economic level dealing with
company-specific information such as market value, industry group
classification, capitalization and trading activity. Standard & Poor's primary
objective for the S&P 500 Index is to be the performance benchmark for the U.S.
equity markets. The companies chosen for inclusion in the S&P 500 Index tend to
be leaders in important industries within the U.S. economy. However, companies
are not selected by Standard & Poor's for inclusion because they are expected to
have superior stock price performance relative to the market in general or other
stocks in particular. Standard & Poor's makes no representation or warranty,
implied or express, to purchasers of Stock Index Fund shares or any member of
the public regarding the advisability of investing in the Fund or the ability of
the S&P 500 Index to track general stock market performance.
The Standard & Poor's Midcap 400 Stock Index ("S&P MidCap 400 Index") is a
market-weighted index composed of 400 common stocks chosen by Standard & Poor's
for market size, liquidity and industry group representation. The purpose of the
S&P MidCap 400 Index is to represent the performance of the
medium-capitalization sector of the U.S. securities market. Medium capitalized
stocks which are included in the S&P 500 Index are excluded from the S&P MidCap
400 Index. Except for a limited number of Canadian securities, the S&P MidCap
400 does not include foreign securities. As of ______, 1999, the approximate
market capitalization range of the companies included in the S&P MidCap 400
Index was between $___ million and $____ billion.
The Russell 2000 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
2000 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 2000 Index was approximately $_____
million. The Russell 2000 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 2000 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 2000
Index because they are expected to have superior stock price performance
relative to the market in general or
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other stocks in particular. Russell makes no representation or warranty, implied
or express, to purchasers of Small Cap Index or 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 2000 Index to track general market performance of
small capitalization stocks.
TRACKING VARIANCE. As discussed in the Prospectus, the Stock Index and
Small Cap Index Funds are subject to the risk of tracking variance. Tracking
variance may result from share purchases and redemptions, transaction costs,
expenses and other factors. Share purchases and redemptions may necessitate the
purchase and sale of securities by a Fund and the resulting transaction costs
which may be substantial because of the number and the characteristics of the
securities held. In addition, transaction costs are incurred because sales of
securities received in connection with spin-offs and other corporate
organizations are made to conform a Fund's holdings with its investment
objective. Tracking variance may also occur due to factors such as the size of a
Fund, the maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Fund's designated Index or the manner in which
the Index is calculated or because the indexing and investment approach of the
Investment Adviser does not produce the intended goal of the Fund. In the event
the performance of a Fund is not comparable to the performance of its designated
Index, the Board of Trustees will evaluate the reasons for the deviation and the
availability of corrective measures. If substantial deviation in a Fund's
performance were to continue for extended periods, it is expected that the Board
of Trustees would consider recommending to shareholders possible changes to the
Fund's investment objective.
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. For the
fiscal year ended March 31, 1999, the turnover rates with respect to the U.S.
Government, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed
Income, Tax-Exempt, California Tax-Exempt Fund, International Fixed Income, High
Yield Municipal, High Yield Fixed Income, Income Equity, Stock Index, Growth
Equity, Select Equity, Mid Cap Growth, Small Cap, International Growth Equity,
International Select Equity and Technology Funds were 123.75%, 54.03%, 57.98%,
84.85%, 140.39%, 62.55%, 16.49%, 0.00%, 0.00%, 79.95%, 2.46%, 49.67%, 87.73%,
173.39%, 18.74%, 177.89%, 168.19% and 61.01%, respectively. The Tax-Exempt Money
Market Fund, Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, MarketPower Fund, Small Cap Index Fund
and Small Cap Growth Fund 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.
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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 although the Funds have no
current intention to do so in the coming year. "Selling short against the box"
involves selling a security that a Fund owns for delivery at a specified date in
the future.
SPECIAL RISK FACTORS AND CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
INSTRUMENTS, FLORIDA MUNICIPAL INSTRUMENTS AND ARIZONA MUNICIPAL INSTRUMENTS
Some of the risk factors relating to investments by the California,
Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds in California,
Florida, and Arizona municipal instruments are summarized below. This summary
does not purport to be a comprehensive description of all relevant factors.
Although the Trust has no reason to believe that the information summarized
herein is not correct in all material respects, this information has not been
independently verified for accuracy or thoroughness by the Trust. Rather, the
information presented herein with respect to California municipal instruments
was culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California available as of the date of this Statement of Additional Information
and, with respect to the Florida Intermediate Tax-Exempt and Arizona Tax-Exempt
Funds, the information is derived principally from official statements relating
to issues of Florida and Arizona municipal instruments released prior to the
date of this Additional Statement. Further, any estimates and projections
presented herein should not be construed as statements of fact. They are based
upon assumptions which may be affected by numerous factors and there can be no
assurance that target levels will be achieved.
CALIFORNIA MUNICIPAL INSTRUMENTS
General
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the California Funds, or result in the default of existing
obligations, including obligations which may be held by the California Funds. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
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Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12 percent of the total United States population and grew by 26 percent in
the 1980s, more than double the national rate. Population growth slowed to less
than 1 percent annually in 1994 and 1995, but rose to 1.8 percent in 1996 and
1.6 percent in 1997. During the early 1990's, net population growth in the State
was due to births and foreign immigration, but in recent years, in-migration
from the other states has increased.
Total personal income in the State, at an estimated $902 billion in 1998,
accounts for almost 13 percent of all personal income in the nation. Total
employment is over 15 million, the majority of which is in the service, trade
and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10 percent recession peak to under 6 percent in early 1999. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994 particularly in high technology manufacturing and services,
including computer software, electronic manufacturing and motion
picture/television production, and other services, entertainment and tourism,
and both residential and commercial construction. International economic
problems starting in 1997 had some moderating impact on California's economy,
but negative impacts, such as a sharp drop in exports to Asia which have hurt
the manufacturing and agricultural sectors, have apparently been offset by
increased exports to Latin American and other nations, and a greater strength in
services, computer software and construction. Current forecasts predict
continued strong growth of the State's economy in 1999, with a slowdown in the
rate of growth predicted in 2000 and beyond. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California municipal instruments may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1 percent of full
cash value of the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2 percent per year, except
under new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above the 1
percent limit to pay debt service on voter-approved bonded indebtedness.
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Under Article XIIIA, the basic 1 percent ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1 percent limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed a non-voter approved levy of "general taxes" which
were not dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
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The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund 50
percent of any excess, with the other 50 percent paid to schools and community
colleges. With more liberal annual adjustment factors since 1988, and depressed
revenues since 1990 because of the recession, few governments are currently
operating near their spending limits, but this condition may change over time.
Local governments may by voter approval exceed their spending limits for up to
four years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $6.8 billion under the limit for
fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the
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impact of these Articles on California municipal instruments or on the ability
of the State or local governments to pay debt service on such California
municipal instruments. It is not possible, at the present time, to predict the
outcome of any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of May 1,
1999, the State had outstanding approximately $19.7 billion of long-term general
obligation bonds, plus $246 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.6 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $15.3 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1997-98, debt service on general obligation
bonds and lease purchase debt was approximately 4.4 percent of General Fund
revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1997-1998 were the
California personal income tax (51 percent of total revenues), the sales tax (32
percent), bank and corporation taxes (11 percent), and the gross premium tax on
insurance (2 percent). The State maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund, but which is required to be replenished as
soon as sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 35 percent).
Recent Budgets. As a result of the severe economic recession from
1990-94 and other factors, during this period the State experienced substantial
revenue shortfalls, and greater than anticipated social service costs. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature
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and Governor responded to these deficits by enacting a series of fiscal steps
between FY1991-92 and FY1994-95, including significant cuts in health and
welfare and other program expenditures, tax increases, transfers of program
responsibilities and some funding sources from the State to local governments,
and transfer of about $3.6 billion in annual local property tax revenues
primarily from cities and counties to local school districts, thereby reducing
State funding for schools.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. The last of these deficit notes was repaid in
April, 1996.
The State's financial condition improved markedly in the years from
FY1995-96 onward, with a combination of better than expected revenues, slowdown
in growth of social welfare programs, and continued spending restraint based on
the actions taken in earlier years. The State's cash position also improved, and
no external deficit borrowing has occurred over the fiscal year since FY
1994-95.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98, and $1.0 billion in
1998-99) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the
recession years was finally eliminated. The Department of Finance estimates that
the State's budget reserve (the SFEU) totaled about $1.8 billion at June 30,
1998 and $1.9 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession
resulted in significant increases in State funding for local school districts
under Proposition 98. From the recession level of about $4,300 per pupil, annual
State funding has increased to over $6,000 per pupil in FY 1999-2000. A
significant amount of the new moneys have been directed to specific educational
reforms, including reduction of class sizes in many grade levels. The improved
budget condition also allowed annual increases in support for higher education
in the State, permitting increased enrollment and reduction of student fees.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid. Generally, health and
welfare costs have been contained even during the recent period of economic
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000.
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FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act, the
Legislature passed a number of additional fiscal bills. Taking these into
account, the Administration projected in September, 1998 that the balance in the
SFEU at June 30, 1999 would be about $1.2 billion.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these was a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting on January 1, 1999, the VLF has been reduced by 25 percent.
Under pre-existing law, VLF funds are automatically transferred to cities and
counties, so the new legislation provided for the General Fund to make up the
reductions. If State General Fund revenues continue to grow above certain
targeted levels in future years, the cut could reach as much as 67.5 percent by
the year 2003. The initial 25 percent VLF cut will be offset by about $500
million in General Fund money in FY 1998-99, and $1 billion annually for future
years. Other tax cuts in FY 1998-99 included an increase in the dependent credit
exemption for personal income tax filers, restoration of a renter's tax credit
for taxpayers, and a variety of business tax relief measures. The total cost of
these tax cuts was estimated at $1.4 billion for FY 1998-99.
The Administration released new projections for the balance of FY 1998-99
on May 14, 1999 as part of the May Revision of the Governor's Proposed Budget
for 1999-2000 (the "May Revision"). The May Revision revealed that the State's
economy was much stronger in late 1998 and into 1999 than the Administration had
thought when it made its first FY 1999-2000 Budget Proposal in January 1999. As
a result, the May Revision updated 1998-99 General Fund revenues to be $57.9
billion, almost $1 billion above the original FY 1998-99 estimates, and over
$1.6 billion above the Administration's January estimate. Most of the increase
is from personal income taxes, reflecting stronger wage employment than
previously estimated, and extraordinary growth in capital gain realizations
resulting from the stock market's rise. The May Revision projected the SFEU will
have a balance of almost $1.9 billion at June 30, 1999.
Although, as noted, the Administration projected a budget reserve in the
SFEU of about $1.9 billion on June 30, 1999, the General Fund fund balance on
that date also reflects $1.0 billion of "loans" which the General Fund made to
local schools in the recession years, representing cash outlays above the
mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1998-99 Budget Act contained a $300 million
appropriation from the General Fund toward this settlement.
FY 1999-2000 Budget. The newly elected Governor, Gray Davis, released his
proposed FY 1999-00 Budget in January 1999. It projected somewhat lower General
Fund revenues than in earlier projections, due to slower economic growth which
was expected in late 1998, but totaling an estimated $60.3 billion. The May
Revision has sharply increased the revenue estimates, by over $2.7 billion, to a
total of almost $63.0 billion, which would represent a 9
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percent increase above FY 1998-99. Again, the greatest increase is expected in
personal income taxes (about 10 percent year-over-year increase), with more
moderate increases in sales taxes (6 percent) and corporate taxes (3 percent).
The 1999-00 Budget Act was signed on June 29, 1999, only the second time
in the decade the budget was in place at the start of the fiscal year. After the
Governor used his line-item veto power to reduce expenditures by about $581
million, the final spending plan called for about $63.7 billion of General Fund
expenditures, $16.1 billion of Special Fund expenditures, and $1.5 billion in
bond funded expenditures. The Governor's final budget actions left the SFEU with
an estimated balance of $881 million at June 30, 2000, but the Governor also
reduced spending to set aside $300 million for future appropriation for either
employee pay raises or potential litigation costs. If not fully used, these
"set-aside" funds would increase the SFEU year-end balance.
The final Budget Act generally provided increased funding for a wide range
of programs. Education spending under Proposition 98 received the largest
increase (over $2.3 billion above 1998-99), with other significant increases for
higher education, health and welfare, natural resources and capital outlay. The
budget provides several hundred million dollars in direct new aid to cities and
counties. A proposal is being drafted to place a constitutional amendment on the
ballot in 2000 to provide more extensive, permanent fiscal relief for local
government.
The final spending plan includes several targeted tax cuts for businesses,
totaling under $100 million in 1999-00. The plan also includes a one-time,
one-year additional cut of 10 percent in the Vehicle License Fee for calendar
year 2000. This cut will cost the General Fund about $500 million in each of
1999-00 and 2000-01 to make up lost funds for local governments. Under the 1998
law, the VLF cut to 35 percent would become permanent in the year 2001 if
General Fund revenues reach a certain specified level in 2000-01.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced in
the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of July 1, 1999 were assigned ratings of "A+"
from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch IBCA.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated
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to creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.
Year 2000 Preparations
The State and local governments, along with all other public and private
institutions in the nation, face a major challenge to ensure that their computer
systems, including microchips embedded into existing machinery, will not fail
prior to or at the January 1, 2000 date which may not be recognized properly by
software utilizing only two digits to identify a year. The new State
Administration has placed a very high priority on "Year 2000" remediation and
contingency planning. The State has a Department of Information Technology
("DOIT") which coordinates activities, provides technical assistance to State
agencies and local governments, and reports on the status of remediation efforts
by over 100 State departments and agencies.
DOIT has reported that, as of early 1999, 372 of 564 "mission critical"
systems in State government had been remediated (although final testing was
still going on in some cases). Of the balance, 54 were being retired and 138
were in process. DOIT does not report on all State agencies. In addition to
hardware and software changes, agencies are preparing business contingency plans
in case of computer problems at 1/1/2000, and are actively coordinating with
outside agencies, vendors, contractors and others with whom computer data is
shared. The State Treasurer and State Controller, responsible for State fiscal
controls and debt service payments, have reported they were fully remediated by
December 31, 1998 and are spending the 1999 year in testing and confirmation of
their systems.
The State has expended and plans to spend many hundreds of millions of
dollars on Year 2000 projects of all sorts, and has set aside several tens of
millions of dollars in contingency funds to support late-coming needs. There is
no survey of local government costs, or the overall status of their activities.
It is likely that larger government agencies are better prepared at this time
than smaller ones. Both the State and local governments are preparing emergency
plans for Year 2000 computer difficulties similar to their normal planning for
natural emergencies, such as floods or earthquakes.
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Obligations of Other Issuers
Other Issuers of California Municipal Instruments. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue municipal instruments, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50 percent following passage of Proposition 13. Subsequently,
the California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75
percent of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Assessment Bonds. California municipal instruments which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales
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activity. In many cases, such bonds are secured by land which is undeveloped at
the time of issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such development may not
occur or may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most cases the issuer
of these bonds is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except from amounts, if any,
in a reserve fund established for the bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax
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increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California municipal instruments in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California municipal instruments.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
FLORIDA MUNICIPAL INSTRUMENTS
The financial condition of the State of Florida may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities but also by entities that are not under the control of the
State. Adverse developments affecting the State's financing activities, its
agencies or its political subdivisions could adversely affect the State's
financial condition.
The State's revenues increased from $32,957,715,000 during the
1996-97 fiscal year ended June 30, 1997 to $35,849,518,000 during the fiscal
year ended June 30, 1998. The State's operating expenditures increased from
$31,494,591,000 during the 1996-97 fiscal year ended June 30, 1997 to
$33,373,020,000 during the 1997-98 fiscal year ended June 30, 1998. The Office
of Economic and Demographic Research of the Florida Legislature also projected
non-agricultural jobs to grow 3.5% and 3.1% in fiscal years 1998-99 and
1999-2000, respectively. The revenue growth in the 1998-1999 fiscal year is
driven by the State's sales tax collections. The sales tax accounts for close to
75% of total revenues through March 31, 1999. A March 31, 1999 estimate shows an
expected year-end surplus of $573.8 million. When this is
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combined with the Budget Stabilization Fund balance of $786.9 million, Florida's
total reserves are $1,360.7 million.
The Constitution of the State of Florida limits the right of the
State and its local governments to tax. The Constitution requires the State to
have a balanced budget and to raise revenues to defray its operating expenses.
The State may not borrow for the purpose of maintaining ordinary operating
expenses, but may generally borrow for capital improvements.
An amendment to the Florida Constitution adopted in 1994 requires
that state revenues in excess of an allowed amount plus a growth factor must be
contributed to a Budget Stabilization Fund until this fund reaches a certain
amount at which time the excess state revenues must be distributed to the
taxpayers. The growth factor is the average annual rate of growth in the state
personal income over the most recent 20 quarters times the amount of state
revenue allowed under the Constitution for the prior fiscal year. Included among
the categories of revenues that are exempt from this revenue limitation are
revenues pledged to state bonds and other payments related to debt. A two-thirds
vote of the Florida legislature can raise the amount of the limit on state
revenues. It is difficult to predict the impact of this amendment on Florida
state finances, especially since courts have not interpreted it extensively. To
the extent that local governments traditionally receive revenues from the state
which are subject to or limited by this Constitutional amendment, the further
distribution of such state revenues may be adversely impacted by the amendment.
There are a number of methods by which the State of Florida may
incur debt. The State may issue bonds backed by the State's full faith and
credit to finance or refinance certain capital projects authorized by its
voters. The total outstanding principal of State bonds pledging the full faith
and credit of the State may not exceed 50% of the total tax revenues of the
State for the two preceding fiscal years, excluding any tax revenues held in
trust. The State also may issue certain bonds backed by the State's full faith
and credit to finance or refinance pollution control, solid waste disposal and
water facilities for local governments; county roads; school districts and
capital public education projects without voter authorization. The State may
also, pursuant to specific constitutional authorization, directly guarantee
certain obligations of the State's authorities, agencies and instrumentalities.
Payments of debt service on State bonds backed by the State's full faith and
credit and State-guaranteed bonds and notes are legally enforceable obligations
of the State. Revenue bonds to finance or refinance certain capital projects
also may be issued by the State of Florida without voter authorization. However,
revenue bonds are payable solely from funds derived directly from sources other
than state tax revenues.
The State of Florida currently imposes, among other taxes, an ad
valorem tax on intangible property and a corporate income tax. The Florida
Constitution prohibits the levying of a personal income tax. Certain other taxes
the State of Florida imposes include: an estate or inheritance tax which is
limited by the State's Constitution to an amount not in excess of the amount
allowed to be credited upon or deducted from federal estate taxes or the estate
taxes of another state; and a 6% sales tax on most goods and certain services
with an option for counties to impose up to an additional 1% sales tax on such
goods and services. In addition, counties chartered before June 1, 1976 or
county with a consolidated county/municipal government may
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assess up to a 1% discretionary sales surtax within the county for the
development, construction, maintenance and operation of a fixed guideway rapid
transit system.
The Constitution reserves the right to charge an ad valorem tax on
real estate and tangible personal property to Florida's local governments. All
other forms of taxation are preempted to the State of Florida except as may be
provided by general law. Motor vehicles, boats, airplanes, trailers, trailer
coaches and mobile homes, as defined by law, may be subject to a license tax for
their operation, but may not be subject to an ad valorem tax.
Under the Constitution, ad valorem taxes may not be levied in excess
of the following millage upon the assessed value of real estate and tangible
personal property: for all county purposes, ten mills; for all municipal
purposes, ten mills; for all school purposes, ten mills; for water management
purposes for the northwest portion of the State, .05 mills; for water management
purposes for the remaining portion of the State, one mill; and for all other
special districts a millage authorized by law and approved by referendum. When
authorized by referendum, the above millage caps may be exceeded for up to two
years. Counties, school districts, municipalities, special districts and local
governmental bodies with taxing powers may issue bonds to finance or refinance
capital projects payable from ad valorem taxes in excess of the above millage
cap when approved by referendum. It should be noted that several municipalities
and counties have charters that further limit either ad valorem taxes or the
millage that may be assessed.
The Florida legislature has passed a number of mandates which limit
or place requirements on local governments without providing the local
governments with compensating changes in their fiscal resources. The Florida
legislature enacted a comprehensive growth management act which forces local
governments to establish and implement comprehensive planning programs to guide
and control future development. This legislation prohibits public or private
development that does not conform with the locality's comprehensive plan. Local
governments may face greater requirements for services and capital expenditures
than they had previously experienced if their locality experiences increased
growth or development. The burden for funding these potential services and
capital expenditures which has been left to the local governments may be quite
large.
The Florida Constitution limits the assessed value of homestead real
property for ad valorem tax purposes to the lower of (A) three percent (3%) of
the assessed value for the prior year; or (B) the percentage change in the
Consumer Price Index for the preceding calendar year. In addition, no such
assessed value shall exceed "just value" and such just value shall be reassessed
(notwithstanding the 3% cap) as of January 1 of the year following a change of
ownership of the assessed real property.
Florida has grown dramatically since 1980 and as of April 1, 1997
ranked fourth nationally with an estimated population of 14.7 million. Florida's
substantial population increases over the past few years are expected to
continue. It is anticipated that corresponding increases in State revenues will
be necessary during the next decade to meet increased burdens on the various
public and social services provided by the State. Much of this growth is being
funded by bonded revenues secured by the expanding real property tax base. As of
1997, real property values
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exceed $724 billion. Residential property values account for over $400 billion
in value while commercial and industrial property values exceed $100 billion.
Florida's job market continues to reflect strong performance. The
state's March 1999 unemployment rate was 4.1 percent, 0.3 percentage points
lower than the year ago rate of 4.4 percent. Florida's unemployment rate was one
of the lowest since October 1973 when it was 3.4 percent. The U.S. unemployment
rate was 4.2 percent in March 1999, just above Florida's rate. Fueled by low
interest rates, construction had the fastest growth rate at 5.8 percent and
added 20,000 jobs over the year. Similarly, finance, insurance, and real estate
and government also experienced year to year increases of 19,100 jobs and 16,400
jobs, respectively. The apparel and textiles industries lost 1,500 jobs due to
tariffs and foreign competition. The State is gradually becoming less dependent
on employment related to construction, agriculture and manufacturing, and more
dependent on employment related to trade and services. Presently, services
constitute 34.9% and trade 25.6% of the State's total non-farm jobs.
Personal income in the State has been growing strongly the last
several years and has generally outperformed both the nation as a whole and the
Southeast in particular. The reasons for this are strong population growth and
diversification of the economy. From 1992 through 1997, the State's per capita
income rose an average of 5.0% per year, while the national per capita income
increased an average of 4.8%. For 1997, the State's per capita personal income
rose an average of 4.0% while the national per capita personal income rose 4.7%.
In 1997, per capita personal income in Florida was $24,795, while the national
per capita personal income was $25,298. The structure of the State's income
differs from that of the nation and the Southeast. Because the State has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (social security and pension benefits,
among other sources of income) are a relatively more important source of income.
Transfer payments, such as social security, are occasionally subject to
legislative change.
Tourism is one of Florida's most important industries. According to
Visit Florida (formerly the Florida Tourism Commission), about 47 million people
visited the State in 1997. Tourists to Florida effectively represent additional
residents, spending their dollars predominantly at eating and drinking
establishments, hotels and motels, and amusement and recreation parks. Their
expenditures generate additional business activity and State tax revenues. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus to a degree, reducing its seasonality.
The State also has a strong construction industry, with single and
multi-family housing starts accounting for approximately 9.2% of total U.S.
housing starts in 1997, while the State's population was only 5.5% of the
nation's total population. The reason for such a dynamic construction industry
was the rapid growth of the State's population. Since 1985, total housing starts
have averaged approximately 148,000 per year. Total housing starts were 132,813
in 1997, and are projected to be 97,600 in 1998-99.
Florida has experienced a diversifying economic base as technology
related industry, healthcare and financial services have grown into leading
elements of Florida's economy, complementing the State's previous reliance
primarily on agriculture and tourism.
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With the increasing costs and capital needs related to its growing population,
Florida's ability to meet its expenses will be dependent in part upon the
State's continued ability to foster business and economic growth. Florida has
also increased its funding of capital projects through more frequent debt
issuance rather than its historical pay-as-you go method.
At the regional level, local economies within Florida perform
differently according to their urban or rural qualities and level of economic
diversification. The spectrum of local economies spans dense urban centers such
as Miami and Tampa to rural agricultural regions of citrus, cattle ranching and
sugar cane production. For example, Central Florida is a premier world-class
resort/vacation destination with its economy driven by the presence of Disney
World, studio theme parks and other tourist oriented recreational parks with a
laser/optical research node and motion picture industries helping to diversify
the Central Florida local economy. In contrast to the highly urban areas of
Southeast Florida, North Florida and the Florida Panhandle are rural in many
areas with local economies is dominated by the logging and paper industries,
defense, tourism, state government and retirement.
Florida has a moderate debt burden. As of June 30, 1998 full faith
and credit bonds totaled $8.7 billion and revenue bonds totaled $5 billion for a
total debt of $13.7 billion. Full faith and credit debt per capita was $577. In
the 1998 fiscal year, debt service as a percent of Governmental Fund
expenditures was 2.0%. In recent years debt issuance for the State has been
increasing. The State brought a new indenture to the market in late Fiscal Year
1998, the Florida Lottery Bonds. These bonds will finance capital improvements
for Florida schools.
The payment on most Florida municipal instruments held by the
Florida Intermediate Tax-Exempt Fund will depend upon the issuer's ability to
meet its obligations. If the State or any of its political subdivisions were to
suffer serious financial difficulties jeopardizing their ability to pay their
obligations, the marketability of obligations issued by the State or localities
within the State, and the value of the Florida Intermediate Tax-Exempt Fund's
portfolio, could be adversely affected.
ARIZONA MUNICIPAL INSTRUMENTS
Under its Constitution, the State of Arizona is not permitted to issue
general obligation bonds secured by the State's full faith and credit. However,
agencies and instrumentalities of the State are authorized under specified
circumstances to issue bonds secured by revenues. The State enters into certain
lease transactions that are subject to annual renewal at its option. Local
governmental units in the State are also authorized to incur indebtedness. The
major source of financing for such local government indebtedness is an ad
valorem property tax. In addition, to finance public projects, local governments
may issue revenue bonds to be paid from the revenues of an enterprise or the
proceeds of an excise tax, from assessment bonds payable from special proceeds
of an excise tax, or from assessment bonds payable by special assessments.
Arizona local governments have also financed public projects through leases that
are subject to annual appropriation at the option of the local government.
There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that can be levied by the various taxing
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jurisdictions without voter approval. It is possible that if such a proposal
were enacted, there would be an adverse impact on State or local government
financing. It is not possible to predict whether any such proposals will be
enacted in the future or what would be their possible impact on state or local
government financing.
The State is required by law to maintain a balanced budget. To achieve
this objective, it has in the past utilized a combination of spending reductions
and tax increases. In recent years, the State's fiscal situation has improved,
even while tax reduction measures have been enacted each year since 1992. In
1992, voters passed a measure that requires a two-thirds vote of the legislature
to increase state taxes.
The State's population, because of continued employment growth, is
expected to record above-average growth rates. After population growth of 3% in
1997 and 2.9% in 1998, 2.8% growth is expected in 1999 and 2.6% in 2000. That
translates into almost 132,000 more people in the state in 1999 and 126,000 in
2000.
The State's diversified economic base is not dependent on any single
industry. Principal economic sectors include services, manufacturing, mining,
tourism, and the military. Agriculture, at one time a major sector, plays a much
smaller role in the economy. For several decades, the population has grown at a
substantially higher rate than the population of the United States.
The economy of the State is growing. Since the current boom peaked in
1994, when employment grew by 6.8%, the rate of growth has slowed, but only
modestly. Through November 1998 (the latest data available), employment was 4.7%
higher than the year before.
Different parts of the State have different growth rates and structures.
The Phoenix metropolitan area accounts for 70.6% of all Arizona jobs and almost
80% of the State's employment growth. The Tucson area saw growth accelerate in
1998 by 3%, versus 1.8% in 1997. The balance of the State also grew at more
moderate levels.
On a percentage basis, this expansion has not been as strong as previous
expansions. Yet, in terms of absolute employment growth, this expansion has
created more jobs than any period of economic growth in the State's history. For
example, since the beginning of the current expansion in March 1991, more than
580,000 jobs have been created. In comparison, 297,200 jobs were created in the
1975-1980 expansion, and about 450,000 jobs were created in the expansion that
lasted from 1982 to 1990.
According to the national Blue Chip Economic Indicators, after real GDP
growth of 3.9% in 1997 and 3.6% in 1998, growth is expected to moderate to 2.2%
in 1999. Inflation is expected to remain low and interest rates are also likely
to be low and through most of 1999.
As of 1998, 47% of all manufacturing employment in the Phoenix area and
25% in Pima County is in high technology. The national average is 14.3%. The
high-tech areas include computers, telecommunications, electronic components,
aviation, and instrumentation. In the Phoenix area, the economy is weighted
towards electronic components employment, which
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accounts for 27% of all manufacturing jobs. Tucson's high-tech manufacturing
employment is more evenly spread among computers, electronic components,
aviation and instrumentation.
It is expected that international trade in the high-tech industry will
continue to grow, which will be a positive for the Arizona economy. But in the
near term, the unbalanced mix of employment could be a problem. Roughly 52% of
Arizona manufacturing exports are of high-tech products; further, nearly 40% of
the state's exports are to Japan, Malaysia, Taiwan, Hong Kong and Singapore, all
of which are experiencing some degree of economic problems.
In 1997, Arizona's total exports as a percent of personal income ranked
fifth in the U.S. at 13.5%, compared to 9.2% for the nation. When analyzing data
using only high-tech exports, Arizona ranked second at 7.1%, versus 2.1%
nationally. Thus, the impact of the reduction in high-tech exports will likely
affect Arizona more than other states. This is expected to result in some
continued layoffs in the manufacturing sector.
The unemployment rate, 4.1% for 1998, is also expected to remain
relatively low, especially in the State's metropolitan areas. However, it is
expected to increase in both 1999 and 2000. The current level of unemployment,
the lowest in nearly three decades, suggests a tight labor market. The modest
rise in unemployment projected for 1999 suggests that labor markets will
moderately soften. After employment growth of 5.6% in 1996, 4.5% in 1997 and an
estimated 4.6% in 1998, employment should increase by another 3.5% in 1999 with
growth continuing at about 3% in 2000 and 2001. The Phoenix area's unemployment
rate remains low, at about 2.7%.
The outlook for continued, albeit slower, growth for the U.S. economy acts
as a base for the Arizona economy. The state has been one of the top five
employment-growth states for quite some time, and it is expected to remain in
the top five through 1999. There are other positive factors as well. First, as
of November 1998, manufacturing was 2.3% above the November 1997 rate. Second,
the unemployment rate is low in greater Phoenix and for many other parts of
Arizona. That suggests that job growth will continue. Third, California, the
State's leading domestic trading partner, is expected to enjoy continued, albeit
slower, growth. Fourth, single-family housing markets continue to boom. Although
the absolute level of permits is expected to decline from 1998's record levels,
the outlook is for a relatively strong housing market.
Housing, which is expected to be up by about 15% in 1998, is expected to
decrease by about 10% in 1999. The slowdown is expected to be in single-family
activity. In 1999, even if single-family housing slows, commercial construction
is expected to continue to do well throughout most of the year, despite higher
vacancy rates in the Phoenix-area office and industrial markets. This is
expected to prevent any significant problem in construction employment in 1999,
despite the likelihood of a slowdown.
Another uncertainty is the tourism market. Given the strong economy,
tourist activity is expected to be strong. But declines in the value of the
Canadian dollar, the peso and other currencies versus the U.S. dollar could hurt
winter visitation in Arizona.
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Personal income, after growing by 8% in 1996 and 7.3% in 1997, is expected
to grow by another 8% in 1998, 7.8% in 1999, and 7% in 2000.
Overall, General Fund revenues are expected to grow modestly, including 4%
in FY 1999 and 5.7% in FY 2001. However, the FY 1999 rate of growth reflects the
impact of the $120 million tax reduction program passed last year, and the FY
2000 revenue estimate includes an incremental reduction to account for an
additional $60 million of tax reductions already enacted.
The Governor's budget proposals in 1999 sought to limit overall spending,
continue the growth of the State's "rainy day" funds, reflect conservative
revenue forecasts to reflect a slowing economy, and propose for the 8th and 9th
consecutive years tax reductions.
State policy makers have been very successful in recent years in
depositing monies into various accounts that have been established for a "rainy
day." These monies are reserved for a true budget emergency precipitated by an
economic downturn. By the end of FY 2001, the rainy day fund is expected to
reach $425 million, or 7.08% of the General Fund revenues.
OTHER INFORMATION ON CALIFORNIA, FLORIDA AND ARIZONA MUNICIPAL INSTRUMENTS
Northern Trust believes that it is likely that sufficient California,
Florida and Arizona municipal instruments and certain specified federal
obligations should be available to satisfy the respective investment objectives,
policies and limitations of the California, Florida Intermediate Tax-Exempt and
the Arizona Tax-Exempt Funds. If Northern Funds' Board of Trustees, after
consultation with Northern Trust, should for any reason determine that it is
impracticable to satisfy a Fund's investment objective, policies and limitations
because of the unavailability of suitable investments, the Board would
re-evaluate the particular Fund's investment objective and policies and consider
changes in its structure and name or possible dissolution.
INVESTMENT RESTRICTIONS
The Funds are subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Fund only by
a vote of the holders of a majority of such Fund's outstanding shares.
No Fund may:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers, dealers
and other financial institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent a Fund from investing
directly or indirectly in portfolio
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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 Money Market Funds) may enter into
futures contracts and related options and forward currency exchange
contracts in accordance with its investment objective and policies.
(5) Invest in companies for the purpose of exercising control.
(6) Act as underwriter of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase and sale of portfolio instruments in
accordance with its investment objective and portfolio management
policies.
(7) Write puts, calls or combinations thereof, except for
transactions in options on securities, financial instruments, currencies
and indices of securities; futures contracts; options on futures
contracts; forward currency exchange contracts; short sales against the
box; interest rate and currency swaps; and pair-off transactions. (This
restriction does not apply to the Tax-Exempt Money Market Fund,
Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, High Yield Municipal Fund, High
Yield Fixed Income Fund, Small Cap Index Fund, Small Cap Growth Fund and
MarketPower Fund. In addition, this restriction does not apply to any type
of option, futures contract, forward contract, short sale, swap or
pair-off transaction unless it involves a put, call or combination thereof
written by a Fund.)
(8) Purchase the securities of any issuer if such purchase
would cause more than 10% of the voting securities of such issuer to be
held by the Fund, except that up to 25% of the value of its total assets
may be invested without regard to this 10% limitation; provided that this
restriction does not apply to the International Fixed Income Fund, the
Florida Intermediate Tax-Exempt Fund, the California Intermediate
Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the California Tax-Exempt
Fund or the MarketPower Fund. (Investments by the Tax-Exempt Money Market
Fund, Short-Intermediate U.S. Government Fund, Small Cap Index Fund, Small
Cap Growth, Mid Cap Growth Fund, High Yield Municipal Fund and High Yield
Fixed Income Fund in the securities of other investment companies are also
not subject to this investment restriction.)
(9) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations) if, except for
the Technology Fund, such purchase would cause 25% or more in the
aggregate of the market value of the total assets of the Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that with respect to
each Money Market
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Fund there is no limitation, and each Money Market Fund reserves freedom
of action, when otherwise consistent with its investment policies, to
concentrate its investments in obligations (other than commercial paper)
issued or guaranteed by U.S. banks (including foreign branches of U.S.
banks) and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by such bank obligations. For the purposes
of this restriction, state and municipal governments and their agencies
and authorities are not deemed to be industries; as to utility companies,
the gas, electric, water and telephone businesses are considered separate
industries; personal credit finance companies and business credit finance
companies are deemed to be separate industries; and wholly-owned finance
companies are considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents. The Technology Fund may not, except during temporary defensive
periods, purchase the securities of any issuer, if, as a result of such
purchase, less than 25% of the assets of the Technology Fund would be
invested in the securities of issuers principally engaged in technology
business activities. (Investments by the Tax-Exempt Money Market Fund,
Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, Small Cap Index Fund, Small Cap
Growth Fund, Mid Cap Growth Fund, MarketPower Fund, High Yield Municipal
Fund and High Yield Fixed Income Fund in the securities of other
investment companies are not subject to this investment restriction.)
(10) Borrow money (other than pursuant to reverse repurchase
agreements), except (a) as a temporary measure, and then only in amounts
not exceeding 5% of the value of a Fund's total assets or (b) from banks,
provided that immediately after any such borrowing all borrowings of the
Fund do not exceed one-third of the Fund's total assets. The exceptions in
(a) and (b) to this restriction are not for investment leverage purposes
but are solely for extraordinary or emergency purposes or to facilitate
management of a Fund by enabling Northern Funds to meet redemption
requests when the liquidation of portfolio instruments is deemed to be
disadvantageous or not possible. If due to market fluctuations or other
reasons the total assets of a Fund fall below 300% of its borrowings,
Northern Funds will reduce the borrowings of such Fund in accordance with
the 1940 Act. In addition, as a matter of fundamental policy, the Funds
may not enter into reverse repurchase agreements exceeding in the
aggregate one-third of their respective total assets.
(11) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if immediately after such purchase more than 5% of the
value of such Fund's total assets would be invested in such issuer, except
that: (a) up to 50% of the value of the California Municipal Money Market
Fund's total assets (so long as no more than 25% of the value of its total
assets are invested in the securities of any one issuer) and up to 25% of
the value of the total assets of each of the other Funds may be invested
in any securities without regard to this 5% limitation; and (b) with
respect to each Fund, such 5% limitation shall not apply to repurchase
agreements collateralized by obligations of the U.S. Government, its
agencies or instrumentalities. (This restriction does not apply to the
International Fixed Income Fund, the Florida Intermediate Tax-Exempt Fund,
the California Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund,
the
55
<PAGE> 174
California Tax-Exempt Fund and the MarketPower Fund.) (Investments by the
Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund,
Small Cap Index Fund, Small Cap Growth, High Yield Municipal Fund and High
Yield Fixed Income 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.
Also, as a matter of fundamental policy, changeable only with the
approval of the holders of a majority of the outstanding shares of the Fund
involved, at least 80% of the annual gross income of the Tax-Exempt Funds and
the Municipal Funds 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 a Fund should adopt a
temporary defensive posture by holding uninvested cash or investing in taxable
securities. Interest earned by the Tax-Exempt Funds 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 (but such interest earned by the
Municipal Funds will be deemed) to have been derived from municipal instruments
for purposes of determining whether the Tax-Exempt and the Municipal Funds meet
this fundamental policy.
As a non-fundamental investment restriction, the International Fixed
Income, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt,
Arizona Tax-Exempt, California Tax-Exempt and MarketPower Funds may not hold, at
the end of any tax quarter, more than 10% of the outstanding voting securities
of any one issuer, except that up to 50% of the total value of the assets of
each Fund may be invested in any securities without regard to this 10%
limitation so long as no more than 25% of the total value of its assets is
invested in the securities of any one issuer (except the U.S. Government, its
agencies and instrumentalities). Also, as a non-fundamental investment
restriction, these Funds will not hold any securities (except U.S. government
securities) that would cause, at the end of any tax quarter, more than 5% of
their respective total assets to be invested in the securities of any one
issuer, except that up to 50% of the respective Fund's total assets may be
invested without regard to this limitation so long as no more than 25% of the
Fund's total assets are invested in any one issuer (except the U.S. government,
its agencies and instrumentalities).
Except as otherwise provided in Investment Restriction (9), for the
purpose of such restriction in determining industry classification with respect
to the Funds other than the International Funds and the Technology Fund,
Northern Funds intends to use the industry classification titles in the
Bloomberg Industry Group Classification. With respect to the International
Funds, Northern Funds intends to use the Morgan Stanley Capital International
industry classification titles. With respect to the Technology Fund, Northern
Funds intends to consider an issuer to be principally engaged in technology
business activities if such issuer is listed in the Morgan Stanley Index, the
H&Q Index, the SoundView Technology Index, the technology grouping of the S&P
500 Index or any other comparable index. The freedom of action reserved in
Investment Restriction (9) above with respect to U.S. branches of foreign banks
is subject to the requirement that they are subject to the same regulation as
domestic
56
<PAGE> 175
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 Money Market, U.S. Government Money Market, U.S. Government Select
Money Market, Municipal Money Market, Tax-Exempt Money Market and California
Municipal Money Market Funds intend, as a non-fundamental policy, to diversify
their 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 (a) 25% of the total assets of the
California Municipal Money Market Fund may be invested in fewer than five
issuers; and 25% of the value of the total assets of the other Money Market
Funds 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 Money Market 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 Municipal Money Market, Tax-Exempt Money Market and California
Municipal Money Market Funds will limit their 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
Securities") to 5% of their total assets, with investments in any one such
issuer being limited to no more than 1% of a 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. The Money Market, U.S. Government and
U.S. Government Select Money Market Funds will limit
57
<PAGE> 176
their investments in all Second Tier Securities (that are not subject to
Guarantees) in accordance with the foregoing percentage limitations.
In addition to the foregoing, each 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 (10)) 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 (10), 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 Money
Market Funds to acquire options, enter into forward currency contracts and
engage in short sales and interest rate and currency swaps, they are not
currently permitted to engage in these transactions under SEC regulations. In
addition, the U.S. Government Select Money Market Fund does not intend to
purchase any bank or corporate obligation during the current fiscal year.
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, except the California Municipal
Money Market, California Intermediate Tax-Exempt, Florida Intermediate
Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt, International Fixed
Income and MarketPower Funds. Each Fund 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) PRINCIPAL OCCUPATION(S)
AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mr. James W. Cozad 72 Chairman of the Board of Vice Chairman of Amoco
12094 Lost Tree Way Trustees Corporation from September 1983
North Palm Beach, Florida 33408 to December 1989 and Chairman
and CEO of
</TABLE>
58
<PAGE> 177
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) PRINCIPAL OCCUPATION(S)
AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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. 71 Trustee Director of Earl Kinship
400 Skokie Blvd., Suite 300 Capital Corporation since
Northbrook, Illinois 60062 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. 67 Trustee Partner of Arthur Andersen &
1534 Basswood Circle Co. S.C. (accounting firm) from
Glenview, Illinois 60025 1966 until his retirement in
December 1989. Financial
Consultant, Ernst & Young from
1992 to 1993 and 1997, Director
of Household Bank, Federal
Savings
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 178
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) PRINCIPAL OCCUPATION(S)
AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank since May 1995, and
Director of First Central
National Life Insurance Company
since July 1998.
- ----------------------------------------------------------------------------------------------------------------------
Mr. Raymond E. George, Jr.(1) 69 Trustee Senior Vice President and
703 Prospect Avenue Senior Fiduciary Officer of The
Winnetka, Illinois 60093 Northern Trust Company from
1990 until his retirement in
October 1993.
- ----------------------------------------------------------------------------------------------------------------------
Mr. Michael E. Murphy(1) 62 Trustee President of Sara Lee
Suite 2222, 20 South Clark Street Foundation since November
Chicago, Illinois 60603 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(1) 41 Trustee Partner in the law firm of
One First National Plaza Sidley & Austin.
Chicago, Illinois 06063
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 179
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) PRINCIPAL OCCUPATION(S)
AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jylanne M. Dunne 39 President Senior Vice President for
4400 Computer Drive Distribution Services at First
Westborough, MA 01581 Data Investor Services Group,
Inc. ("FDISG") (since 1988).
- ----------------------------------------------------------------------------------------------------------------------
Richard H. Rose 43 Vice President Vice President and Division
4400 Computer Drive Manager of Mutual Fund
Westborough, MA 01581 Administration at FDISG (since
1994); Senior Vice President
at The Boston Company Advisors,
Inc. (prior thereto).
- ----------------------------------------------------------------------------------------------------------------------
Brian R. Curran 31 Treasurer Director of Fund Administration
4400 Computer Drive and Accounting at FDISG (since
Westborough, MA 01581 1997); Director of Fund
Accounting at State Street Bank
(February 1997 to October
1997); Senior Auditor at Price
Waterhouse L.L.P. (February
1994 to February 1997); Manager
of Fund Accounting at State
Street Bank (prior thereto).
- ----------------------------------------------------------------------------------------------------------------------
Judith E. Clear 33 Assistant Treasurer Client Treasury Manager of
4400 Computer Drive Mutual Fund Administration at
Westborough, MA 01581 First Data Investor Services
Group, Inc. (since 1997);
Compliance Manager at Citizens
Trust (1994 to 1996); Senior
Fund Administration Analyst at
Keystone Investor
</TABLE>
61
<PAGE> 180
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) PRINCIPAL OCCUPATION(S)
AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Services
Group (1988 to 1994);
- ----------------------------------------------------------------------------------------------------------------------
Jeffrey A. Dalke 49 Secretary Partner in the law firm of
One Logan Square Drinker Biddle & Reath LLP
18th and Cherry Streets
Philadelphia, PA
19103-6996
- ----------------------------------------------------------------------------------------------------------------------
Linda J. Hoard 51 Assistant Secretary Counsel at FDISG (since 1998);
4400 Computer Drive Attorney Consultant for
Westborough, MA 01581 Fidelity Investments, Investors
Bank & Trust Company and FDISG
(September 1994 to June 1998);
Vice President and Assistant
General Counsel at MFS
Investment Management (prior
thereto).
- ----------------------------------------------------------------------------------------------------------------------
Therese Hogan 36 Assistant Secretary Director of the State
4400 Computer Drive Regulation Department at FDISG
Westborough, MA 01581 (since 1994); Senior Legal
Assistant at Palmer and Dodge
(prior thereto).
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Messrs. George and Murphy and Ms. Skinner are considered to be
"interested" Trustees of Northern Funds as defined in the 1940 Act.
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, First Data Investor Services Group, Inc. ("Investor
Services Group") 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. As a result of the responsibilities
assumed by Northern Funds' service providers under Northern Funds' Advisory
Agreement, Transfer Agency Agreement, Custodian Agreement, Co-Administration
Agreement and Distribution Agreement, Northern Funds itself requires no
employees.
62
<PAGE> 181
Each officer (except Mr. Dalke) holds comparable positions with certain
other investment companies for which Investor Services Group provides services.
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
Investor Services Group, of which certain officers are also officers, receives
fees from Northern Funds for administrative services. Drinker Biddle & Reath
LLP, of which Mr. Dalke is a partner, receives legal fees as counsel to Northern
Funds.
For the fiscal year ended March 31, 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(1) $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(2) $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) Mr. Cathcart retired from the Board of Trustees on September 30, 1999.
(2) 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
63
<PAGE> 182
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 _______, 1999, Northern Trust
Corporation and its subsidiaries had approximately $____ billion in assets and
$____ 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 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. NTQA, also a
wholly-owned subsidiary of Northern Trust Corporation, serves as investment
adviser principally to defined benefit and defined contribution plans and
manages over 60 equity and bond commingled and common trust funds. As of
_______, 1999, the Investment Advisers and their affiliates administered
approximately $____ trillion in assets, including $_____ billion for which the
Investment Advisers 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 (other than the Stock Index, Small
Cap Index and Small Cap Funds), and also provides certain ancillary services.
NTQA provides similar services to the Stock Index, Small Cap Index and Small Cap
Funds. The Investment Advisers are 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 and NTQA (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 Advisers shall use their
64
<PAGE> 183
best judgment to obtain the best overall terms available, and (b) with respect
to other securities, the Investment Advisers 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 Advisers are to consider all factors they deem 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 Advisers may consider the brokerage and research services provided to
the Funds and/or other accounts over which the Investment Advisers or an
affiliate of the Investment Advisers exercise 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 Advisers and
does not reduce the advisory fees payable to the Investment Advisers 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.
For the fiscal years or periods indicated, the amount of commissions paid
by each Fund was as follows:
<TABLE>
<CAPTION>
========================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
=========================================================================================================
<S> <C> <C> <C>
Income Equity Fund $ 36,166 $ 91,382 $ 67,369
- ---------------------------------------------------------------------------------------------------------
Stock Index Fund $ 12,651 $ 32,541 $ 27,972
- ---------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 252,010 $ 475,781 $ 364,847
- ---------------------------------------------------------------------------------------------------------
Select Equity Fund $ 119,043 $ 312,832 $ 96,747
- ---------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund(1) $ 46,823 N/A N/A
- ---------------------------------------------------------------------------------------------------------
Small Cap Fund $ 137,526 $ 324,908 $ 170,785
- ---------------------------------------------------------------------------------------------------------
International Growth Equity Fund $1,717,776 $1,455,258 $2,043,586
- ---------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 184
<TABLE>
<CAPTION>
========================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
=========================================================================================================
<S> <C> <C> <C>
International Select Equity Fund $1,024,518 $ 610,796 $ 634,588
- ---------------------------------------------------------------------------------------------------------
Technology Fund $ 84,102 $ 79,005 $ 40,228
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1. The Mid Cap Growth Fund commenced operations on March 31, 1998.
No commissions were paid by the Funds to any "affiliated" persons (as
defined in the 1940 Act) of the Funds. Transactions on foreign stock exchanges
involve payment for brokerage commissions which are generally fixed.
Over-the-counter issues, including corporate debt and government securities, are
normally traded on a "net" basis (i.e., without commission) through dealers, or
otherwise involve transactions directly with the issuer of an instrument. With
respect to over-the-counter transactions, the Investment Advisers 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.
Northern Funds is required to identify any securities of its "regular
brokers or dealers" or their parents which Northern Funds acquired during its
most recent fiscal year.
During the fiscal year ended March 31, 1999, the Money Market Fund
acquired or sold securities of Bear Stearns & Co., Inc., Morgan (J.P.) & Co.,
Inc. and Lehman Brothers, Inc. As of March 31, 1999 the Money Market Fund owned
securities of Bear Stearns & Co., Inc., Morgan (J.P.) & Co. and Lehman Brothers,
Inc. in the amounts of $25,001,000, $55,374,000 and $335,214,000 respectively.
During the fiscal year ended March 31, 1999, the U.S. Government Money
Market Fund acquired or sold securities of ABN-AMRO and Lehman Brothers, Inc. As
of March 31, 1999, the U.S. Government Money Market Fund owned securities of
ABN-AMRO and Lehman Brothers, Inc. in the amounts of $20,000,000 and $28,564,000
respectively.
During the fiscal year ended March 31, 1999, the U.S. Government Select
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1999, the Municipal Money Market
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the California Municipal
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1999, the U.S. Government Fund did
not acquire or sell securities of its regular broker-dealers.
66
<PAGE> 185
During the fiscal year ended March 31, 1999, the Intermediate Tax-Exempt
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999; the Florida Intermediate
Tax-Exempt Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1999, the Fixed Income Fund
acquired or sold securities of Donaldson, Lufkin & Jenrette and Lehman Brothers,
Inc. As of March 31, 1999, the Fixed Income Fund owned securities of Lehman
Brothers, Inc. in the amount of $4,399,000.
During the fiscal year ended March 31, 1999, the Tax-Exempt Fund did not
acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the California Tax-Exempt
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the International Fixed
Income Fund sold securities of Banque Paribas. As of March 31, 1999, the
International Fixed Income Fund did not own securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1999, the High Yield Municipal Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the High Yield Fixed Income
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the Income Equity Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the Stock Index Fund acquired
or sold securities of Merrill Lynch & Co., Inc. As of March 31, 1999, the Stock
Index Fund owned securities of Merrill Lynch & Co., Inc. in the amount of
$478,000.
During the fiscal year ended March 31, 1999, the Growth Equity
Fund acquired or sold securities of Merrill Lynch & Co., Inc. and
Morgan Stanley Dean Witter & Co. As of March 31, 1999, the Growth
Equity Fund owned securities of Merrill Lynch & Co., Inc. and Morgan
Stanley Dean Witter & Co. in the amount of $3,997,000 and $3,898,000.
During the fiscal year ended March 31, 1999, the Select Equity Fund
acquired or sold securities of Merrill Lynch & Co., Inc. As of March 31, 1999,
the Select Equity Fund owned securities of Merrill Lynch & Co., Inc. in the
amount of $619,000.
During the fiscal year ended March 31, 1999, the Mid Cap Growth Fund did
not acquire or sell securities of its regular broker-dealers.
67
<PAGE> 186
During the fiscal year ended March 31, 1999, the Small Cap Fund sold
securities of Banque Paribas. As of March 31, 1999, the Small Cap Fund did not
own securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999, the International Growth
Equity Fund sold securities of Deutsche Bank and Societe Generale Securities. As
of March 31, 1999 the International Growth Equity Fund did not own securities of
its regular broker-dealers.
During the fiscal year ended March 31, 1999, the International Select
Equity Fund sold securities of Banque Paribas and Societe Generale. As of March
31, 1999, the International Select Equity Fund did not own securities of its
regular broker-dealers.
During the fiscal year ended March 31, 1999, the Technology Fund sold
securities of Banque Paribas. As of March 31, 1999, the Technology Fund did not
own securities of its regular broker-dealers.
During the fiscal year ended March 31, 1999 the Small Cap Index Fund,
Small Cap Growth Fund, Short-Intermediate U.S. Government Fund, California
Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and MarketPower Fund had
not yet commenced operations.
During the fiscal year ending March 31, 1999, Northern Funds directed
brokerage transactions to brokers because of research services provided. The
amount of such transactions and related commissions were as follows: for the
Income Equity Fund, $65,524,789 in research commission transactions and $30,231
in research commissions; for the Stock Index Fund, $32,559,925 in research
commission transactions and $12,014 in research commissions; for the Growth
Equity Fund, $242,523,742 in research commission transactions and $239,086 in
research commissions; for the Select Equity Fund, $112,947,776 in research
commission transactions and $94,548 in research commissions; for the Mid Cap
Growth Fund, $79,512,853 in research commission transactions and $37,383 in
research commissions; for the Small Cap Fund, $19,684,916 in research commission
transactions and $17,506 in research commissions; for the International Growth
Equity Fund, $405,230,730 in research commission transactions and $1,067,083 in
research commissions; for the International Select Equity Fund, $196,523,961 in
research commission transactions and $573,230 in research commissions; and for
the Technology Fund, $227,815,831 in research commission transactions and
$77,653 in research commissions.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Investment
Advisers believe 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 an 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 an
68
<PAGE> 187
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 each 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 Advisers may render
similar services to others so long as their services under such Agreement are
not impaired thereby. The Advisory Agreement also provides that Northern Funds
will indemnify the Investment Advisers against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.
From time to time, the Investment Advisers may voluntarily waive a portion
or all of their fees otherwise payable to it with respect to the Funds.
For the fiscal years or periods indicated, Northern Trust and NTQA
received advisory fees, after fee waivers and reimbursements, as follows:
<TABLE>
<CAPTION>
======================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $15,349,562 $ 9,490,597 $ 5,197,260
- -----------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $ 1,730,444 $ 1,364,316 $ 950,352
- -----------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market $ 1,450,638 $ 673,956 $ 297,792
Fund
- -----------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $ 8,162,930 $ 6,064,365 $ 4,796,468
- -----------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $ 1,091,368 $ 719,108 $ 494,616
- -----------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 1,895,842 $ 1,527,868 $ 1,199,667
- -----------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $ 2,242,387 $ 1,973,661 $ 1,741,679
- -----------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt Fund $ 196,206 $ 125,977 $ 0
- -----------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 1,752,818 $ 1,105,332 $ 779,240
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 188
<TABLE>
<CAPTION>
======================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Fund $ 1,365,071 $ 1,035,810 $ 874,423
- -----------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund $ 404,924 $ 88,551 N/A
- -----------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 118,107 $ 129,287 $ 111,384
- -----------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 0 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 0 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 978,113 $ 818,335 $ 519,235
- -----------------------------------------------------------------------------------------------------------------
Stock Index Fund(4) $ 490,454 $ 226,431 $ 0
- -----------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 4,529,273 $ 3,339,695 $ 2,267,044
- -----------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 1,249,368 $ 802,297 $ 369,460
- -----------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 216,101 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
Small Cap Fund(4) $ 2,669,690 $ 2,460,252 $ 1,468,705
- -----------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $ 1,946,058 $ 1,756,185 $ 1,817,708
- -----------------------------------------------------------------------------------------------------------------
International Select Equity Fund $ 1,195,310 $ 1,138,571 $ 1,111,449
- -----------------------------------------------------------------------------------------------------------------
Technology Fund $ 1,757,940 $ 754,963 $ 198,909
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996 and
the Technology Fund commenced operations on April 1, 1996.
4. NTQA assumed investment advisory responsibilities for these Funds on April
1, 1998.
For the fiscal years or periods indicated, Northern Trust voluntarily
waived and reimbursed advisory fees for each of the Funds as follows:
<TABLE>
<CAPTION>
==============================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $7,674,790 $4,745,304 $2,622,157
- --------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $ 865,224 $ 682,159 $ 519,441
- --------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund $ 725,320 $ 632,972 $ 419,570
- --------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $4,081,471 $3,032,186 $2,417,444
- --------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $ 545,685 $ 568,061 $ 497,282
- --------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 0 $ 0 $ 31,267
- --------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 189
<TABLE>
<CAPTION>
==============================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Tax-Exempt Fund $ 160,168 $ 140,974 $ 153,096
- --------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt Fund $ 23,427 $ 26,197 $ 53,960
- --------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 0 $ 0 $ 36,750
- --------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 97,545 $ 73,985 $ 99,421
- --------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund $ 28,923 $ 53,795 N/A
- --------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 15,857 $ 10,037 $ 34,638
- --------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 10,562 N/A N/A
- --------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 41,621 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 172,607 $ 144,411 $ 138,239
- --------------------------------------------------------------------------------------------------------------
Stock Index Fund(4) $ 245,227 $ 117,685 $ 70,191
- --------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 799,277 $ 589,353 $ 440,662
- --------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 514,443 $ 330,356 $ 209,152
- --------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 93,569 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Small Cap Fund(4) $1,099,279 $1,013,041 $ 639,770
- --------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $ 389,208 $ 351,234 $ 368,198
- --------------------------------------------------------------------------------------------------------------
International Select Equity Fund $ 239,060 $ 227,712 $ 225,196
- --------------------------------------------------------------------------------------------------------------
Technology Fund $ 351,585 $ 150,991 $ 89,958
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996 and
the Technology Fund commenced operations on April 1, 1996.
4. NTQA assumed investment advisory responsibilities for these Funds on April
1, 1998.
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
71
<PAGE> 190
to a fee from Northern Funds, payable monthly, at an annual rate of .10% of the
average daily net asset value of each of the Funds.
For the fiscal years or periods indicated, the amount of transfer agency
fees incurred by each of the Funds was as follows:
<TABLE>
<CAPTION>
=====================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $3,837,356 $2,372,628 $ 1,299,295
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $ 432,607 $ 341,076 $ 244,185
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money $ 362,656 $ 217,819 $ 119,115
Market Fund
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $2,040,714 $1,516,077 $ 1,199,098
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market $ 272,840 $ 214,526 $ 164,871
Fund
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 252,777 $ 203,714 $ 164,123
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $ 320,338 $ 281,949 $ 251,858
- ------------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt $ 29,284 $ 20,290 $ 6,302
Fund
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 233,707 $ 147,377 $ 108,797
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 195,008 $ 147,971 $ 129,549
- ------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund $ 57,846 $ 18,926 N/A
- ------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 14,885 $ 15,480 $ 16,224
- ------------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 1,408 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 5,549 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 115,071 $ 96,274 $ 65,560
- ------------------------------------------------------------------------------------------------------------------
Stock Index Fund $ 122,613 $ 57,352 $ 8,670
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 532,850 $ 392,901 $ 270,025
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 146,983 $ 94,387 $ 48,045
- ------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 30,967 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $ 314,078 $ 289,438 $ 175,244
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $ 194,604 $ 175,617 $ 181,765
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 191
<TABLE>
<CAPTION>
=====================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Select Equity Fund $ 119,530 $ 113,856 $ 111,143
- ------------------------------------------------------------------------------------------------------------------
Technology Fund $ 175,792 $ 75,496 $ 23,916
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Northern Trust maintains custody of the assets of the Funds (other than
the International Funds) pursuant to the terms of its Custodian Agreement with
Northern Funds. Northern Trust maintains custody of the assets of the
International Funds pursuant to the terms of its Foreign Custody Agreement with
Northern Funds. Under each of these agreements, Northern Trust (l) holds each
Fund's cash and securities, (2) maintains such cash and securities in separate
accounts in the name of the Fund, (3) makes receipts and 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. Under its Foreign
Custody Agreement, Northern Trust has entered into agreements with financial
institutions and depositories located in foreign countries with respect to the
custody of the International Funds' foreign securities.
As compensation for the services rendered to each Fund (other than the
International Funds) under the Custodian Agreement, and the assumption by
Northern Trust of certain related expenses, Northern Trust is entitled to
payment from each of the Funds as follows: (a) a basic custodial fee of (i)
$18,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's
average daily net assets to the extent they exceed $100 million, plus (b) a
basic accounting fee of (i) $25,000 annually for each Fund, plus (ii) 1/100th of
1% annually of each Fund's average daily net assets to the extent they exceed
$50 million, plus (c) a fixed dollar fee for each trade in portfolio securities,
plus (d) a fixed dollar fee for each time that Northern Trust as Custodian
receives or transmits funds via wire, plus (e) reimbursement of expenses
incurred by Northern Trust as Custodian for telephone, postage, courier fees,
office supplies and duplicating. The fees referred to in clauses (c) and (d) are
subject to annual upward adjustments based on increases in the Consumer Price
Index for All Urban Consumers, provided that
73
<PAGE> 192
Northern Trust may permanently or temporarily waive all or any portion of any
upward adjustment.
As compensation for the services rendered to the International Funds under
the Foreign Custody Agreement, and the assumption by Northern Trust of certain
related expenses, Northern Trust is entitled to payment from each of those Funds
as follows: (i) $35,000 annually for each Fund, plus (ii) 9/100th of 1% annually
of each Fund's average daily net assets, plus (iii) reimbursement for fees
incurred by Northern Trust as foreign Custodian for telephone, postage, courier
fees, office supplies and duplicating. As compensation for basic accounting
services rendered to the International Funds by Northern Trust, Northern Trust
is entitled to receive $25,000 for the first $50 million of each of those Fund's
average daily net assets and 1/100th of 1% of each Fund's average daily net
assets in excess of $50 million.
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.]
74
<PAGE> 193
For the fiscal years or periods indicated, the amount of custody and fund
accounting fees incurred by each of the Funds was as follows:
<TABLE>
<CAPTION>
==================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $844,081 $540,182 $319,698
- -------------------------------------------------------------------------------------------------------------
U.S. Government Money Market $136,794 $114,701 $ 90,285
Fund
- -------------------------------------------------------------------------------------------------------------
U.S. Government Select Money $110,597 $ 79,062 $ 61,237
Market Fund
- -------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $478,551 $358,220 $280,150
- -------------------------------------------------------------------------------------------------------------
California Municipal Money $100,159 $ 86,643 $ 72,486
Market Fund
- -------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 85,772 $ 72,223 $ 65,101
- -------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $103,042 $ 91,127 $ 87,303
- -------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt $ 48,986 $ 46,979 $ 31,173
Fund
- -------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 84,111 $ 64,094 $ 57,834
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 78,492 $ 64,384 $ 60,461
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund $ 50,725 $ 48,223 N/A
- -------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 77,396 $ 74,075 $ 75,592
- -------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 14,132 N/A N/A
- -------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 14,132 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 61,425 $ 56,325 $ 54,136
- -------------------------------------------------------------------------------------------------------------
Stock Index Fund $122,803 $133,408 $ 64,425
- -------------------------------------------------------------------------------------------------------------
Growth Equity Fund $143,431 $115,833 $ 92,102
- -------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 72,051 $ 60,090 $ 51,726
- -------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 44,274 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Small Cap Fund $141,187 $136,631 $ 88,231
- -------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $257,479 $228,550 $239,257
- -------------------------------------------------------------------------------------------------------------
International Select Equity Fund $182,139 $167,301 $168,250
- -------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 194
<TABLE>
<CAPTION>
==================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology Fund $ 78,748 $ 55,245 $ 63,987
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Unless sooner terminated, Northern Funds' Advisory Agreement, Transfer
Agency Agreement, Custodian Agreement and Foreign Custody 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 (or NTQA) and by Northern Trust (or NTQA) 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 and NTQA believe that they 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 and NTQA from continuing to perform such services
for Northern Funds.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Northern Trust or NTQA 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 NTQA 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
76
<PAGE> 195
services now provided by Northern Funds Distributor, LLC. 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 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."
CO-ADMINISTRATORS AND DISTRIBUTOR
Northern Trust and Investor Services Group, 4400 Computer Drive,
Westborough, Massachusetts 01581, act as co-administrators for the Funds under a
Co-Administration Agreement with Northern Funds. Subject to the general
supervision of Northern Funds' Board of Trustees, Northern Trust and Investor
Services Group (the "Co-Administrators") provide supervision of all aspects of
Northern Funds' non-investment advisory operations and perform various corporate
secretarial, treasury and blue sky services, including but not limited to: (a)
maintaining office facilities and furnishing corporate officers for Northern
Funds; (b) furnishing data processing services, clerical services, and executive
and administrative services and standard stationery and office supplies; (c)
performing all functions ordinarily performed by the office of a corporate
treasurer, and furnishing the services and facilities ordinarily incident
thereto, such as expense accrual monitoring and payment of Northern Funds'
bills, preparing monthly reconciliation of Northern Funds' expense records,
updating projections of annual expenses, preparing materials for review by the
Board of Trustees and compliance testing; (d) preparing and submitting reports
to Northern Funds' shareholders and the SEC; (e) preparing and printing
financial statements; (f) preparing monthly Fund profile reports; (g) preparing
and filing Northern Funds' federal and state tax returns (other than those
required to be filed by Northern Funds' custodian and transfer agent) and
providing shareholder tax information to Northern Funds' transfer agent; (h)
assisting in marketing strategy and product development; (i) performing
oversight/management responsibilities, such as the supervision and coordination
of certain of Northern Funds' service providers; (j) effecting and maintaining,
as the case may be, the registration of shares of Northern Funds for sale under
the securities laws of various jurisdictions; (k) assisting in maintaining
corporate records and good standing status of Northern Funds in its state of
organization; and (l)
77
<PAGE> 196
monitoring Northern Funds' arrangements with respect to services provided by
Service Organizations to their customers who are the beneficial owners of
shares.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the
Co-Administrators are entitled to a fee from each Fund, computed daily and
payable monthly, at an annual rate of 0.15% of the average daily net assets of
each Fund.
Prior to October 1, 1999, Sunstone Financial Group, Inc., 207 E. Buffalo
Street, Milwaukee, Wisconsin 53202 acted as Northern Funds' administrator
pursuant to an administration agreement substantially similar to the
Co-Administration Agreement currently in effect with Northern Trust and Investor
Services Group.
For the fiscal years or periods indicated, Sunstone received, after
waivers, administrative fees as follows:
<TABLE>
<CAPTION>
==================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $2,447,894 $1,186,568 $1,164,584
- -------------------------------------------------------------------------------------------------------------
U.S. Government Money Market $ 294,367 $ 217,652 $ 218,281
Fund
- -------------------------------------------------------------------------------------------------------------
U.S. Government Select Money $ 226,085 $ 124,207 $ 23,962
Market Fund
- -------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $1,339,727 $ 929,212 $1,075,662
- -------------------------------------------------------------------------------------------------------------
California Municipal Money $ 176,849 $ 131,467 $ 81,496
Market Fund
- -------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 171,664 $ 124,997 $ 195,647
- -------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $ 215,890 $ 178,379 $ 301,417
- -------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt $ 17,638 $ 11,284 $ 7,174
Fund
- -------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 154,709 $ 85,293 $ 129,589
- -------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 128,048 $ 92,041 $ 154,841
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund $ 35,426 $ 6,684 N/A
- -------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 10,053 $ 10,534 $ 19,435
- -------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 708 N/A N/A
- -------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 2,958 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 78,886 $ 57,142 $ 77,746
- -------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 197
<TABLE>
<CAPTION>
==================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Index Fund $ 77,739 $ 30,318 $ 9,252
- -------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 349,439 $ 235,526 $ 320,662
- -------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 94,686 $ 53,548 $ 56,368
- -------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 14,391 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Small Cap Fund $ 224,567 $ 157,708 $ 208,264
- -------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $ 132,079 $ 115,012 $ 219,176
- -------------------------------------------------------------------------------------------------------------
International Select Equity Fund $ 82,930 $ 74,312 $ 133,479
- -------------------------------------------------------------------------------------------------------------
Technology Fund $ 87,044 $ 41,187 $ 27,287
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
For the fiscal years or periods indicated, Sunstone waived administrative
fees with respect to each Fund as follows:
<TABLE>
<CAPTION>
=======================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $3,308,194 $2,372,408 $ 790,270
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund $ 354,550 $ 293,967 $ 149,167
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market $ 317,904 $ 202,525 $ 155,378
Fund
- ------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund $1,721,373 $1,344,926 $ 727,816
- ------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund $ 232,414 $ 244,331 $ 166,479
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Fund $ 207,505 $ 180,577 $ 51,170
- ------------------------------------------------------------------------------------------------------------------
Intermediate Tax-Exempt Fund $ 264,621 $ 244,548 $ 77,538
- ------------------------------------------------------------------------------------------------------------------
Florida Intermediate Tax-Exempt Fund $ 26,288 $ 19,151 $ 2,308
- ------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $ 195,856 $ 135,774 $ 34,026
- ------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund $ 164,475 $ 129,918 $ 39,928
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 198
<TABLE>
<CAPTION>
=======================================================================
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Tax-Exempt Fund $ 51,343 $ 21,785 N/A
- ------------------------------------------------------------------------------------------------------------------
International Fixed Income Fund $ 12,274 $ 12,687 $ 4,953
- ------------------------------------------------------------------------------------------------------------------
High Yield Municipal Fund $ 1,405 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
High Yield Fixed Income Fund $ 5,367 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Income Equity Fund $ 93,722 $ 87,270 $ 20,875
- ------------------------------------------------------------------------------------------------------------------
Stock Index $ 106,182 $ 55,711 $ 3,836
- ------------------------------------------------------------------------------------------------------------------
Growth Equity Fund $ 449,843 $ 353,831 $ 85,494
- ------------------------------------------------------------------------------------------------------------------
Select Equity Fund $ 125,790 $ 88,034 $ 15,958
- ------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund $ 32,060 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund $ 246,554 $ 276,453 $ 55,295
- ------------------------------------------------------------------------------------------------------------------
International Growth Equity Fund $ 159,830 $ 148,415 $ 54,062
- ------------------------------------------------------------------------------------------------------------------
International Select Equity Fund $ 96,366 $ 96,473 $ 33,602
- ------------------------------------------------------------------------------------------------------------------
Technology Fund $ 176,646 $ 72,057 $ 8,821
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
1. The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until September 30, 2001, and thereafter for successive one-year terms
with respect to each Fund, provided that the Agreement is approved annually (1)
by the Board of Trustees or (2) by the vote of a majority of the outstanding
shares of such Fund (as defined below under "Description of Shares"), provided
that in either event the continuance is also approved by a majority of the
Trustees who are not parties to the Agreement and who are not interested persons
(as defined in the 1940 Act) of any party thereto, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Co-Administration
Agreement is terminable at any time after September 30, 2001 without penalty by
Northern Funds on at least 60 days written notice to the Co-Administrators. Each
Co-Administrator may terminate the Co-Administration Agreement with respect to
itself at any time after September 30, 2001 without penalty on at least 60 days
written notice to Northern Funds and the other Co-Administrator.
Northern Funds may terminate the Co-Administration Agreement prior to
September 30, 2001 in the event that Northern Funds or its shareholders incur
damages in excess of $100,000 as a result of the willful misfeasance, bad faith
or negligence of the Co-Administrators, or the reckless disregard of their
duties under the Agreement. Northern
80
<PAGE> 199
Funds may also terminate the Co-Administration Agreement prior to September 30,
2001 in the event that the Co-Administrators fail to meet one of the performance
standards set forth in the Agreement.
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 Distributors, LLC for such distribution services. Northern Funds
Distributors, LLC is a wholly-owned subsidiary of Provident Distributors, Inc.
("PDI"). PDI, based in West Conshohocken, Pennsylvania, is an independently
owned and operated broker-dealer.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that
Northern Funds will indemnify each Co-Administrator against all claims except
those resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that Northern Funds will indemnify Northern
Funds Distributors, LLC against certain liabilities relating to untrue
statements or omissions of material fact except those resulting from the
reliance on information furnished to Northern Funds by Northern Funds
Distributors, LLC, or those resulting from the willful misfeasance, bad faith or
negligence of Northern Funds Distributors, LLC, or Northern Funds Distributors,
LLC's breach of confidentiality.
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
81
<PAGE> 200
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 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.
For the fiscal period ended March 31, 1999, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Stock
Index Fund, Select Equity Fund, Small Cap Fund, International Growth Equity
Fund, International Select Equity Fund and Technology Fund paid fees of $25,567,
$29,542, $146, $37, $37, $73, $110, $957, $37 and $2,103, respectively, under
the Service Plan. No other Funds paid fees under either Plan.
For the fiscal period ended March 31, 1998, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Select
Equity Fund, Small Cap Fund, International Select Equity Fund and Technology
Fund paid fees of $107, $40,296, $181, $145, $440, $368, $78 and $449,
respectively, under the Service Plan. No other Funds paid fees under either
Plan.
For the fiscal period ended March 31, 1997, the Municipal Money Market
Fund and the U.S. Government Money Market Fund paid fees of $98 and $59,754,
respectively, under the Service Plan. No other Funds paid fees under either
Plan.
82
<PAGE> 201
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103, serve as counsel to Northern
Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds. The financial
statements dated March 31, 1999, incorporated by reference into this Additional
Statement have been incorporated in reliance on the report of Arthur Andersen
LLP given on the authority of said firm as experts in auditing and accounting.
IN-KIND PURCHASES 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 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.
83
<PAGE> 202
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 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. Such involuntary redemptions
will not be made if the value of shares in an account falls below the minimum
solely because of a decline in the Fund's net asset value. 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").
84
<PAGE> 203
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern Trust. To
invest through any of the tax-sheltered retirement plans, please call Northern
Trust for information and the required separate application. To determine
whether the benefits of a tax-sheltered retirement plan are available and/or
appropriate, a shareholder should consult with a tax adviser.
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 Investor
Services Group, 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 Investor Services Group, intend to voluntarily
reimburse a portion of the Funds' expenses and/or reduce their advisory and
co-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
MONEY MARKET FUNDS
From time to time Northern Funds may advertise quotations of "yields" and
"effective yields" with respect to each Money Market Fund, and the Municipal
Money Market Fund, Tax-Exempt Money Market Fund and the California Municipal
Money Market Fund may advertise their "tax-equivalent yields" and
"tax-equivalent effective yields." 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
85
<PAGE> 204
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.
"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 annualized yield of each Money Market Fund for the seven-day period
ended March 31, 1999 was as follows(1):
86
<PAGE> 205
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund 4.50% 4.60% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund 4.46% 4.56% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund 4.38% 4.47% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund 2.49% 2.52% 3.61% 3.65%
- --------------------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund 2.41% 2.44% 3.49% 3.54%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian" and "Co-Administrators and
Distributor." In the absence of such fee reductions and expense limitations, the
annualized yield of each Fund for the same seven-day period would have been as
follows(1):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund 4.16% 4.25% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Money Market Fund 4.09% 4.18% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Select Money Market Fund 4.00% 4.08% N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund 2.15% 2.17% 3.12% 3.14%
- --------------------------------------------------------------------------------------------------------------------------------
California Municipal Money Market Fund 2.06% 2.08% 2.99% 3.01%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
A Money Market Fund may also quote, from time to time, total return
information using the formula described in the following section.
87
<PAGE> 206
NON-MONEY MARKET FUNDS
The Non-Money Market Funds calculate their total returns separately 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 returns for each Non-Money Market
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 a 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 Non-Money Market Funds 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.
A Non-Money Market Fund calculates its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
1
(ERV)-
T = (---)n - 1
( P )
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof);
P = hypothetical initial payment of $1,000;
and
n = period covered by the computation,
expressed in years.
A Non-Money Market Fund calculates its "aggregate total return" by
determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
[(ERV)]
Aggregate Total Return = T = [(---)] - 1
[( P )]
The calculations set forth below are made assuming that (a) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, and (b) all recurring fees
charged to all shareholder accounts are included.
88
<PAGE> 207
The ending redeemable value (variable "ERV" in the formula) is determined by
assuming complete redemption of the hypothetical investment after deduction of
all nonrecurring charges at the end of the measuring period.
89
<PAGE> 208
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE TOTAL RETURNS (%)
SINCE SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT FUND 6.01% 5.99% N/A 5.99% 6.01% 33.74% N/A 33.74%
(4/1/94 inception)
INTERMEDIATE TAX-EXEMPT FUND 4.88% 5.27% N/A 5.27% 4.88% 29.28% N/A 29.28%
(4/1/94 inception)
FLORIDA INTERMEDIATE 5.38% N/A N/A 6.28% 5.38% N/A N/A 17.36%
TAX-EXEMPT FUND
(8/15/96 inception)
FIXED INCOME FUND 5.18% 7.35% N/A 7.35% 5.18% 42.55% N/A 42.55%
(4/1/94 inception)
TAX-EXEMPT FUND 5.47% 6.73% N/A 6.73% 5.47% 38.50% N/A 38.50%
(4/1/94 inception)
CALIFORNIA TAX-EXEMPT FUND 6.20% N/A N/A 9.09% 6.20% N/A N/A 18.80%
(4/8/97 inception)
INTERNATIONAL FIXED INCOME 9.68% 6.78% N/A 6.78% 9.68% 38.84% N/A 38.84%
FUND
(4/1/94 inception)
INCOME EQUITY FUND 0.67% 13.18% N/A 13.18% 0.67% 85.70% N/A 85.70%
(4/1/94 inception)
STOCK INDEX FUND 17.78% N/A N/A 28.82% 17.78% N/A N/A 87.49%
(10/7/96 inception)
GROWTH EQUITY FUND 24.72% 22.54% N/A 22.54% 24.72% 176.29% N/A 176.29%
(4/1/94 inception)
</TABLE>
90
<PAGE> 209
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE TOTAL RETURNS (%)
SINCE SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECT EQUITY FUND 28.79% N/A N/A 24.90% 28.79% N/A N/A 203.19%
(4/6/94 inception)
MID CAP GROWTH FUND 17.19% N/A N/A 17.19% 17.19% N/A N/A 17.19%
(3/31/98 inception)
SMALL CAP FUND (23.46)% 8.92% N/A 8.92% (23.46)% 53.32% N/A 53.32%
(4/1/94 inception)
INTERNATIONAL GROWTH EQUITY 13.04% 8.28% N/A 8.28% 13.04% 48.82% N/A 48.82%
FUND
(4/1/94 inception)
INTERNATIONAL SELECT EQUITY 9.16% N/A N/A 7.44% 9.16% N/A N/A 43.08%
FUND
(4/5/94 inception)
TECHNOLOGY FUND 79.97% N/A N/A 49.16% 79.97% N/A N/A 231.84%
(4/1/96 inception)
</TABLE>
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The yield of a Non-Money Market 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.
A Non-Money Market Fund calculates its 30-day (or one month) standard
yield in accordance with the method prescribed by the SEC for mutual funds:
[(a-b )6 ]
[(--- ) ]
Yield = 2 [(cd + 1) - 1]
[( ) ]
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding during the
period entitled to receive dividends; and
d = net asset value per share on the last day of the
period.
Based on the foregoing calculations, for the 30-day period ended March 31,
1999, the yields for the U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt,
International Fixed Income, High Yield Municipal, High Yield Fixed Income and
Income Equity Funds, after fee waivers, were 4.77%, 3.26%, 3.42%, 5.20%, 3.84%,
3.77%, 2.55%, 3.26%, 7.43% and 2.83%, respectively. Also for the 30-day period
ended March 31, 1999, the yields for the U.S. Government, Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt,
California Tax-Exempt, International Fixed Income, High Yield Municipal and High
Yield Fixed Income Funds, absent fee waivers, were 4.60%, 3.04%, 3.00%, 4.92%,
3.61%, 3.46%, 1.56%, (0.91)%, 6.24% and 2.45%, respectively.
A Non-Money Market Fund's "tax-equivalent" yield is computed by: (a)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (b)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax. For the 30-day period ended March 31, 1999, and
using a federal income tax rate of 31%, the 30-day tax-equivalent yields, after
fee waivers, were 4.72%, 4.96%, 5.57%, 5.46% and 4.72% for the Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, California Tax-Exempt
and High Yield Municipal Funds, respectively. Also, for the 30-day period ended
March 31, 1999, and using a federal income tax rate of 31%, the 30-day
tax-equivalent yields, absent fee waivers, were 4.41%, 4.35%, 5.23%, 5.01% and
(0.91)% for the Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt,
Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds, respectively.
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GENERAL INFORMATION
The performance information set forth above includes the reinvestment of
dividends and distributions. Certain performance information set forth above
reflects fee waivers in effect; in the absence of fee waivers, these performance
figures would be reduced. Any fees imposed by Northern Trust, NTQA 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 to the S&P 500 Index, the S&P MidCap 400 Index, the Russell
2000 or 1000 Small Stock Index, the Consumer Price Index or the Dow Jones
Industrial Average. In addition, performance of the U.S. Government and Fixed
Income Funds may be compared to the Lehman Brothers Government Bond Index (or
its two components, the Treasury Bond Index and Agency Bond Index), the Lehman
Brothers Corporate Bond Index, the Lehman Brothers Intermediate Government Bond
Index and the Lehman Brothers Government/Corporate Bond Index. Performance of
the Intermediate Tax-Exempt and Tax-Exempt Funds may be compared to the Lehman
Brothers Municipal Bond or 5-Year Municipal Bond Indices; performance of the
California Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers
Mutual Fund California Intermediate Index; performance of the Florida
Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers Florida
Intermediate Tax-Exempt Index; performance of the Arizona Tax-Exempt Fund may be
compared to the Lehman Brothers Arizona Municipal Bond Index; performance of the
California Tax-Exempt Fund may be compared to the Lehman Brothers California
Municipal Exempt Index and performance of the California Intermediate Tax-Exempt
Fund, Florida Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and
California Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund
Intermediate Municipal Index. Performance of the High Yield Municipal Fund may
be compared to Lehman Brothers Municipal Non-Investment Grade Bond Index.
Performance of the High Yield Fixed Income Fund may be compared to Merrill Lynch
High Yield Master II Index, Lehman Brothers High Yield Corporate Bond Index and
Salomon Brothers Extended High-Yield Market Index. Performance of the Income
Equity Fund may be compared to the Merrill Lynch Investment Grade Convertible
Bond Index. Performance of the International Funds may be compared to the Mortan
Stanley Capital International Europe,
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Australia and Far East Index ("EAFE"), the Morgan Stanley EAFE blended with
Emerging Markets Free Index and the J.P. Morgan International Government Bond
Index. Performance of the Technology Fund may be compared to the Morgan Stanley
Index, the Hambrecht and Quist Technology Index, the SoundView Technology Index,
the technology grouping of the S&P 500 Index and any other comparable technology
index. 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.
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 and NTQA 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
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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
and NTQA. 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.
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, each Money Market Fund seeks to maintain a
net asset value of $1.00 per share and, in this connection, values its
instruments on the basis of amortized cost 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
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which value, as determined by amortized cost, is higher or lower than the price
a Fund would receive if the Fund sold the instrument. During such periods the
yield to investors in the Fund may differ somewhat from that obtained in a
similar entity which uses available indications as to market value to value its
portfolio instruments. For example, if the use of amortized cost resulted in a
lower (higher) aggregate Fund value on a particular day, a prospective investor
in the Fund would be able to obtain a somewhat higher (lower) yield and
ownership interest than would result from investment in such similar entity and
existing investors would receive less (more) investment income and ownership
interest. However, Northern Funds expects that the procedures and limitations
referred to in the following paragraphs of this section will tend to minimize
the differences referred to above.
Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the
Funds' operations and delegating special responsibilities involving portfolio
management to Northern Trust, has established procedures that are intended,
taking into account current market conditions and the Funds' investment
objectives, to stabilize the net asset value of each Money Market Fund, as
computed for the purposes of purchases and redemptions, at $1.00 per share. The
Trustees' procedures include periodic monitoring of the difference (the "Market
Value Difference") between the amortized cost value per share and the net asset
value per share based upon available indications of market value. Available
indications of market value consist of actual market quotations or appropriate
substitutes which reflect current market conditions and include (a) quotations
or estimates of market value for individual portfolio instruments and/or (b)
values for individual portfolio instruments derived from market quotations
relating to varying maturities of a class of money market instruments. In the
event the Market Value Difference exceeds 1/2 of 1%, the Trustees' procedures
provide that the Trustees will take such steps as they consider appropriate
(e.g., selling portfolio instruments to shorten average portfolio maturity or to
realize capital gains or losses, reducing or suspending shareholder income
accruals, redeeming shares in kind, or utilizing a net asset value per share
based upon available indications of market value which under such circumstances
would vary from $1.00) to eliminate or reduce to the extent reasonably
practicable any material dilution or other unfair results to investors or
existing shareholders which might arise from Market Value Differences. In
particular, if losses were sustained by a Fund, the number of outstanding shares
might be reduced in order to maintain a net asset value per share of $1.00. Such
reduction would be effected by having each shareholder proportionately
contribute to the Fund's capital the necessary shares to restore such net asset
value per share. Each shareholder will be deemed to have agreed to such
contribution in these circumstances by investing in the Fund.
Rule 2a-7 requires that each Money Market Fund limit its investments to
instruments which Northern Trust determines to present minimal credit risks and
which are "Eligible Securities" as defined by the SEC and described in the
Prospectus. The Rule also requires that each Money Market Fund maintain a
dollar-weighted average portfolio maturity (not more than 90 days) appropriate
to its policy of maintaining a stable net asset value per share and precludes
the purchase of any instrument deemed under the Rule to have a remaining
maturity of more than 397 days. Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than 90 days, the
Rule requires a Money Market Fund to invest its available cash in such a manner
as to reduce such maturity to the prescribed limit as soon as reasonably
practicable.
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Securities held by the other Funds 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.
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-
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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.
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 Income Equity Fund, Stock Index Fund,
Growth Equity Fund, Select Equity Fund, MarketPower Fund, Mid Cap Growth, Small
Cap Index Fund, Small Cap Fund, Small Cap Growth Fund and Technology Fund, may
constitute "qualifying dividends." The other Funds, however, are not expected to
pay qualifying dividends.
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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 Municipal Money Market, California
Municipal Money Market, Tax-Exempt Money Market, Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt,
Arizona Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds are
designed to provide investors with federally tax-exempt interest income. The
Funds are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Funds would not be
suitable for tax-exempt institutions 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 Funds' dividends being tax-exempt. In
addition, the Funds may not be an appropriate investment for persons or entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, 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 their partners and S corporations and their shareholders.
In order for the Municipal Money Market, California Municipal Money
Market, Tax-Exempt Money Market, Intermediate Tax-Exempt, California
Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona
Tax-Exempt, California Tax-Exempt or High Yield Municipal Funds to pay federal
exempt-interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of the Fund must consist
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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 Funds and the Municipal Funds in
determining certain adjustments for alternative minimum tax purposes.
The Funds will determine annually the percentages of their respective net
investment income which are exempt from tax, which constitute an item of tax
preference for purposes of the federal alternative minimum tax, and which are
fully taxable, and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Funds.
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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 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.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA FUNDS
Assuming each of the California Funds qualifies as a regulated investment
company, it will be relieved of liability for California state franchise and
corporate income tax to the extent its earnings are distributed to its
shareholders. Each of the California Funds may be taxed on its undistributed
taxable income. If for any year one of the California Funds does not qualify as
a regulated investment company, all of that Fund's taxable income (including
interest income on California municipal instruments for franchise tax purposes
only) may be subject to California state franchise or income tax at regular
corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of a regulated investment company, or series thereof,
consists of obligations the interest on which, if held by an individual, is
exempt from taxation by California ("California municipal instruments") then a
regulated investment company, or series thereof, will be qualified to pay
dividends exempt from California state personal income tax to its non-corporate
shareholders (hereinafter referred to as "California exempt-interest
dividends"). "Series" of a regulated investment company is defined as a
segregated portfolio of assets, the beneficial interest in which is defined as a
series of stock of the company. Each of the California Funds intends to qualify
under the above requirements so that it can pay California exempt-interest
dividends. If one of the California Funds fails to so qualify, no part of that
Fund's dividends to shareholders will be exempt from the California state
personal income tax. Each of the California Funds may reject purchase orders for
shares if it appears desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, each of the California
Funds will notify each shareholder of the portion of the dividends paid by the
Fund to the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California
exempt-interest dividends paid by the Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the Fund for such
year on California municipal instruments over any amounts that, if the Fund were
treated as an individual, would be considered expenses related to tax-exempt
income or amortizable bond
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premium and would thus not be deductible under federal income or California
state personal income tax law. The percentage of total dividends paid by the
Fund with respect to any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or "related persons"
with respect to California municipal instruments held by one of the California
Funds, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection, rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See "Federal - Tax-Exempt Information" above.
To the extent any dividends paid to shareholders are derived from the
excess of net long-term capital gains over net short-term capital losses, such
dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gain dividends for federal income tax
purposes. See "Federal - General Information" above. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of one of the
California Funds is not deductible for California state personal income tax
purposes if that Fund distributes California exempt-interest dividends during
the shareholder's taxable year.
In addition, any loss realized by a shareholder of the California Funds
upon the sale of shares held for six months or less may be disallowed to the
extent of any exempt-interest dividends received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution will be treated as long-term capital loss to the extent of
such long-term capital gains distribution. Finally, any loss realized upon the
redemption of shares within thirty days before or after the acquisition of other
shares of the same Fund may be disallowed under the "wash sale" rules.
California may tax income derived from repurchase agreements involving
federal obligations because such income represents a premium paid at the time
the government obligations are repurchased rather than interest paid by the
issuer of the obligations.
The foregoing is only a summary of some of the important California state
personal income tax considerations generally affecting the California Funds and
their shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the California Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of a Fund's dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
one of the California Funds, including, in particular, corporate investors which
may be subject to either
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California franchise tax or California corporate income tax, should consult
their tax advisers with respect to the application of such taxes to the receipt
of Fund dividends and as to their own California state tax situation, in
general.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE FLORIDA INTERMEDIATE
TAX-EXEMPT FUND
The State of Florida does not currently impose an income tax on
individuals. Thus, individual shareholders of the Florida Intermediate
Tax-Exempt Fund will not be subject to any Florida income tax on distributions
received from the Fund. However, Florida does currently impose an income tax on
certain corporations. Consequently, distributions may be taxable to corporate
shareholders.
The State of Florida currently imposes an "intangibles tax" at the annual
rate of 2 mills or 0.20% on certain securities and other intangible assets owned
by Florida residents. Every natural person is entitled to an exemption of the
first $20,000 of the value of taxable property against the first mill of the
annual tax. Spouses filing jointly are entitled to a $40,000 exemption. With
respect to the second mill, natural persons are entitled to an exemption of the
first $100,000 of otherwise taxable property (joint filers are entitled to a
$200,000 exemption). Taxpayers are limited to only one exemption under each
provision. Notes, bonds and other obligations issued by the State of Florida or
its municipalities, counties, and other taxing districts, or by the United
States Government, its agencies and certain U.S. territories and possessions
(such as Guam, Puerto Rico and the Virgin Islands) as well as cash are exempt
from this intangibles tax. If on December 31 of any year at least 90 percent of
the net asset value of the portfolio of the Florida Intermediate Tax-Exempt Fund
consists solely of such exempt assets, then the Fund's shares will be exempt
from the Florida intangibles tax payable in the following year.
In order to take advantage of the exemption from the intangibles tax in
any year, it may be necessary for the Fund to sell some of its non-exempt assets
held in its portfolio during the year and reinvest the proceeds in exempt assets
including cash prior to December 31. Transaction costs involved in restructuring
the portfolio in this fashion would likely reduce the Fund's investment return
and might exceed any increased investment return the Fund achieved by investing
in non-exempt assets during the year.
Outside the State of Florida, income distributions may be taxable to
shareholders under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. Government obligations which, if realized directly, would be
exempt from such income taxes. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE ARIZONA TAX-EXEMPT FUND
Individuals, trusts and estates who are subject to Arizona income tax will
not be subject to such tax on dividends paid by the Arizona Tax-Exempt Fund, to
the extent that such dividends qualify as exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Code and are
attributable to either (i) obligations of the State of Arizona or its political
subdivisions thereof or (ii) obligations issued by the governments of Guam,
Puerto Rico, or the
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Virgin Islands. In addition, dividends paid by the Arizona Tax-Exempt Fund which
are attributable to interest payments on direct obligations of the United States
government will not be subject to Arizona income tax to the extent the Arizona
Tax-Exempt Fund qualifies as a regulated investment company under Subchapter M
of the Code. Other distributions from the Arizona Tax-Exempt Fund, however, such
as distributions of short-term or long-term capital gains, will generally not be
exempt from Arizona income tax.
There are no municipal income taxes in Arizona. Moreover, because shares
of the Arizona Tax-Exempt Fund are intangibles, they are not subject to Arizona
property tax. Shareholders of the Arizona Tax-Exempt Fund should consult their
tax advisors about other state and local tax consequences of their investment in
the Arizona Tax-Exempt Fund.
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 thirty portfolios, each of which
is discussed in this Additional Statement. Under the terms of the Trust
Agreement, each share of each Fund has a par value of $.0001, represents a
proportionate interest in the particular Fund with each other share of its class
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. Upon any liquidation of a Fund,
shareholders of each class of a Fund are entitled to share pro rata in the net
assets belonging to that class available for distribution. Shares do not have
any preemptive or conversion rights. The right of redemption is described under
"Redeeming and Exchanging Shares" in the Prospectus. Pursuant to the terms of
the 1940 Act, the right of a shareholder to redeem shares and the date of
payment by a Fund may be suspended for more than seven days (a) for any period
during which the New York Stock Exchange is closed, 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
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of creditors, will be specifically allocated to and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of Northern Funds.
Expenses with respect to the portfolios of Northern Funds are normally allocated
in proportion to the net asset value of the respective portfolios except where
allocations of direct expenses can otherwise be fairly made.
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 September 30, 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, 9.6%, Short Term Investment Fund, 18.0%, Northern Trust Bank - M&I
Sweep Account, 5.5%; U.S. Government Money Market Fund: Northern Trust Bank -
Miami on behalf of its customers, 9.5%, Northern
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Trust Bank - M&I Sweep Account, 12.5%; Municipal Money Market Fund: Northern
Trust Bank - Miami on behalf of its customers, 25.9%; U.S. Government Select
Money Market Fund: Northern Trust Bank - Miami on behalf of its customers,
29.9%; Florida Intermediate Tax-Exempt Fund: Abraham General Partnership, 9.4%,
Donaldson, Lufkin & Jenrette, 9.4% and John C. Schumann, Jr., 7.2%; California
Municipal Money Market Fund: Northern Trust Bank - M&I Sweep Account, 9.6%;
Stock Index Fund: CCT Comb Funds, 8.5%; Select Equity Fund: Donaldson, Lufkin &
Jenrette, 11.6%; International Select Equity Fund: James L. Knight 1969 Trust,
5.9%; California Tax-Exempt Fund: Julius Epstein Residuary T/U/W, 5.5%; Small
Cap Index Fund: Dupont JB, 5.8% and CCT Comb Funds, 10.8%; High Yield Fixed
Income Fund: The Northern Trust Company Pension Plan, 5.0% and William B.
Graham, 7.3%; High Yield Municipal Fund: William D. Cox, 5.8%. The address of
all of the above persons is c/o The Northern Trust Bank, 50 S. LaSalle Street,
Chicago, Illinois 60675.
As of September 30, 1999, Northern Trust possessed sole or shared voting
or investment power for its customer accounts with respect to more than 50% of
the outstanding shares of Northern Funds. As of the same date, Northern Fund's
Trustees and officers as a group owned less than 1% of the outstanding shares of
each Fund.
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
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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 Northern Funds will indemnify Trustees and officers of Northern Funds
against liabilities and expenses incurred in connection with litigation and
other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Trust Agreement and to have become a party thereto.
FINANCIAL STATEMENTS
The audited financial statements and related report of the Trust's
independent auditors, contained in the annual report to shareholders for the
fiscal year ended March 31, 1999 (the "Annual Report") are hereby incorporated
herein by reference. No other part of the Annual Report is incorporated by
reference herein. Copies of the Annual Report 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.
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
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Registration Statement of which the Prospectus and this Additional Statement
form a part, each such statement being qualified in all respects by such
reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("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 evidenced by many of the following characteristics:
leading market positions in well-established
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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.
"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.
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"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."
"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.
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"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 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
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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 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.
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"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.
"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
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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.
"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.
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"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.
"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.
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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.
"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
As stated in the Prospectus, the Funds (other than the
Money Market Funds) may enter into certain futures transactions. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. 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 the price of the offsetting purchase, the Fund is
immediately paid the difference and thus
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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 comprised of securities of a particular industry group. A Fund
may also sell futures
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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 or NTQA 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 Advisers. 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 Advisers. 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 Advisers' ability to predict correctly movements in the direction of
the market. For example, if a particular Fund has hedged against the possibility
of a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
VI. Options on Futures Contracts
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example,
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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
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ITEM 23. EXHIBITS
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The following exhibits are incorporated herein by reference:
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(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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<TABLE>
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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.
(14) Amendment No. 13 to Agreement and Declaration of
Trust dated September 15, 1999 filed as Exhibit
(a)(14) to PEA No. 25.
(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.
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<TABLE>
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(6) Addendum No. 5 to the Investment Advisory Agreement
dated February 12, 1997 filed as Exhibit 5(e) to PEA
No. 19.
(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.
(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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<TABLE>
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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) Addendum No. 7 to the Transfer Agency Agreement dated
December 21, 1998 filed as Exhibit (h)(11) to PEA No.
22.
(i) Opinion of Hale & Dorr LLP filed as Exhibit (i) to
PEA No. 25.
(k) None.
</TABLE>
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<TABLE>
<S> <C> <C>
(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.
(n) None.
</TABLE>
The following exhibits to the Registration Statement are filed herewith
electronically pursuant to EDGAR rules:
<TABLE>
<S> <C> <C> <C>
(a) (15) Amendment No. 14 to Agreement and Declaration of
Trust dated October 1, 1999.
(a) (16) Form of Amendment No. 15 to Agreement and Declaration
of Trust dated _______________, 1999.
(b) (4) Amendment No. 3 to the By-Laws dated September 15,
1999.
(d) (10) Addendum No. 8 to the Investment Advisory Agreement
dated September 15, 1999.
(d) (11) Form of Addendum No. 9 to the Investment Advisory
Agreement dated _______, 1999.
(e) (1) Distribution Agreement between Registrant and
Northern Funds Distributors, LLC dated October 1,
1999.
(e) (2) Form of Amended and Restated Schedule A to the
Distribution Agreement dated ________, 1999.
</TABLE>
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<TABLE>
<S> <C> <C>
(g) (13) Addendum No. 9 to the Custodian Agreement dated
September 15, 1999.
(g) (14) Form of Addendum No. 10 to the Custodian Agreement
dated _________, 1999.
(h) (9) Addendum No. 8 to the Transfer Agency Agreement dated
September 15, 1999.
(h) (10) Form of Addendum No. 9 to the Transfer Agency
Agreement dated ________, 1999.
(h) (11) Amended and Restated Service Plan, adopted as of
April 1, 1999 and most recently revised as of
September 15, 1999, and Related Agreement.
(h) (12) Co-Administration Agreement among Registrant, First
Data Investor Services Group, Inc. and The Northern
Trust Company dated October 1, 1999.
(h) (13) Form of Amended and Restated Schedule A to the
Co-Administration Agreement dated _________, 1999.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(j) (2) Consent of Independent Public Accountants.
(l) (6) Purchase Agreement between Registrant and Miriam M.
Allison dated September 3, 1999 for shares of the
Small Cap Index Fund.
(l) (7) Purchase Agreement between Registrant and The
Northern Trust Company dated September 3, 1999 for
shares of the Income Equity Fund, Stock Index Fund,
Growth Equity Fund, Technology Fund, International
Growth Equity Fund and Small Cap Index Fund.
(l) (8) Purchase Agreement between Registrant and Martin C.
Gawne dated September 30, 1999 for shares of the
Small Cap Growth Fund.
(l) (9) Purchase Agreement between Registrant and Martin C.
Gawne dated September 30, 1999 for shares of the
Short-Intermediate U.S. Government Fund.
(l) (10) Purchase Agreement between Registrant and Martin C.
Gawne dated September 30, 1999 for shares of the
California Intermediate Tax-Exempt Fund.
</TABLE>
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<TABLE>
<S> <C> <C>
(l) (11) Purchase Agreement between Registrant and Martin C.
Gawne dated September 30, 1999 for shares of the
Arizona Tax-Exempt Fund.
(l) (12) Purchase Agreement between Registrant and The
Northern Trust Company dated October 1, 1999 for
shares of the U.S. Government Fund, Intermediate
Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund,
California Tax-Exempt Fund, International Fixed
Income Fund, Arizona Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund and Short-Intermediate
U.S. Government Fund.
(m) Amended and Restated Distribution and Service Plan,
adopted April 1, 1994 and most recently revised as of
September 15, 1999, and Related Agreement.
</TABLE>
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).
Article 10 of the Co-Administration Agreement dated October 1,
1999 among the Registrant, The Northern Trust Company and First Data
Investor Services Group, Inc. provides that Registrant will indemnify The
Northern Trust Company and First Data Investor Services Group, Inc. (each a
"Co-Administrator") against all claims except those resulting from the willful
misfeasance, bad faith or negligence of such Co-Administrator, or the Co-
Administrator's breach of confidentiality. A copy of the Co-Administration
Agreement is filed herewith as Exhibit (h)(11).
Section 3.1 of the Distribution Agreement between the
Registrant and Northern Funds Distributors, LLC provides for indemnification of
Northern Funds Distributors, LLC, 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).
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:
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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 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
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<PAGE> 250
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.
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 within the last two fiscal years, as well as the capacity
in which such person was connected.
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<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 and Director
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
</TABLE>
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<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 Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Henry Crown & Co. Vice President
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>
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<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 Corporation Director
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Corporation Vice Chairman of the
700 Brickell Avenue Board and Director
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>
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<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>
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<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>
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<PAGE> 256
<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>
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<PAGE> 257
<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>
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<PAGE> 258
<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>
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<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>
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<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
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<PAGE> 261
(b) To the best of Registrant's knowledge,
the directors and 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>
Jane Haegele Director None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
Philip H. Rinnander President and Secretary None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
Jason A. Greim Vice President and Treasurer None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
</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, One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania
19103. Records relating to First Data Investor Services Group, Inc.'s functions
as co-administrator for the Registrant are located at 101 Federal Street,
Boston, Massachusetts 02110. Records relating to Northern Funds Distributors,
LLC's functions as distributor, for the Registrant are located at Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428-2961. 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.
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<PAGE> 262
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. 27 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia and State of Pennsylvania on the 15th day of October, 1999.
NORTHERN FUNDS
By: /s/ Brian R. Curran
-------------------------------
Brian R. Curran
Treasurer
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 27 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>
/*/ James W. Cozad* Trustee October 15, 1999
- ---------------------------------
James W. Cozad
/*/ Wesley M. Dixon, Jr.* Trustee October 15, 1999
- ---------------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee October 15, 1999
- ---------------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee October 15, 1999
- ---------------------------------
Raymond E. George, Jr.
/*/ Michael E. Murphy* Trustee October 15, 1999
- ---------------------------------
Michael E. Murphy
/*/ Mary Jacobs Skinner* Trustee October 15, 1999
- ---------------------------------
Mary Jacobs Skinner
/*/ Jylanne M. Dunne* President October 15, 1999
- ---------------------------------
Jylanne M. Dunne (Chief Executive
Officer)
/s/ Brian R. Curran Treasurer October 15, 1999
- ---------------------------------
Brian R. Curran (Chief Financial
and Accounting
Officer)
*By: /s/ Brian R. Curran
- ---------------------------------
Brian R. Curran,
Attorney-in-fact
</TABLE>
<PAGE> 263
NORTHERN FUNDS
(A Massachusetts Business Trust)
CERTIFICATE OF SECRETARY
I. The foregoing resolution was duly adopted by the Board of Trustees of
Northern Funds at a Meeting of the Board of Trustees held on September
15, 1999, and remains in effect on the date hereof:
RESOLVED, that the form of Power of Attorney presented to this
meeting appointing Richard H. Rose, Brian R. Curran, Linda J. Hoard,
Jylanne M. Dunne and Jeffrey A. Dalke as attorneys in-fact for the
Trustees and for the President and Treasurer with regard to all filings
or amendments to the Trust's Registration Statement with the Securities
and Exchange Commission made on or after the effectiveness of the
Co-Administration Agreement be, and hereby is, approved.
II. The Co-Administration Agreement between Northern Funds, The Northern
Trust Company and First Data Investor Services Group, Inc. became
effective as of October 1, 1999.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day
of October, 1999.
/s/ Jeffrey A. Dalke
---------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 264
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a
Trustee of Northern Funds, a business trust organized under the laws of The
Commonwealth of Massachusetts (the "Trust"), does hereby make, constitute and
appoint Richard H. Rose, Brian R. Curran, Linda J. Hoard, Jylanne M. Dunne, and
Jeffrey A. Dalke, and each of them, attorneys-in-fact and agents of the
undersigned with full power and authority of substitution and resubstitution, in
any and all capacities, to execute for and on behalf of the undersigned any and
all filings and amendments to the Registration Statement on Form N-1A relating
to the shares of the Trust and any other documents and instruments incidental
thereto, and to deliver and file the same, with all exhibits thereto, and all
documents and instruments in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
that said attorneys-in-fact and agents, and each of them, deem advisable or
necessary to enable the Trust to effectuate the intents and purposes hereof, and
the undersigned hereby fully ratifies and confirms all that said
attorneys-in-fact and agents, of any of them, or their or his or her substitute
or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed his or her name this
15th day of September, 1999.
/s/ James W. Cozad
---------------------------
James W. Cozad
/s/ Wesley M. Dixon, Jr.
---------------------------
Wesley M. Dixon, Jr.
/s/ William J. Dolan, Jr.
---------------------------
William J. Dolan, Jr.
-1-
<PAGE> 265
/s/ Raymond E. George, Jr.
---------------------------
Raymond E. George, Jr.
/s/ Michael E. Murphy
---------------------------
Michael E. Murphy
/s/ Mary Jacobs Skinner
---------------------------
Mary Jacobs Skinner
-2-
<PAGE> 266
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the
President of Northern Funds, a business trust organized under the laws of The
Commonwealth of Massachusetts (the "Trust"), does hereby make, constitute and
appoint Richard H. Rose, Brian R. Curran, Linda J. Hoard and Jeffrey A. Dalke,
and each of them, attorneys-in-fact and agents of the undersigned with full
power and authority of substitution and resubstitution, in any and all
capacities, to execute for and on behalf of the undersigned any and all filings
and amendments to the Registration Statement on Form N-1A relating to the shares
of the Trust and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing that
said attorneys-in-fact and agents, and each of them, deem advisable or necessary
to enable the Trust to effectuate the intents and purposes hereof, and the
undersigned hereby fully ratifies and confirms all that said attorneys-in-fact
and agents, of any of them, or their or his or her substitute or substitutes,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed her name this 15th
day of September, 1999.
/s/ Jylanne M. Dunne
---------------------------
Jylanne M. Dunne
-3-
<PAGE> 267
NORTHERN FUNDS
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (15) Amendment No. 14 to Agreement and Declaration of Trust dated October 1, 1999.
(a) (16) Form of Amendment No. 15 to Agreement and Declaration of Trust dated
_______________, 1999.
(b) (4) Amendment No. 3 to the By-Laws dated September 15, 1999.
(d) (10) Addendum No. 8 to the Investment Advisory Agreement dated September 15, 1999.
(d) (11) Form of Addendum No. 9 to the Investment Advisory Agreement dated _______,
1999.
(e) (1) Distribution Agreement between Registrant and Northern Funds Distributors, LLC dated
October 1, 1999.
(e) (2) Form of Amended and Restated Schedule A to the Distribution Agreement dated
________, 1999.
(g) (13) Addendum No. 9 to the Custodian Agreement dated September 15, 1999.
(g) (14) Form of Addendum No. 10 to the Custodian Agreement dated ________, 1999.
(h) (9) Addendum No. 8 to the Transfer Agency Agreement dated September 15, 1999.
(h) (10) Form of Addendum No. 9 to the Transfer Agency Agreement dated ________, 1999.
(h) (11) Amended and Restated Service Plan, adopted as of April 1, 1999 and most recently
revised as of September 15, 1999, and Related Agreement.
(h) (12) Co-Administration Agreement among Registrant, First Data Investor Services
Group, Inc. and The Northern Trust Company dated October 1, 1999.
</TABLE>
<PAGE> 268
<TABLE>
<S> <C> <C>
(h) (13) Form of Amended and Restated Schedule A to the Co-Administration Agreement
dated _________, 1999.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(j) (2) Consent of Independent Public Accountants.
(l) (6) Purchase Agreement between Registrant and Miriam M. Allison dated September 3, 1999
for shares of the Small Cap Index Fund.
(l) (7) Purchase Agreement between Registrant and The Northern Trust Company dated September 3, 1999
for shares of the Income Equity Fund, Stock Index Fund, Growth Equity Fund, Technology Fund,
International Growth Equity Fund and Small Cap Index Fund.
(l) (8) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares
of the Small Cap Growth Fund.
(l) (9) Purchase Agreement between Registrant and Martin C. Gawne dated September 30,
1999 for shares of the Short-Intermediate U.S. Government Fund.
(l) (10) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares
of the California Intermediate Tax-Exempt Fund.
(l) (11) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares
of the Arizona Tax-Exempt Fund.
(l) (12) Purchase Agreement between Registrant and The Northern Trust Company dated October 1, 1999 for
shares of the U.S. Government Fund, Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund,
California Tax-Exempt Fund, International Fixed Income Fund, Arizona Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund and Short-Intermediate U.S. Government Fund.
(m) Amended and Restated Distribution and Service Plan, adopted April 1, 1994 and most recently revised
as of September 15, 1999, and Related Agreement.
</TABLE>
-2-
<PAGE> 1
EXHIBIT (a)(15)
NORTHERN FUNDS
AMENDMENT NO. 14 TO AGREEMENT AND
DECLARATION OF TRUST
WHEREAS, Section 7.3 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 by an instrument in writing
executed by a majority of the Trustees of the Trust and setting forth such
amendment and reciting that it was hereby adopted by the Trustees;
NOW, THEREFORE, the undersigned, being a majority of the
Trustees of the Trust, hereby:
(1) amend the Declaration to change the designation and name
of the Initial Classes of the "Growth Equity Shares," "Income Equity
Shares," "Small Cap Shares," "Select Equity Shares," "International
Growth Equity Shares," "International Select Equity Shares,"
"International Fixed Income Shares," "Fixed Income Shares," "U.S.
Government Shares," "Intermediate Tax-Exempt Shares," "Tax-Exempt
Shares," "Money Market Shares," "U.S. Government Money Market Shares,"
"Municipal Money Market Shares," and "Mid-Cap Growth Fund" to the
Initial Classes of the "Growth Equity Fund," "Income Equity Fund,"
"Small Cap Fund," "Select Equity Fund," "International Growth Equity
Fund," "International Select Equity Fund," "International Fixed Income
Fund," "Fixed Income Fund," "U.S. Government Fund," "Intermediate
Tax-Exempt Fund," "Tax-Exempt Fund," "Money Market Fund," "U.S.
Government Money Market Fund," "Municipal Money Market Fund," and "Mid
Cap Growth Fund," respectively;
(2) amend the Declaration to change the principal place of
business of the Trust outside of Massachusetts, which is now designated
on the first page of the Declaration, to 50 South LaSalle Street,
Chicago, Illinois 60675; and
(3) 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 1st day of October, 1999.
/s/ James W. Cozad /s/ Raymond E. George, Jr.
- ---------------------------- ----------------------------------
James W. Cozad Raymond E. George, Jr.
/s/ Wesley M. Dixon, Jr. /s/ Michael E. Murphy
- ---------------------------- ----------------------------------
Wesley M. Dixon, Jr. Michael E. Murphy
/s/ William J. Dolan, Jr. /s/ Mary Jacobs Skinner
- ---------------------------- ----------------------------------
William J. Dolan, Jr. Mary Jacobs Skinner
<PAGE> 1
EXHIBIT (a)(16)
NORTHERN FUNDS
AMENDMENT NO. 15 TO AGREEMENT AND
DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of Trust
dated October 12, 1993 (the "Declaration") of Northern Funds (the "Trust")
provides that the Declaration may be amended to establish and designate new
Series or Classes of Shares by an instrument in writing executed by a majority
of the Trustees of the Trust and setting forth such establishment and
designation and the relative rights and preferences of such Series or Classes;
NOW, THEREFORE, the undersigned, being a majority of the
Trustees of the Trust, hereby:
(1) amend the Declaration by designating and establishing one
additional Series and Class of Shares ("Additional Series and Classes")
to be known as the Initial Class of the "MarketPower Fund," the
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.
--------------------------------
Raymond E. George, Jr.
- ----------------------------- --------------------------------
James W. Cozad Michael E. Murphy
- ----------------------------- --------------------------------
Wesley M. Dixon, Jr. Mary Jacobs Skinner
- -----------------------------
William J. Dolan, Jr.
<PAGE> 1
EXHIBIT (b)(4)
NORTHERN FUNDS
BY-LAW AMENDMENT NO. 3
ADOPTED ON SEPTEMBER 15, 1999
ARTICLE 5
OFFICES, FISCAL YEAR AND SEAL
* * *
RESOLVED, that Section 5.1 of the By-Laws of Northern Funds be, and hereby is,
amended and restated as set forth below:
5.1 Offices. The Trust shall maintain an office of record in Boston,
Massachusetts, which office may be the office of any resident agent appointed by
the Trust if located in that city. The Trust may maintain one or more other
offices, including its principal office, outside of Massachusetts, in such
cities as the Trustees may determine from time to time. Unless the Trustees
otherwise determine, the principal office of the Trust shall be located in
Chicago, Illinois.
<PAGE> 1
EXHIBIT (d)(10)
NORTHERN FUNDS
ADDENDUM NO. 8 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the 15th day of September, 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 0.60% of the
Tax-Exempt Money Market Fund's and 1.20% of the Small Cap Growth 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: /s/ Diane Anderson By: /s/ Silas S. Cathcart
------------------------ -----------------------
Title: President
THE NORTHERN TRUST COMPANY
Attest: /s/ Diane Anderson By: /s/ Archibald E. King
------------------------ -----------------------
Title: Vice President
-2-
<PAGE> 1
EXHIBIT (d)(11)
NORTHERN FUNDS
ADDENDUM NO. 9 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, by Addendum No. 7 dated December 21, 1998 and by
Addendum No. 8 dated September 15, 1999 (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, High Yield Fixed Income Fund, Tax-Exempt Money
Market Fund and the Small Cap Growth 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
MarketPower Fund (the "Fund"), and that it desires to retain the Investment
Adviser to act as the investment adviser for the Fund and the Investment Adviser
has notified the Trust that it is willing to serve as investment adviser for the
Fund;
<PAGE> 2
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Investment
Adviser to act as investment adviser to the Trust for the Fund in accordance
with the terms set forth in the Advisory Agreement. The Investment Adviser
hereby accepts such appointment and agrees to render the services set forth in
the Advisory Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses
assumed pursuant to the Advisory Agreement regarding the Fund, the Trust will
pay the Investment Adviser, and the Investment Adviser will accept as full
compensation therefor from the Trust, a fee at the annual rate of 1.20% of the
MarketPower Fund's average net assets.
3. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Advisory Agreement shall be deemed to include the
Fund. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Advisory Agreement.
4. Miscellaneous. The initial term of the Advisory Agreement
with respect to the Fund shall continue, unless sooner terminated in accordance
with the Advisory Agreement, until March 31, 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:
---------------------
-2-
<PAGE> 1
EXHIBIT (e)(1)
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 1st day of October, 1999 (the
"Agreement") by and between Northern Funds (the "Fund"), a Massachusetts
business trust, and Northern Funds Distributors, LLC, a Wisconsin limited
liability company (the "Distributor").
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and is currently offering shares of beneficial interest (the "Shares"),
representing interests in investment portfolios of the Fund identified on
Schedule A hereto (the "Portfolios") which are registered with the Securities
and Exchange Commission (the "SEC") pursuant to the Fund's Registration
Statement on Form N-1A (the "Registration Statement"); and
WHEREAS, the Fund desires to retain the Distributor as distributor for
the Portfolios to provide for the sale and distribution of the Shares of the
Portfolios identified on Schedule A and for such additional classes or series as
the Fund may issue, and the Distributor is prepared to provide such services
commencing on the date first written above.
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
1. SERVICE AS DISTRIBUTOR
1.1 The Fund hereby appoints the Distributor as exclusive distributor of
the Shares covered by the Registration Statement then in effect under
the Securities Act of 1933, as amended (the "1933 Act"), on the terms
and for the periods set forth in this Agreement. The Distributor hereby
accepts such appointment and agrees to render the services and perform
the duties set forth in this Agreement without compensation. The
Distributor will have no liability for payment for the purchase of
Shares by unaffiliated investors sold pursuant to this Agreement or
with respect to redemptions or repurchases of Shares.
1.2 The Distributor agrees to sell Shares of each of the Portfolios, as
agent, from time to time during the term of this Agreement at the
Shares' then current net asset value (with any purchase price
adjustments, as applicable). The net asset value of the Shares shall be
determined in the manner provided in the then current prospectus and
statement of additional information relating to the Shares
(collectively, the "Prospectus" and "Statement of Additional
Information"), and when determined shall be applicable to all
transactions as provided in the Prospectus. The net asset value of the
Shares shall be calculated by the Fund or by another entity on behalf
of the Fund. The Distributor shall have no duty to inquire into, or
liability for, the accuracy of the net asset value per Share as
calculated.
1.3 The Distributor agrees to use appropriate efforts to solicit orders for
the sale of the Shares. The Distributor shall, at its own expense,
finance appropriate activities which are primarily intended to result
in the sale of Shares, including, but not limited to, the
<PAGE> 2
distribution services set forth in Schedule B to this Agreement. It
is contemplated that the Distributor may enter into selling agreements
with securities dealers, financial institutions and other industry
professionals, such as investment advisers, accountants and estate
planning firms, with respect to the offering of Shares to the public.
The Distributor will require each dealer with whom the Distributor has
a selling agreement to conform to the applicable provisions of the
Registration Statement, with respect to the public offering price of
the Shares, and the Distributor shall not cause the Fund to withhold
the placing of purchase orders so as to make a profit thereby.
1.4 The Fund understands that the Distributor is now, and may in the future
be, the distributor of the shares of several investment companies or
series (collectively, the "Investment Entities"), including Investment
Entities having investment objectives similar to those of the
Portfolios. The Fund further understands that investors and potential
investors in the Portfolios may invest in shares of such other
Investment Entities. The Fund agrees that the Distributor's duties to
such Investment Entities shall not be deemed in conflict with its
duties to the Fund under this Section 1.4.
1.5 The Distributor shall not utilize any materials in connection with the
sale or offering of Shares except the Fund's then current Prospectus
and Statement of Additional Information and such other materials as the
Fund shall provide or approve. The Fund agrees to furnish the
Distributor with sufficient copies of any and all communications with
the public or other materials which the Fund intends to use in
connection any sales of Shares, in adequate time for the Distributor to
file and clear such materials with the proper authorities before they
are put in use. The Distributor and the Fund may agree that any such
material does not need to be filed subsequent to distribution. In
addition, the Fund agrees not to use any such materials until so filed
and cleared for use, if required, by appropriate authorities as well as
by the Distributor.
1.6 All activities by the Distributor and its agents and employees, as
distributor of the Shares, shall comply with all applicable laws, rules
and regulations, including, without limitation, all rules and
regulations made or adopted by the SEC or the National Association of
Securities Dealers.
1.7 The Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent for the Fund.
1.8 Whenever in its judgment such action is warranted, the Fund may decline
to accept any orders for, or make any sales of, the Shares until such
time as the Fund deems it advisable to accept such orders and to make
such sales, and the Fund shall notify the Distributor promptly of any
such determination.
1.9 The Fund agrees to execute any and all documents and to furnish any and
all information and otherwise to take all actions that may be
reasonably necessary in connection with the qualification of the Shares
for sale in such states where Shares are offered for sale. The Fund
shall notify the Distributor in writing of the states in which the
Shares are to be sold
-2-
<PAGE> 3
and shall notify the Distributor in writing of any changes to the
information contained in the previous notification.
1.10 The Fund shall furnish from time to time, for use in connection with
the sale of the Shares, such information with respect to the Fund and
the Shares as the Distributor may reasonably request; and the Fund
warrants that the statements contained in any such information shall
fairly show or represent what they purport to show or represent. The
Fund shall also furnish the Distributor upon request with: (a) audited
annual statements and unaudited semi-annual statements of a Portfolio's
books and accounts prepared by the Fund, (b) quarterly earnings
statements of a Portfolio prepared by the Fund, (c) a monthly itemized
list of the securities in a Portfolio, (d) monthly balance sheets as
soon as practicable after the end of each month, and (e) from time to
time such additional information regarding the financial condition of a
Portfolio as the Distributor may reasonably request.
1.11 The Fund represents to the Distributor that all Registration Statements
and Prospectuses filed by the Fund with the SEC under the 1933 Act with
respect to the Shares have been prepared in conformity with the
requirements of the 1933 Act and the rules and regulations of the SEC
thereunder. As used in this Agreement, the term "Registration
Statement" shall mean any Registration Statement and any Prospectus and
any Statement of Additional Information relating to the Fund filed with
the SEC and any amendments or supplements thereto at any time filed
with the SEC. Except as to information included in the Registration
Statement in reliance upon information provided to the Fund by the
Distributor or any affiliate of the Distributor expressly for use in
the Registration Statement, the Fund represents and warrants to the
Distributor that any Registration Statement, when such Registration
Statement becomes effective, will contain statements required to be
stated therein in conformity with the 1933 Act and the rules and
regulations of the SEC; that all statements of fact contained in any
such Registration Statement will be true and correct when such
Registration Statement becomes effective; and that no Registration
Statement when such Registration Statement becomes effective will
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of the Shares. The
Distributor may but shall not be obligated to propose from time to time
such amendment or amendments to any Registration Statement and such
supplement or supplements to any Prospectus as, in the light of future
developments, may, in the opinion of the Distributor's counsel, be
necessary or advisable. The Distributor shall promptly notify the Fund
of any advice given to it by its counsel regarding the necessity or
advisability of amending or supplementing such Registration Statement.
If the Fund shall not propose such amendment or amendments and/or
supplement or supplements within fifteen days after receipt by the Fund
of a written request from the Distributor to do so, the Distributor
may, at its option, terminate this Agreement. The Fund shall not file
any amendment to any Registration Statement or supplement to any
Prospectus without giving the Distributor reasonable notice thereof in
advance; provided, however, that nothing contained in this Agreement
shall in any way limit the Fund's right to file at any time such
amendments to any Registration Statement and/or supplements to any
Prospectus, of whatever character, as the Fund may deem
-3-
<PAGE> 4
advisable, such right being in all respects absolute and unconditional.
The Fund authorizes the Distributor to use any Prospectus or Statement
of Additional Information in the form furnished by the Fund from time
to time in connection with the sale of the Shares.
1.12 No Shares shall be offered by either the Distributor or the Fund under
any of the provisions of this Agreement and no orders for the purchase
or sale of Shares hereunder shall be accepted by the Fund if and so
long as effectiveness of the Registration Statement then in effect or
any necessary amendments thereto shall be suspended under any of the
provisions of the 1933 Act, or if and so long as a current Prospectus
as required by Section 5(b)(2) of the 1933 Act is not on file with the
SEC; provided, however, that nothing contained in this Section 1.12
shall in any way restrict or have any application to or bearing upon
the Fund's obligation to redeem Shares tendered for redemption by any
shareholder in accordance with the provisions of the Fund's
Registration Statement or Agreement and Declaration of Trust.
1.13 The Fund agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor:
(a) of any request by the SEC for amendments to the Registration
Statement, Prospectus or Statement of Additional Information
then in effect or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement,
Prospectus or Statement of Additional Information then in
effect or the initiation by service of process on the Fund of
any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement
of a material fact made in the Registration Statement,
Prospectus or Statement of Additional Information then in
effect or that requires the making of a change in such
Registration Statement, Prospectus or Statement of Additional
Information in order to make the statements therein not
misleading; and
(d) of all actions of the SEC with respect to any amendments to
any Registration Statement, Prospectus or Statement of
Additional Information which may from time to time be filed
with the SEC.
For purposes of this Section 1.13, informal requests by or acts of the
staff of the SEC shall not be deemed actions of or requests by the SEC.
1.14 The Fund represents and warrants to the Distributor that the Fund is an
investment company registered under the 1940 Act and the Shares sold by
each Portfolio are, and will be, registered under the 1933 Act.
-4-
<PAGE> 5
1.15 The Distributor agrees to maintain, and preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act, such records as are
required to be maintained by Rule 31a-1(d) under the 1940 Act.
2. COMPENSATION AND EXPENSES
The Fund will bear the following expenses:
(a) preparation, printing and distribution of sufficient copies of
the Prospectus and Statement of Additional Information to
existing shareholders;
(b) preparation, printing and distribution of reports and other
communications (not prepared by the Distributor) to existing
shareholders;
(c) registration of the Shares under the federal and state
securities laws;
(d) maintaining facilities for the issue and transfer of Shares;
(e) supplying information, prices and other data to be furnished
by the Fund under this Agreement;
(f) any original issue taxes or other transfer taxes applicable to
the sale or delivery of the Shares or certificates therefor;
and
(g) any payments made in accordance with any plan adopted pursuant
to Rule 12b-1 under the 1940 Act.
3. INDEMNIFICATION
3.1 The Fund agrees to indemnify and hold the Distributor, its officers,
directors, and employees, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, costs, expenses (including
reasonable attorneys' fees), losses, damages, charges, payments and
liabilities of any sort or kind which the Distributor, its officers,
directors, employees or any such controlling person may incur under the
1933 Act, under any other statute, or under common law or otherwise,
arising out of or based upon (i) any untrue statement, or alleged
untrue statement, of a material fact contained in the Fund's
Registration Statement, Prospectus or Statement of Additional
Information (including amendments and supplements thereto), or (ii) any
omission, or alleged omission, to state a material fact required to be
stated in the Fund's Registration Statement, Prospectus or Statement of
Additional Information (including amendments or supplements thereto) or
necessary to make the statements therein not misleading; provided,
however, that insofar as any losses, claims, damages, costs, charges,
payments, liabilities or expenses arise out of or are based upon any
such untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information
furnished to the Fund by the Distributor or its affiliated persons for
use in the Fund's Registration Statement,
-5-
<PAGE> 6
Prospectus or Statement of Additional Information (including amendments
or supplements thereto), such indemnification is not applicable; and
further provided that the Fund's agreement to indemnify the Distributor
and the Fund's representations and warranties hereinbefore set forth in
Section 1.11 shall not be deemed to cover any liability to the Fund,
its officers, trustees or shareholders to which the Distributor would
otherwise be subject by reason of: (a) the Distributor's willful
misfeasance, bad faith or negligence in the performance of its duties
and obligations, or by reason of the Distributor's reckless disregard
of its duties and obligations under this Agreement; or (b) the
Distributor's breach of Section 12 of this Agreement. The Fund agrees
and acknowledges that the Distributor has not prior to the date hereof
assumed, and will not assume, any obligations or liabilities arising
out of the conduct of the Fund or its distributor prior to the date
hereof of those duties which the Distributor has agreed to perform
pursuant to this Agreement. The Fund further agrees to indemnify the
Distributor against any losses, claims, damages or liabilities to which
the Distributor may become subject in connection with the conduct by
the Fund or its distributor of such duties prior to the date hereof;
provided that the Fund's agreement to indemnify the Distributor shall
not be deemed to cover any liability to the Fund, its officers,
trustees or shareholders to which the Distributor would otherwise be
subject by reason of willful misfeasance, bad faith or negligence in
the performance of its duties and obligations, or by reason of the
Distributor's reckless disregard of its duties and obligations under
this Agreement.
3.2 The Distributor agrees to indemnify and hold harmless the Fund, its
several officers and trustees and each person, if any, who controls a
Portfolio within the meaning of Section 15 of the 1933 Act, from and
against any and all claims, costs, expenses (including reasonable
attorneys' fees), losses, damages, charges, payments and liabilities of
any sort or kind which the Fund, its officers or trustees, or any such
controlling person, may incur under the 1933 Act, under any other
statute, or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its officers or
trustees, or any controlling person, resulting from such claims or
demands, shall arise out of or be based upon any untrue statement, or
alleged untrue statement, of a material fact contained in the Fund's
Registration Statement, Prospectus or Statement of Additional
Information (including amendments and supplements thereto), or any
omission, or alleged omission, to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if such statement or omission was made in reliance upon
information furnished or confirmed to the Fund by the Distributor or
its affiliated persons (as defined in the 1940 Act). The Distributor
also agrees to indemnify and hold harmless the Fund, its officers or
trustees, or any controlling person in connection with any claim or in
connection with any action, suit or proceeding which arises out of or
is alleged to arise out of: (a) the Distributor's willful misfeasance,
bad faith or negligence in the performance of its duties and
obligations, or by reason of the Distributor's reckless disregard of
its duties and obligations under this Agreement; or (b) the
Distributor's breach of Section 12 of this Agreement. The foregoing
rights of indemnification shall be in addition to any other rights to
which the Fund, its officers or trustees, or any controlling person
shall be entitled to as a matter of law.
-6-
<PAGE> 7
3.3 In any case in which one party hereto (the "Indemnifying Party") may be
asked to indemnify or hold the other party hereto (the "Indemnified
Party") harmless, the Indemnified Party will notify the Indemnifying
Party in writing promptly after identifying any situation which it
believes presents or appears likely to present a claim for
indemnification (an "Indemnification Claim") against the Indemnifying
Party, although the failure to do so shall not relieve the Indemnifying
Party from any liability which it may otherwise have to the Indemnified
Party, and the Indemnified Party shall keep the Indemnifying Party
advised with respect to all developments concerning such situation. The
Indemnifying Party shall be entitled to participate at its own expense
in the defense, or if it so elects, to assume the defense of, any
Indemnification Claim which may be the subject of this indemnification,
and, in the event that the Indemnifying Party so elects, such defense
shall be conducted by counsel of good standing chosen by the
Indemnifying Party and approved by the Indemnified Party, which
approval shall not be unreasonably withheld. In the event the
Indemnifying Party elects to assume the defense of any such
Indemnification Claim and retain such counsel, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by
the Indemnified Party. In the event that the Indemnifying Party does
not elect to assume the defense of any such Indemnification Claim, or
in case the Indemnified Party reasonably does not approve of counsel
chosen by the Indemnifying Party, or in case there is a conflict of
interest between the Indemnifying Party or the Indemnified Party, the
Indemnifying Party will reimburse the Indemnified Party for the fees
and expenses of any counsel retained by the Indemnified Party. The Fund
agrees promptly to notify the Distributor of the commencement of any
litigation or proceedings against the Fund or any of its officers or
trustees in connection with the issue and sale of any of the Shares,
and the Distributor agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against the Distributor
or any of its officers, directors, employees or controlling persons in
connection with the issuance and sale of any of the Shares. The
Indemnified Party will not confess any Indemnification Claim or make
any compromise in any case in which the Indemnifying Party will be
asked to provide indemnification, except with the Indemnifying Party's
prior written consent.
3.4 The obligations of the parties hereto under this Section 3 shall
survive the termination of this Agreement.
3.5 The Fund's indemnification agreement contained in this Section 3 and
the Fund's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Distributor, its officers,
directors and employees, or any controlling person, and shall survive
the delivery of any Shares. This agreement of indemnity will inure
exclusively to the Distributor's benefit, to the benefit of its several
officers, directors and employees, and their respective estates and to
the benefit of its controlling persons and their successors.
3.6 The Distributor's indemnification agreement contained in this Section 3
and the Distributor's representations and warranties in this Agreement
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Fund
-7-
<PAGE> 8
or its officers and trustees, or any controlling person, and shall
survive the delivery of any Shares.
4. STANDARD OF CARE; LIMITATION OF LIABILITY
4.1 The Distributor shall not be liable to the Fund for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of its obligations and duties under
this Agreement, except a loss resulting from: (a) the Distributor's
willful misfeasance, bad faith or negligence in the performance of such
obligations and duties, or by reason of its reckless disregard thereof;
or (b) the Distributor's breach of Section 12 of this Agreement.
4.2 Each party shall have the duty to mitigate damages for which the other
party may become responsible.
4.3 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS,
TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO
THE OTHER PARTY FOR CONSEQUENTIAL DAMAGES, PROVIDED, HOWEVER, THAT
NOTHING CONTAINED IN THIS SECTION 4.3 SHALL BE CONSTRUED SO AS TO LIMIT
THE RIGHTS OF ANY SHAREHOLDER OF THE FUND, WHETHER SUING ON HIS, HER OR
ITS OWN BEHALF OR DERIVATIVELY THROUGH THE FUND, TO CONSEQUENTIAL
DAMAGES.
5. TERM
5.1 This Agreement shall become effective on the date first written above
and, unless sooner terminated as provided herein, shall continue until
September 30, 2000 and thereafter shall continue automatically for
successive one-year terms, provided such continuance is specifically
approved at least annually by (i) the Fund's Board of Trustees or (ii)
by a vote of a majority (as defined in the 1940 Act and Rule 18f-2
thereunder) of the outstanding voting securities of the Fund, provided
that in either event the continuance is also approved by a majority of
the trustees who are not parties to this Agreement and who are not
interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval. This Agreement is terminable without
penalty, on at least sixty days' written notice, by the Fund's Board of
Trustees, by vote of a majority (as defined in the 1940 Act and Rule
18f-2 thereunder) of the outstanding voting securities of the Fund, or
by the Distributor. This Agreement will also terminate automatically in
the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
5.2 In the event a termination notice is given by the Fund and provided
that the Distributor is not in default under this Agreement at the time
of such termination notice, all expenses associated with movement of
records and materials and conversion thereof to a successor distributor
will be borne by the Fund.
-8-
<PAGE> 9
6. MODIFICATIONS AND WAIVERS
No change, termination, modification, or waiver of any term or
condition of the Agreement shall be valid unless in writing signed by
each party. No such writing shall be effective as against the
Distributor unless said writing is executed by a Senior Vice President,
Executive Vice President or President of the Distributor. No such
writing shall be effective as against the Fund unless said writing is
executed by the Chairman of the Fund's Board of Trustees. A party's
waiver of a breach of any term or condition in the Agreement shall not
be deemed a waiver of any subsequent breach of the same or another term
or condition.
7. NO PRESUMPTION AGAINST DRAFTER
The Distributor and the Fund have jointly participated in the
negotiation and drafting of this Agreement. The Agreement shall be
construed as if drafted jointly by the Fund and the Distributor, and no
presumptions arise favoring any party by virtue of the authorship of
any provision of this Agreement.
8. PUBLICITY
Neither the Distributor nor the Fund shall release or publish news
releases, public announcements, advertising or other publicity relating
to this Agreement or to the transactions contemplated by it without
prior review and written approval of the other party; provided,
however, that either party may make such disclosures as are required by
legal, accounting or regulatory requirements after making reasonable
efforts in the circumstances to consult in advance with the other
party.
9. SEVERABILITY
The parties intend every provision of this Agreement to be severable.
If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or
invalidity shall not affect the validity of the remainder of this
Agreement. In such case, the parties shall in good faith modify or
substitute such provision consistent with the original intent of the
parties. Without limiting the generality of this paragraph, if a court
determines that any remedy stated in this Agreement has failed of its
essential purpose, then all other provisions of this Agreement shall
remain fully effective.
10. FORCE MAJEURE
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default
or delay is caused, directly or indirectly, by circumstances beyond
such party's reasonable control. In any such event, the non-performing
party shall be excused from any further performance and observance of
the obligations so affected only for so long as such circumstances
prevail and such
-9-
<PAGE> 10
party continues to use commercially reasonable efforts to recommence
performance or observance as soon as practicable.
11. MISCELLANEOUS
11.1 Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or the Distributor shall be
sufficiently given if addressed to the party and received by it at its
office set forth below or at such other place as it may from time to
time designate in writing.
To the Fund:
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
with a copy to:
Jeffrey A. Dalke, Esq.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
To the Distributor:
c/o Provident Distributors, Inc.
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428-2961
with a copy to the Distributor's
Chief Legal Officer
11.2 The laws of the Commonwealth of Massachusetts, excluding the applicable
provisions of the 1940 Act, shall govern the interpretation, validity,
and enforcement of this Agreement. To the extent the provisions of
Massachusetts law or the provisions hereof conflict with the 1940 Act,
the 1940 Act shall control. All actions arising from or related to this
Agreement shall be brought in the state and federal courts sitting in
the City of Boston, and the Distributor and the Fund hereby submit
themselves to the exclusive jurisdiction of those courts.
11.3 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
-10-
<PAGE> 11
11.4 The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect.
11.5 This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and is not intended
to confer upon any other person any rights or remedies hereunder.
12. CONFIDENTIALITY
12.1 The parties agree that the Proprietary Information (defined below) is
confidential information of the parties and their respective licensers.
The Fund and the Distributor shall exercise at least the same degree of
care, but not less than reasonable care, to safeguard the
confidentiality of the Proprietary Information of the other as it would
protect its own Proprietary Information. The Fund and the Distributor
may use the Proprietary Information only to exercise their respective
rights or perform their respective duties under this Agreement. Except
as otherwise required by law, the Fund and the Distributor shall not
duplicate, sell or disclose to others the Proprietary Information of
the other, in whole or in part, without the prior written permission of
the other party. The Fund and the Distributor may, however, disclose
Proprietary Information to their respective employees who have a need
to know the Proprietary Information to perform work for the other,
provided that the Fund and the Distributor shall use reasonable efforts
to ensure that the Proprietary Information is not duplicated or
disclosed by their respective employees in breach of this Agreement.
The Fund and the Distributor may also disclose the Proprietary
Information to independent contractors, auditors and professional
advisors, provided they first agree in writing to be bound by
confidentiality obligations substantially similar to this Section 12.
Notwithstanding the previous sentence, in no event shall either the
Fund or the Distributor disclose the Proprietary Information to any
competitor of the other without specific, prior written consent.
12.2 Proprietary Information means:
(a) any data or information that is completely sensitive material, and
not generally known to the public, including, but not limited to,
information about product plans, marketing strategies, finance,
operations, customer relationships, customer profiles, sales estimates,
business plans, and internal performance results relating to the past,
present or future business activities of the Fund or the Distributor,
their respective subsidiaries and affiliated companies and the
customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or the
Distributor a competitive advantage over its competitors;
(c) all confidential or proprietary concepts, documentation, reports,
data, specifications, computer software, source code, object code, flow
charts, databases,
-11-
<PAGE> 12
inventions, know-how, show-how and trade secrets, whether or not
patentable or copyrightable;
(d) all documents, inventions, substances, engineering and laboratory
notebooks, drawings, diagrams, specifications, bills of material,
equipment, prototypes and models, and any other tangible manifestation
of the foregoing of either party which now exist or come into the
control or possession of the other; and
(e) with respect to the Fund, all records and other information
relative to the Fund and its prior, present or potential shareholders
(and clients of such shareholders).
12.3 Notwithstanding the foregoing, it is hereby understood and agreed by
the parties hereto that any marketing strategies, financing plans,
customer profiles, sales estimates, business plans or similar items
prepared or developed by the Distributor for the benefit of the Fund
shall be considered the Proprietary Information of the Fund and nothing
in this Agreement shall be construed to prevent or prohibit the Fund
from disclosing such Proprietary Information to a successor
distributor.
12.4 The obligations of the parties hereto under this Section 12 shall
survive the termination of this Agreement.
13. TRUSTEE AND SHAREHOLDER LIABILITY
This Agreement is executed by or on behalf of the Fund with respect to
each of the Portfolios and the obligations hereunder are not binding
upon any of the trustees, officers or shareholders of the Fund
individually but are binding only upon the Portfolio to which such
obligations pertain and the assets and property of such Portfolio. All
obligations of the Fund under this Agreement shall apply only on a
Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not
be liable for the obligations of another Portfolio. The Fund's
Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts.
14. ENTIRE AGREEMENT
This Agreement, including all Schedules hereto, constitutes the entire
agreement between the parties with respect to the subject matter hereof
and supersedes all prior and contemporaneous proposals, agreements,
contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
NORTHERN FUNDS
By: /s/ Jylanne Dunne
-----------------------------
Name: Jylanne Dunne
--------------------------
Title: Sr. Vice President
-------------------------
NORTHERN FUNDS DISTRIBUTORS, LLC
By: /s/ Jason A. Greim
-----------------------------
Name: Jason A. Greim
--------------------------
Title: Vice President
-------------------------
-13-
<PAGE> 14
SCHEDULE A
NAME OF PORTFOLIOS
Money Market Fund
U.S. Government Money Market Fund
U.S. Government Select Money Market Fund
Tax-Exempt Money Market Fund
Municipal Money Market Fund
California Municipal Money Market Fund
U.S. Government Fund
Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
Fixed Income Fund
Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Tax-Exempt Fund
International Fixed Income Fund
High Yield Municipal Fund
High Yield Fixed Income Fund
Income Equity Fund
Stock Index Fund
Growth Equity Fund
Select Equity Fund
Mid Cap Growth Fund
Small Cap Index Fund
Small Cap Fund
Small Cap Growth Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
<PAGE> 15
SCHEDULE B
DISTRIBUTION SERVICES
The Distributor shall, at its own expense, finance appropriate activities which
are primarily intended to result in the sale of the Shares. Such services shall
include, but are not limited to:
1. Preparation and execution of selling agreements
monitoring accruals
monitoring expenses
making disbursements for expenses and fees
2. Advertising and sales literature submission to the NASD
3. Investor qualification calls, as necessary
4. Printing and mailing of Prospectuses to other than existing
shareholders
5. Formation and maintenance of a private label distributor for the Shares
-2-
<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:
Money Market Fund International Fixed Income Fund
U.S. Government Money Market Fund High Yield Municipal Fund
U.S. Government Select Money Market Fund High Yield Fixed Income Fund
Tax-Exempt Money Market Fund Income Equity Fund
Municipal Money Market Fund Stock Index Fund
California Municipal Money Market Fund Growth Equity Fund
U.S. Government Fund Select Equity Fund
Short-Intermediate U.S. Government Fund Mid Cap Growth Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
California Intermediate Tax-Exempt Fund Small Cap Fund
Florida Intermediate Tax-Exempt Fund Small Cap Growth Fund
Fixed Income Fund International Growth Equity Fund
Tax-Exempt Fund International Select Equity Fund
Arizona Tax-Exempt Fund Technology Fund
California Tax-Exempt Fund MarketPower Fund
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By: _________________________
Title: ______________________
Date: _______________________
NORTHERN FUNDS DISTRIBUTORS, LLC
By: _________________________
Title: ______________________
Date: _______________________
<PAGE> 1
EXHIBIT (g)(13)
NORTHERN FUNDS
ADDENDUM NO. 9 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the 15th day of September, 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: /s/ Diane Anderson By: /s/ Silas S. Cathcart
------------------------ -------------------------------
Title: President
-----------------------------
THE NORTHERN TRUST COMPANY
Attest: /s/ Diane Anderson By: /s/ Archibald E. King
------------------------ -------------------------------
Title: Vice President
-----------------------------
<PAGE> 1
EXHIBIT (g)(14)
NORTHERN FUNDS
ADDENDUM NO. 10 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, by Addendum No. 8 dated December 21, 1998 and by Addendum No.
9 dated September 15, 1999 (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, High
Yield Fixed Income Fund, Tax-Exempt Money Market and the Small Cap Growth Fund;
WHEREAS, the Trust is establishing the MarketPower Fund (the
"Fund"), and the Trust desires to retain Northern under the terms of the
Custodian Agreement to act as the custodian for the Fund, and Northern is
willing to so act; and
WHEREAS, the Trust and Northern desire to enter into this
Addendum No. 10 to provide compensation for the 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 Fund in accordance
with the terms set forth in the Custodian Agreement.
Northern hereby accepts such appointment and agrees
to render the services set forth in the Custodian
Agreement for the compensation therein provided.
2. Capitalized Terms. From and after the date hereof,
the term "Funds" as used in the Custodian Agreement
shall be deemed to include the Fund.
<PAGE> 2
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
the 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 the 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 the 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 the
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 Fund 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.
-2-
<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: ___________________________
-3-
<PAGE> 1
EXHIBIT (h)(9)
NORTHERN FUNDS
ADDENDUM NO. 8 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the 15th day of September, 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: /s/ Diane Anderson By: /s/ Silas S. Cathcart
------------------------ ------------------------------------
Title: President
---------------------------------
THE NORTHERN TRUST COMPANY
Attest: /s/ Diane Anderson By: /s/ Archibald E. King
------------------------ ------------------------------------
Title: Vice President
--------------------------------
<PAGE> 1
EXHIBIT (h)(10)
NORTHERN FUNDS
ADDENDUM NO. 9 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, Addendum No.
7 dated December 21, 1998 and by Addendum No. 8 dated September 15, 1999 (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, High Yield Fixed Income Fund, Tax-Exempt Money Market Fund and the Small
Cap Growth Fund; and
WHEREAS, the Trust is establishing the MarketPower Fund (the "Fund"),
and the Trust desires to retain the Transfer Agent under the terms of the
Transfer Agency Agreement to render transfer agency and other services with
respect to the Fund and the record and/or beneficial owners of the Fund, and the
Transfer Agent is willing to render such services.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Transfer Agent as
transfer agent with respect to the Fund in accordance with the
terms set forth in the Transfer Agency Agreement. The Transfer
Agent hereby accepts such appointment and agrees to render the
services and perform the duties set forth in the Transfer
Agency Agreement for the compensation therein provided.
<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 Fund. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to
them in the Transfer Agency Agreement.
3. Miscellaneous. The initial term of the Transfer Agency
Agreement with respect to the Fund shall continue, unless
sooner terminated in accordance with the Transfer Agency
Agreement, until March 31, 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)(11)
NORTHERN FUNDS
AMENDED AND RESTATED SERVICE PLAN
Section 1. Upon the recommendation of the co-administrators of
Northern Funds, any officer of Northern Funds is authorized to execute and
deliver, in the name and on behalf of Northern Funds, written agreements based
on the form attached hereto as Appendix A or any other form duly approved by the
Board of Trustees ("Agreements") with securities dealers, financial institutions
and other industry professionals that are shareholders or dealers of record or
which have a servicing relationship with the beneficial owners of Shares of
Northern Funds ("Service Organizations"). Pursuant to such Agreements, Service
Organizations shall provide support services as set forth therein to their
clients who beneficially own Shares of any Fund offered by Northern Funds in
consideration of a fee, computed monthly in the manner set forth in the
Agreements, at an annual rate of up to .25% of the average daily net asset value
of the Shares beneficially owned by such clients. The Northern Trust Company and
its affiliates are eligible to become Service Organizations and to receive fees
under this Plan.
Section 2. The co-administrators shall monitor the
arrangements pertaining to Northern Funds' Agreements with Service Organizations
in accordance with the terms of their co-administration agreement with Northern
Funds. The co-administrators shall not, however, be obliged by this Plan to
recommend, and Northern Funds shall not be obliged to execute, any Agreement
with any qualifying Service Organization.
Section 3. So long as this Plan is in effect, the
co-administrators shall provide to Northern Funds' Board of Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended pursuant to this Plan and the purposes for which such expenditures were
made.
Section 4. This Plan shall become effective immediately with
respect to each particular Fund upon the approval of the Plan (and the form of
Agreement attached hereto) by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons," as defined in the
Act, of Northern Funds and have no direct or indirect financial interest in the
operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees"), pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of this Plan (and form of Agreement).
Section 5. Unless sooner terminated, this Plan shall continue
until March 31, 2000 and thereafter shall continue automatically for successive
annual periods provided such continuance is approved at least annually in the
manner set forth in Section 4.
<PAGE> 2
Section 6. This Plan may be amended at any time with respect
to any Fund by the Board of Trustees, provided that any material amendment of
the terms of this Plan shall become effective only upon the approvals set forth
in Section 4.
Section 7. This Plan is terminable at any time with respect to
any Fund by vote of a majority of the Disinterested Trustees.
Section 8. All expenses incurred by Northern Funds with
respect to the Shares of a particular Fund in connection with Agreements and the
implementation of this Plan shall be borne entirely by such Fund.
Section 9. This Plan was originally adopted by Northern Funds
as of April 1, 1994 and most recently revised as of September 15, 1999.
-2-
<PAGE> 3
Appendix A
SERVICING AGREEMENT
Gentlemen:
We wish to enter into this Servicing Agreement with you
concerning the provision of support services to your clients ("Clients") who may
from time to time beneficially own shares of any Fund ("Shares") offered by
Northern Funds.
The terms and conditions of this Servicing Agreement are as
follows:
Section 1. You agree to provide one or more of the following
support services to Clients who may from time to time beneficially own Shares:
(i) processing dividend and distribution payments from us on behalf of Clients;
(ii) providing information periodically to Clients showing their positions in
Shares; (iii) arranging for bank wires; (iv) responding to Client inquiries
relating to the services performed by you; (v) providing subaccounting with
respect to Shares beneficially owned by Clients or the information to us
necessary for subaccounting; (vi) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (vii) processing exchange and redemption requests from Clients and
placing net exchange and redemption orders with our service contractors; (viii)
assisting Clients in changing dividend options, account designations and
addresses; and (ix) providing such other similar services as we may reasonably
request to the extent you are permitted to do so under applicable statutes,
rules and regulations.
Section 2. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned services and assistance to Clients.
Section 3. Neither you nor any of your officers, employees or
agents are authorized to make any representations concerning us or the Shares
except those contained in our then current prospectuses and statements of
additional information for Shares, copies of which will be supplied by us to
you, or in such supplemental literature or advertising as may be authorized by
us in writing.
Section 4. For all purposes of this Agreement you will be
deemed to be an independent contractor, and will have no authority to act as
agent for us in any matter or in any respect. By your written acceptance of this
Agreement, you agree to and do release, indemnify and hold us harmless from and
against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of
A-1
<PAGE> 4
Shares by or on behalf of Clients. You and your employees will, upon request, be
available during normal business hours to consult with us or our designees
concerning the performance of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities
provided by you hereunder, we will pay to you, and you will accept as full
payment therefor, a fee at the annual rate of .____ of 1% of the average daily
net asset value of the Shares beneficially owned by your Clients for whom you
are the dealer of record or holder of record or with whom you have a servicing
relationship (the "Clients' Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this Section
5, the average daily net asset value of the Clients' Shares will be computed in
the manner specified in our Registration Statement (as the same is in effect
from time to time) in connection with the computation of the net asset value of
Shares for purposes of purchases and redemptions. The fee rate stated above may
be prospectively increased or decreased by us, in our sole discretion, at any
time upon notice to you. Further, we may, in our discretion and without notice,
suspend or withdraw the sale of Shares, including the sale of Shares to you for
the account of any Client or Clients. All fees payable by Northern Funds under
this Agreement with respect to the Shares of a particular Fund shall be borne
by, and be payable entirely out of the assets allocable to, said Shares; and no
other class of Shares of any other Fund offered by Northern Funds shall be
responsible for such fees.
Section 6. Any person authorized to direct the disposition of
monies paid or payable by us pursuant to this Agreement will provide to our
Board of Trustees, and our Trustees will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish us or our designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Clients of the services
described herein), and will otherwise cooperate with us and our designees
(including, without limitation, any auditors designated by us), in connection
with the preparation of reports to our Board of Trustees concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as any
other reports or filings that may be required by law.
Section 7. We may enter into other similar Servicing
Agreements with any other person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you
represent, warrant and agree that: (i) the compensation payable to you
hereunder, together with any other compensation you receive from Clients for
services contemplated by this Agreement, will not be excessive or unreasonable
under the laws and instruments governing your relationships with Clients; (ii)
you will provide to Clients a schedule of any fees that you may charge to them
relating to the investment of their assets in Shares; and (iii) the services
provided by you under this Agreement will in no event be primarily intended to
result in the sale of Shares.
Section 9. This Agreement will become effective on the date a
fully executed copy of this Agreement is received by us or our designee. Unless
sooner terminated, this Agreement will continue until the next March 31, and
thereafter will continue automatically for
A-2
<PAGE> 5
successive annual periods provided such continuance is specifically approved at
least annually by us in the manner described in Section 12. This Agreement is
terminable with respect to the Shares of any Fund, without penalty, at any time
by us (which termination may be by a vote of a majority of the Disinterested
Trustees as defined in Section 12) or by you upon notice to the other party
hereto.
Section 10. All notices and other communications to either you
or us will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device to the appropriate address stated herein.
Section 11. This Agreement will be construed in accordance
with the laws of the State of Illinois.
Section 12. This Agreement has been approved by vote of a
majority of (i) our Board of Trustees and (ii) those Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of us
and have no direct or indirect financial interest in the operation of the
Service Plan adopted by us or in any agreement related thereto cast in person at
a meeting called for the purpose of voting on such approval ("Disinterested
Trustees"). This Agreement is executed by or on behalf of the Trust and the
obligations hereunder are not binding upon any of the Trustees, Officers or
Shareholders of the Trust individually but are binding only upon the Trust and
its assets and property. All obligations of the Trust under this Agreement shall
apply only on a Fund by Fund basis, and the assets of one Fund shall not be
liable for the obligations of another Fund. The Trust's Agreement and
Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts.
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and promptly
return it to us, c/o The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois, 60675.
Very truly yours,
NORTHERN FUNDS
By:_______________________________
Date:_______________________ (Authorized Officer)
Accepted and Agreed to:
By:_______________________________
Date:_______________________ (Authorized Officer)
A-3
<PAGE> 1
EXHIBIT (h)(12)
CO-ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT (the "Agreement"), dated as of this 1st
day of October, 1999 (the "Effective Date"), by and among FIRST DATA INVESTOR
SERVICES GROUP, INC. ("Investor Services Group"), a Massachusetts corporation,
THE NORTHERN TRUST COMPANY ("Northern"), an Illinois state bank (each a
"Co-Administrator" and collectively, the "Co-Administrators"), and NORTHERN
FUNDS (the "Fund"), a Massachusetts business trust.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund desires to retain the Co-Administrators to render
certain administrative services with respect to each investment portfolio listed
in Schedule A hereto, as the same may be amended from time to time by the
parties hereto (collectively, the "Portfolios"), and the Co-Administrators are
willing to render such services.
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby, the parties hereto
agree as follows:
Article 1 Definitions.
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Advisory Agreement" shall mean the Investment Advisory
and Ancillary Services Agreement between the Fund and Northern made as
of April 1, 1994, as currently in effect and as amended and/or
superseded from time to time.
(b) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of a party as the same may be amended from
time to time.
(c) "Assign" and "Assignment" shall have the same meaning
herein as the term "assignment" has in the 1940 Act.
(d) "Authorized Person" shall be deemed to include (i) any
Board Member or officer of the Fund; or (ii) any person, whether or not
such person is an officer or employee of the Fund, duly authorized to
give Oral Instructions or Written Instructions on behalf of the Fund as
indicated in writing to a Co-Administrator from time to time.
<PAGE> 2
(e) "Board Members" shall mean the Directors or Trustees of
the governing body of the Fund, as the case may be.
(f) "Board of Directors" shall mean the Board of Directors or
Board of Trustees of the Fund, as the case may be.
(g) "By-Laws" shall mean the By-Laws of a party as the same
may be amended from time to time.
(h) "Commission" shall mean the Securities and Exchange
Commission.
(i) "Custodian" refers to any custodian or subcustodian of
securities and other property, which the Fund may from time to time
deposit, or cause to be deposited or held under the name or account of
such a custodian pursuant to a custody agreement.
(j) "1933 Act" shall mean the Securities Act of 1933 and the
rules and regulations promulgated thereunder, all as amended from time
to time.
(k) "1940 Act" shall mean the Investment Company Act of 1940
and the rules and regulations promulgated thereunder, all as amended
from time to time.
(l) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by a Co-Administrator from a
person reasonably believed by a Co-Administrator to be an Authorized
Person.
(m) "Prospectus" shall mean the most recently dated Fund
Prospectuses and Statements of Additional Information, including any
supplements thereto if any, which has become effective under the 1933
Act and the 1940 Act.
(n) "Shares" refers collectively to such shares of capital
stock or beneficial interest, as the case may be, or class thereof, of
each respective Portfolio of the Fund as may be issued from time to
time.
(o) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by a Co-Administrator to be an
Authorized Person and actually received by a Co-Administrator. Written
Instructions shall include manually executed originals and authorized
electronic transmissions, including telefacsimile of a manually
executed original or other process.
Article 2 Appointment of the Co-Administrators.
The Fund hereby appoints Northern and Investor Services Group to act as
Co-Administrators of the Fund for the period and on the terms set forth in this
Agreement. Northern and Investor Services Group accept such appointment and
agree to render the services herein set
- 2 -
<PAGE> 3
forth for the compensation herein provided. This Agreement shall be effective
and binding on the parties hereto as of the Effective Date.
Article 3 Duties of the Co-Administrators.
3.1 Subject to the general supervision of the Board of Directors, the
Co-Administrators shall provide supervision of all aspects of the Fund's
operations (other than those referred to in paragraph 3(a) of the Advisory
Agreement) and perform the customary services of an administrator, including but
not limited to the corporate secretarial, treasury and blue sky services set
forth in Schedule B to this Agreement.
3.2 In performing their duties under this Agreement, the
Co-Administrators: (a) will act in accordance with the Articles of
Incorporation, By-Laws, Prospectus and with the Oral Instructions and Written
Instructions of the Fund and will conform to and comply with the requirements of
the 1940 Act and all other applicable federal or state laws and regulations; and
(b) will consult with legal counsel to the Fund, as necessary and appropriate.
Furthermore, the Co-Administrators shall not have or be required to have any
authority to supervise the investment or reinvestment of the securities or other
properties which comprise the assets of the Fund or any of its Portfolios and
shall not provide any investment advisory services to the Fund or any of its
Portfolios under this Agreement.
3.3 In addition to the duties set forth herein, the Co-Administrators
shall perform such other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing between the Fund
and the Co-Administrators.
3.4 The Co-Administrators agree to provide the services described
herein in accordance with the performance standards annexed hereto as Exhibit 1
of Schedule B and incorporated herein (the "Performance Standards"). Such
Performance Standards may be amended from time to time upon written agreement by
the parties.
3.5 The services of the Co-Administrators hereunder are not deemed
exclusive and the Co-Administrators shall be free to render similar services to
others so long as their services under this Agreement are not impaired thereby.
Article 4 Recordkeeping and Other Information.
4.1 The Co-Administrators shall create and maintain all records
required of them pursuant to their duties hereunder and as set forth in Schedule
B in accordance with all applicable laws, rules and regulations, including
records required by Section 31(a) of the 1940 Act. Where applicable, such
records shall be maintained by the Co-Administrators for the periods and in the
places required by Rule 31a-2 under the 1940 Act.
4.2 To the extent required by Section 31 of the 1940 Act, the
Co-Administrators agree that all such records prepared or maintained by the
Co-Administrators relating to the services to be performed by the
Co-Administrators hereunder are the property of the Fund and will be
- 3 -
<PAGE> 4
preserved, maintained and made available in accordance with such section, and
will be surrendered promptly to the Fund on and in accordance with the Fund's
request.
Article 5 Fund Instructions.
5.1 A Co-Administrator will have no liability when acting upon Written
or Oral Instructions reasonably believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund.
5.2 At any time, a Co-Administrator may request Written Instructions
from the Fund and may seek advice from legal counsel for the Fund, or its own
legal counsel, with respect to any matter arising in connection with this
Agreement, and it shall not be liable for any action taken or not taken in good
faith in accordance with such Written Instructions or in accordance with the
opinion of counsel for the Fund or for the Co-Administrator. Written
Instructions requested by a Co-Administrator will be provided by the Fund within
a reasonable period of time.
5.3 Each Co-Administrator, its officers, agents or employees, shall
accept Oral Instructions or Written Instructions given to them by any person
representing or acting on behalf of the Fund only if said representative is an
Authorized Person. The Fund agrees that all Oral Instructions shall be followed
within one business day by confirming Written Instructions, and that the Fund's
failure to so confirm shall not impair in any respect a Co-Administrator's right
to rely on Oral Instructions.
Article 6 Compensation.
6.1 Each Co-Administrator will from time to time employ or associate
with itself such person or persons as the Co-Administrator may believe to be
particularly suited to assist it in performing services under this Agreement.
Such person or persons include officers and employees who are employed by both
the Co-Administrator and the Fund. The Co-Administrator shall pay the
compensation of such person or persons and no obligation shall be incurred on
behalf of the Fund in such respect.
6.2 The Co-Administrators shall not be required to pay any of the
following expenses incurred by the Fund: membership dues in the Investment
Company Institute or any similar organization; investment advisory fees; custody
and transfer agency fees; fees paid under any service or distribution plan
adopted by the Fund; costs of printing and mailing stock certificates; costs of
typesetting and printing of the Prospectus for regulatory purposes and for
distribution to existing shareholders of the Portfolios; costs of shareholders'
reports and notices; interest on borrowed money; brokerage commissions; stock
exchange listing fees; taxes and fees payable to federal, state and other
governmental agencies; fees of Board Members of the Fund who are not affiliated
with the Co-Administrators; outside auditing expenses; outside legal expenses;
blue sky registration or filing fees; or other expenses not specified in this
Section 6.2 which may be properly payable by the Fund. The Co-Administrators
shall not be required to pay any blue sky
- 4 -
<PAGE> 5
registration or filing fees unless and until they have received the amount of
such fees from the Fund.
6.3 The Fund on behalf of each of the Portfolios will compensate the
Co-Administrators for the performance of their obligations hereunder in
accordance with the fees and charges set forth in the written Fee Schedule
annexed hereto as Schedule C and incorporated herein.
6.4 During the term of this Agreement, the Co-Administrators will pay
all expenses incurred by them in connection with the performance of their duties
under Article 3 and Article 4 hereof, other than those items listed in Section
6.2 and those out-of-pocket costs of the preparations, submissions, updatings
and filings of the Fund's Prospectus.
6.5 Any compensation agreed to hereunder may be adjusted from time to
time by the unanimous consent of the parties.
Article 7 Documents.
In connection with the appointment of the Co-Administrators, the Fund
shall, on or before the Effective Date, but in any case within a reasonable
period of time for the Co-Administrators to prepare to perform their duties
hereunder, deliver or caused to be delivered to the Co-Administrators the
documents set forth in the written schedule of fund documents annexed hereto as
Schedule D.
Article 8 Fund Accounting System.
8.1 Each Co-Administrator shall retain title to and ownership of any
and all data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions, discoveries,
patentable or copyrightable matters, concepts, expertise, patents, copyrights,
trade secrets, and other related legal rights owned and/or developed by it in
connection with the services provided by such Co-Administrator to the Fund
pursuant to this Agreement (the "Co-Administrator System").
8.2 Each Co-Administrator hereby grants to the Fund a limited license
to the Co-Administrator System for the sole and limited purpose of having such
Co-Administrator provide the services contemplated hereunder and nothing
contained in this Agreement shall be construed or interpreted otherwise and such
license shall immediately terminate with the termination of this Agreement.
8.3 In the event that the Fund, including any affiliate or agent of the
Fund or any third party acting on behalf of the Fund, is provided with direct
access to the Co-Administrator System, such direct access capability shall be
limited to direct entry to the Co-Administrator System by means of on-line
mainframe terminal entry or PC emulation of such mainframe terminal entry, and
any other non-conforming method of transmission of information to the
Co-Administrator System is strictly prohibited without the prior written consent
of the particular Co-Administrator.
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<PAGE> 6
Article 9 Representations and Warranties.
9.1 Investor Services Group represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good
standing under the laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform the services
contemplated by this Agreement;
(c) all requisite corporate proceedings have been taken to
authorize it to enter into this Agreement; and
(d) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
9.2 Northern represents and warrants to the Fund that:
(a) it is duly organized, existing and in good standing under
the laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform the services
contemplated by this Agreement;
(c) all requisite corporate proceedings have been taken to
authorize it to enter into this Agreement; and
(d) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
9.3 The Fund represents and warrants to each Co-Administrator that:
(a) it is duly organized, existing and in good standing under
the laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into this Agreement;
(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize
it to enter into this Agreement;
(d) a registration statement under the 1933 Act and the 1940
Act on behalf of each of the Portfolios is currently effective; and
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<PAGE> 7
(e) as of the date hereof, each Portfolio is duly registered
and lawfully eligible for sale in each jurisdiction indicated for such
Portfolio on the list furnished to the Co-Administrators pursuant to
Article 7 of this Agreement and that it will notify the
Co-Administrators immediately of any changes to the aforementioned
list.
Article 10 Indemnification.
10.1 The Fund shall indemnify and hold each Co-Administrator harmless
from and against any and all claims, costs, expenses (including reasonable
attorneys' fees), losses, damages, charges, payments and liabilities of any sort
or kind which may be asserted against a Co-Administrator or for which a
Co-Administrator may be held to be liable in connection with this Agreement or a
Co-Administrator's performance hereunder (a "Claim"), unless such Claim resulted
from: (a) the willful misfeasance, bad faith or negligence of such
Co-Administrator in the performance of its duties hereunder, or by reason of its
reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14
of this Agreement.
10.2 The Fund agrees and acknowledges that the Co-Administrators have
not prior to the Effective Date assumed, and will not assume, any obligations or
liabilities arising out of the conduct by the Fund or its administrator prior to
the Effective Date of those duties which the Co-Administrators have agreed to
perform pursuant to this Agreement. The Fund further agrees to indemnify each
Co-Administrator against any losses, claims, damages or liabilities to which a
Co-Administrator may become subject in connection with the conduct by the Fund
or its administrator of such duties prior to the Effective Date.
10.3 Each Co-Administrator jointly and severally shall indemnify and
hold the Fund harmless from and against any and all claims, costs, expenses
(including reasonable attorneys' fees), losses, damages, charges, payments and
liabilities of any sort or kind which may be asserted against the Fund or for
which the Fund may be held to be liable in connection with this Agreement or the
Fund's performance hereunder (a "Claim"), provided that such Claim resulted
from: (a) the willful misfeasance, bad faith or negligence of such
Co-Administrator in the performance of its duties hereunder, or by reason of its
reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14
of this Agreement.
10.4 In any case in which one party (the "Indemnifying Party") may be
asked to indemnify or hold another party (the "Indemnified Party") harmless, the
Indemnified Party will notify the Indemnifying Party in writing promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification (an "Indemnification Claim") against the
Indemnifying Party, although the failure to do so shall not relieve the
Indemnifying Party from any liability which it may otherwise have to the
Indemnified Party, and the Indemnified Party shall keep the Indemnifying Party
advised with respect to all developments concerning such situation. The
Indemnifying Party shall be entitled to participate at its own expense in the
defense, or if it so elects, to assume the defense of, any Indemnification Claim
which may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel of good
standing chosen by the Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld. In the event the Indemnifying
Party elects to assume the defense of any
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<PAGE> 8
such Indemnification Claim and retain such counsel, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by the Indemnified
Party. In the event that the Indemnifying Party does not elect to assume the
defense of any such Indemnification Claim, or in case the Indemnified Party
reasonably does not approve of counsel chosen by the Indemnifying Party, or in
case there is a conflict of interest between the Indemnifying Party or the
Indemnified Party, the Indemnifying Party will reimburse the Indemnified Party
for the fees and expenses of any counsel retained by the Indemnified Party. The
Indemnified Party will not confess any Indemnification Claim or make any
compromise in any case in which the Indemnifying Party will be asked to provide
indemnification, except with the Indemnifying Party's prior written consent. The
obligations of the parties hereto under this Article 10 shall survive the
termination of this Agreement.
Article 11 Standard of Care.
11.1 The Co-Administrators shall at all times act in good faith and
agree to use their best efforts within commercially reasonable limits to ensure
the accuracy of all services performed under this Agreement, but assume no
responsibility for loss or damage to the Fund unless said errors are caused by
the Co-Administrators' willful misfeasance, bad faith or negligence in the
performance of their duties hereunder, or by reason of their reckless disregard
thereof.
11.2 Each party shall have the duty to mitigate damages for which
another party may become responsible.
11.3 Without in any way limiting the foregoing, in the event the
Co-Administrators shall provide blue sky services to the Fund, the
Co-Administrators shall have no liability for failing to file on a timely basis
any material to be provided by the Fund or its designee that the
Co-Administrators have not received on a timely basis from the Fund or its
designee, nor shall the Co-Administrators have any responsibility to review the
accuracy or adequacy of materials they receive from the Fund or its designee for
filing; nor shall the Co-Administrators have any liability for monetary damages
for the sale of securities in jurisdictions where Shares are not properly
registered, or in jurisdictions where Shares are sold in excess of the lawfully
registered amount, unless such failure of proper registration or excess sales is
due to the willful misfeasance, bad faith or negligence of the
Co-Administrators, or the reckless disregard of their duties hereunder. The
Co-Administrators shall not be liable for any errors which result from
inaccurate or inadequate information reported to the Co-Administrators directly
or indirectly from the Fund's transfer agent. The Co-Administrators shall be
under no obligation to investigate or confirm the accuracy or adequacy of any
information provided to the Co-Administrators by the Fund's transfer agent.
11.4 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO
EVENT SHALL ANY PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS,
TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO ANY OTHER
PARTY FOR CONSEQUENTIAL DAMAGES.
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<PAGE> 9
Article 12 Term and Termination.
12.1 This Agreement shall be effective on the Effective Date and,
unless sooner terminated as provided herein, shall continue until September 30,
2001 (the "Initial Term").
12.2 Upon the expiration of the Initial Term, this Agreement shall
continue automatically for successive one-year terms ("Renewal Terms") with
respect to each Portfolio, provided such continuance is specifically approved at
least annually by (i) the Board of Directors or (ii) by a vote of a majority (as
defined in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting
securities of the particular Portfolio, provided that in either event the
continuance is also approved by a majority of the Board Members who are not
parties to this Agreement and who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval.
12.3 The Fund may terminate this Agreement at any time after the
Initial Term, with or without cause, and without penalty, on at least sixty (60)
days written notice to the Co-Administrators.
12.4 Each Co-Administrator may terminate this Agreement with respect to
itself at any time after the Initial Term, with or without cause, and without
penalty, on at least sixty (60) days written notice to the Fund and the other
Co-Administrator.
12.5 The Fund may terminate this Agreement at any time during the
Initial Term in the event that the Fund or its shareholders incur damages in
excess of one hundred thousand dollars ($100,000) as a result of the willful
misfeasance, bad faith or negligence of the Co-Administrators, or the reckless
disregard of their duties hereunder. For this purpose, "damages" is defined as
damages caused by a single event, or cumulative series of events related to the
same matter, which generates a monetary loss to the Fund or its shareholders.
The Fund's right to terminate this Agreement pursuant to this Section 12.5 shall
remain effective even if the Co-Administrators have made the Fund or its
shareholders whole with respect to the damages caused.
12.6 The Fund may also terminate this Agreement at any time during the
Initial Term, regardless of the amount of damages to the Fund or its
shareholders, in the event that the Co-Administrators have failed to meet one of
the performance standards set forth in Exhibit 1 to Schedule B (a "Triggering
Event"). The Fund will provide the Co-Administrators with sixty (60) days
written notice if the Fund intends to exercise its option to terminate this
Agreement under this Section 12.6; provided, however, that such notice must be
given within sixty (60) days following the end of the month in which the
Triggering Event occurs. Notwithstanding the foregoing, the Fund's rights under
this Section 12.6 shall not become effective until ninety (90) days following
the Effective Date.
12.7 In the event this Agreement: (a) is terminated by the Fund
pursuant to Section 12.5, Section 12.6 or Section 12.9 hereof; or (b) is not
continued after the expiration of the Initial Term or any Renewal Term, all
reasonable expenses associated with the movement of records and materials and
conversion thereof to a successor administrator shall be borne by the
Co-
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<PAGE> 10
Administrators, and the Fund shall not be responsible for the Co-Administrators'
costs associated with such termination; provided, however, that such expenses
shall not exceed $25,000 in the event this Agreement is not continued after the
expiration of the Initial Term or any Renewal Term. In the event this Agreement
is terminated by the Fund pursuant to any other provision of this Agreement, all
reasonable expenses associated with conversion to a successor administrator
shall be borne by the Fund.
12.8 Notwithstanding anything contained in this Agreement to the
contrary, unless this Agreement is terminated pursuant to Section 12.5, Section
12.6 or Section 12.9 hereof, should the Fund move any of the services provided
by the Co-Administrators hereunder to a successor service provider during the
Initial Term, or should, during the Initial Term, all or substantially all of
the Fund's assets be merged with or purchased by another entity which does not
utilize the services of the Co-Administrators, the Co-Administrators shall be
entitled to receive fees from the Fund for the period from the date of such
movement, merger or purchase until the end of the Initial Term (the "Unexpired
Term"). The fees payable for the Unexpired Term shall be accelerated to the date
of such movement, merger or purchase and shall be calculated in accordance with
Section 6.3 herein at the asset levels on such date.
12.9 The Fund may terminate this Agreement upon its Assignment by a
Co-Administrator unless the conditions to an Assignment as set forth in Article
16 hereof have been satisfied.
Article 13 Additional Portfolios.
In the event that the Fund establishes one or more Portfolios in
addition to those identified in Schedule A with respect to which the Fund
desires to have the Co-Administrators render services as administrator under the
terms hereof, the Fund shall so notify the Co-Administrators in writing, and if
the Co-Administrators agree in writing to provide such services, Schedule A
shall be deemed amended to include such additional Portfolios.
Article 14 Confidentiality.
14.1 The parties agree that the Proprietary Information (defined below)
is confidential information of the parties and their respective licensers. The
Fund and the Co-Administrators shall exercise at least the same degree of care,
but not less than reasonable care, to safeguard the confidentiality of the
Proprietary Information of each other as they would exercise to protect their
own Proprietary Information. The Fund and the Co-Administrators may use the
Proprietary Information only to exercise their respective rights or perform
their respective duties under this Agreement. Except as otherwise required by
law, the Fund and the Co-Administrators shall not duplicate, sell or disclose to
others the Proprietary Information of the other, in whole or in part, without
the prior written permission of the affected party. The Fund and the
Co-Administrators may, however, disclose Proprietary Information to their
respective employees who have a need to know the Proprietary Information to
perform work for the other, provided that the Fund and the Co-Administrators
shall use reasonable efforts to ensure that the Proprietary Information is not
duplicated or disclosed by their respective employees in breach of this
Agreement. The Fund and the Co-Administrators may also disclose the Proprietary
Information to independent
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<PAGE> 11
contractors, auditors and professional advisors, provided they first agree in
writing to be bound by confidentiality obligations substantially similar to this
Section 14.1. Notwithstanding the previous sentence, in no event shall either
the Fund or the Co-Administrators disclose the Proprietary Information to any
competitor of the other without specific, prior written consent.
14.2 Proprietary Information means:
(a) any data or information that is competitively sensitive
material, and not generally known to the public, including, but not
limited to, information about product plans, marketing strategies,
finance, operations, customer relationships, customer profiles, sales
estimates, business plans, and internal performance results relating to
the past, present or future business activities of the Fund or the
Co-Administrators, their respective subsidiaries and affiliated
companies and the customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or the
Co-Administrators a competitive advantage over their competitors;
(c) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object
code, flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable;
(d) all documents, inventions, substances, engineering and
laboratory notebooks, drawings, diagrams, specifications, bills of
material, equipment, prototypes and models, and any other tangible
manifestation of the foregoing of any party hereto which now exist or
come into the control or possession of the other; and
(e) with respect to the Fund, all records and other
information relative to the Fund and its prior, present or potential
shareholders (and clients of such shareholders).
14.3 The obligations of confidentiality and restriction on use herein
shall not apply to any Proprietary Information that a party proves:
(a) Was in the public domain prior to the date of this
Agreement or subsequently came into the public domain through no fault
of such party; or
(b) Was lawfully received by the party from a third party free
of any obligation of confidence to such third party; or
(c) Was already in the possession of the party prior to
receipt thereof, directly or indirectly, from the other party; or
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<PAGE> 12
(d) Is required to be disclosed in a judicial or
administrative proceeding after all reasonable legal remedies for
maintaining such information in confidence have been exhausted
including, but not limited to, giving the other party as much advance
notice of the possibility of such disclosure as practical so the other
party may attempt to stop such disclosure or obtain a protective order
concerning such disclosure; or
(e) Is subsequently and independently developed by employees,
consultants or agents of the party without reference to the Proprietary
Information disclosed under this Agreement.
14.4 Notwithstanding the foregoing, it is hereby understood and agreed
by the parties hereto that any marketing strategies, customer profiles or
administrative, business or shareholder servicing plans or similar items
prepared or developed by the Co-Administrators for the benefit of the Fund shall
be considered the Proprietary Information of the Fund and nothing in this
Agreement shall be construed to prevent or prohibit the Fund from disclosing
such Proprietary Information to a successor administrator.
14.5 The obligations of the parties hereto under this Article 14 shall
survive the termination of this Agreement.
Article 15 Force Majeure.
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default or delay
is caused, directly or indirectly, by circumstances beyond such party's
reasonable control. In any such event, the non-performing party shall be excused
from any further performance and observance of the obligations so affected only
for as long as such circumstances prevail and such party continues to use
commercially reasonable efforts to recommence performance or observance as soon
as practicable.
Article 16 Assignment and Subcontracting.
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Except for the pending acquisition of Investor Services Group
by PNC Bank Corp., this Agreement may not be Assigned or otherwise transferred
by any party hereto without the prior written consent of the other parties;
provided, however, that each party may, in its sole discretion, Assign all its
right, title and interest in this Agreement to an entity controlling, controlled
by, or under common control with, such party, provided that the Board of
Directors in its sole discretion reasonably determines within ninety (90) days
of receiving written notice of such Assignment that: (i) the financial capacity
of a Co-Administrator's assignee is not materially less than that of the
Co-Administrator; (ii) the nature and quality of the services to be provided
hereunder are not materially adversely affected by such Assignment; and (iii)
the quality and capability of the personnel and facilities of a
Co-Administrator's assignee are not materially less than those of the
Co-Administrator. The Co-Administrators may, in their sole discretion, engage
subcontractors to perform any non-material or non-substantive obligations
contained in this Agreement that they
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<PAGE> 13
are otherwise required to perform hereunder, provided that the Co-Administrators
shall be responsible for all compensation payable to such subcontractors and
shall remain responsible for the acts and omissions of such subcontractors to
the same extent that the Co-Administrators are hereunder.
Article 17 Notice.
Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or a Co-Administrator shall be sufficiently
given if addressed to a party and received by it at its office set forth below
or at such other place as it may from time to time designate in writing.
To the Fund:
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
with a copy to:
Jeffrey A. Dalke, Esq.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
To Northern:
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to Investor Services Group's General Counsel
Article 18 Governing Law/Venue.
The laws of the Commonwealth of Massachusetts shall govern the
interpretation, validity, and enforcement of this Agreement. All actions arising
from or related to this Agreement shall
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<PAGE> 14
be brought in the state and federal courts sitting in the City of Boston, and
the parties hereby submit themselves to the exclusive jurisdiction of those
courts.
Article 19 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 20 Captions.
The captions of this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
Article 21 Publicity.
No party shall release or publish news releases, public announcements,
advertising or other publicity relating to this Agreement or to the transactions
contemplated by it without the prior review and written approval of the other
parties; provided, however, that a party may make such disclosures as are
required by legal, accounting or regulatory requirements after making reasonable
efforts in the circumstances to consult in advance with the other parties.
Article 22 Relationship of Parties.
The Co-Administrators agree that they are independent contractors and
not partners or co-venturers and nothing contained herein shall be interpreted
or construed otherwise.
Article 23 Entire Agreement; Severability.
23.1 This Agreement, including all Schedules and Exhibits hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations and understandings, whether written or
oral, between the parties with respect to the subject matter hereof. No change,
termination, modification or waiver of any term or condition of the Agreement
shall be valid unless in writing signed by each party. No such writing shall be
effective as against Investor Services Group unless said writing is executed by
a Senior Vice President, Executive Vice President or President of Investor
Services Group. No such writing shall be effective as against the Fund unless
said writing is executed by the Chairman of the Board of Directors or another
person specifically designated by the Board of Directors. No such writing shall
be effective as against Northern unless said writing is executed by the Vice
President, Senior Vice President, Executive Vice President or President of
Northern. A party's waiver of a breach of any term or condition in the Agreement
shall not be deemed a waiver of any subsequent breach of the same or another
term or condition.
23.2 The parties intend every provision of this Agreement to be
severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In
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<PAGE> 15
such case, the parties shall in good faith modify or substitute such provision
consistent with the original intent of the parties. Without limiting the
generality of this paragraph, if a court determines that any remedy stated in
this Agreement has failed of its essential purpose, then all other provisions of
this Agreement shall remain fully effective.
Article 24 Board Member and Shareholder Liability.
This Agreement is executed by or on behalf of the Fund with respect to
each of the Portfolios and the obligations hereunder are not binding upon any of
the Board Members, officers or shareholders of the Fund individually but are
binding only upon the Portfolio to which such obligations pertain and the assets
and property of such Portfolio. All obligations of the Fund under this Agreement
shall apply only on a Portfolio-by-Portfolio basis, and the assets of one
Portfolio shall not be liable for the obligations of another Portfolio. The
Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the Effective Date.
NORTHERN FUNDS
By:/s/ James W. Cozad
-----------------------------------------
Name: James W. Cozad
-------------------------------------
Title: Chairman of the Board of Trustees
-------------------------------------
THE NORTHERN TRUST COMPANY
By:/s/ Lloyd Wennlund
-----------------------------------------
Name: Lloyd Wennlund
-------------------------------------
Title: Senior Vice President
-------------------------------------
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:/s/ Jylanne Dunne
-----------------------------------------
Name: Jylanne Dunne
-------------------------------------
Title: Senior Vice President
-------------------------------------
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<PAGE> 17
SCHEDULE A
LIST OF PORTFOLIOS
Money Market Fund
U.S. Government Money Market Fund
U.S. Government Select Money Market Fund
Tax-Exempt Money Market Fund
Municipal Money Market Fund
California Municipal Money Market Fund
U.S. Government Fund
Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
Fixed Income Fund
Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Tax-Exempt Fund
International Fixed Income Fund
High Yield Municipal Fund
High Yield Fixed Income Fund
Income Equity Fund
Stock Index Fund
Growth Equity Fund
Select Equity Fund
Mid Cap Growth Fund
Small Cap Index Fund
Small Cap Fund
Small Cap Growth Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
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<PAGE> 18
SCHEDULE B
DUTIES OF THE CO-ADMINISTRATORS
(a) Maintaining office facilities (which may be in the offices of a
Co-Administrator or a corporate affiliate) and furnishing corporate officers for
the Fund;
(b) Furnishing data processing services, clerical services, and
executive and administrative services and standard stationery and office
supplies;
(c) Performing all functions ordinarily performed by the office of a
corporate treasurer, and furnishing the services and facilities ordinarily
incident thereto, as follows:
- Expense accrual monitoring and payment of the Fund's bills,
preparing monthly reconciliation of the Fund's expense records
and updating projections of annual expenses
- Determining dividends
- Calculating yields and total returns
- Preparing materials for review by the Board of Directors,
e.g., written reports pursuant to Rules 2a-7, 10f-3, 17a-7,
17e-1 and 144A and the Fund's applicable procedures
- Tax and financial counsel
- Creating expense pro formas for new Portfolios/classes
- Reporting Fund statistical information to investment company
reporting agencies and associations (e.g., Lipper Analytical
Services, Inc. and the Investment Company Institute)
- Compliance testing (e.g., to test compliance with applicable
provisions of the Prospectus, 1940 Act and Internal Revenue
Code)
(d) Preparing and submitting reports to the Fund's shareholders and the
Commission including, but not necessarily limited to, Annual Reports and
Semi-Annual Reports on Form N-SAR;
(e) Preparing and printing financial statements;
(f) Preparing monthly Portfolio profile reports;
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<PAGE> 19
(g) Preparing and filing the Fund's federal and state tax returns
(other than those required to be filed by the Fund's custodian and transfer
agent) and providing shareholder tax information to the Fund's transfer agent;
(h) Assisting the Fund's investment adviser, at the adviser's request,
in monitoring and developing compliance procedures for the Fund which will
include, among other matters, procedures to assist the adviser in monitoring
compliance with each Portfolio's investment objective, policies, restrictions,
tax matters and applicable laws and regulations;
(i) Assisting in marketing strategy and product development;
(j) Performing oversight/management responsibilities, including the
following:
- Supervision and coordination of transfer agent
- Supervision and coordination of IRA custodian
- Supervision and coordination of Fund custodian
- Vendor management and invoicing
- Daily report coordination
- Media relations
- Sales literature forms and development
- Fund operations coordination
- Management of auditor relationship
- Oversight of Portfolio compliance and tax function
(k) Performing "blue sky" compliance functions, as follows:
- Effecting and maintaining, as the case may be, the
registration of Shares of the Fund for sale under the
securities laws of the jurisdictions listed in the Written
Instructions of the Fund, which instructions will include the
amount of Shares to be registered as well as the warning
threshold to be maintained.
- Filing with each appropriate jurisdiction the appropriate
materials relating to the Fund.
- Providing to the Fund quarterly reports of sales activity in
each jurisdiction in accordance with the Written Instructions
of the Fund. Sales will be reported by shareholder residence.
NSCC trades and order clearance will be reported by the
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<PAGE> 20
state provided by the dealer at the point of sale. Trades by
omnibus accounts will be reported by trustee state of
residence in accordance with the Written Instructions of the
Fund outlining the entities which are permitted to maintain
omnibus positions with the Fund.
- In the event sales of Shares in a particular jurisdiction
reach or exceed the warning levels provided in the Written
Instructions of the Fund, the Co-Administrators will promptly
notify the Fund with a recommendation of the amount of Shares
to be registered in such jurisdiction and the fee for such
registration. The Co-Administrators will not register
additional Shares in such jurisdiction unless and until the
Co-Administrators shall have received Written Instructions to
do so.
- If the Co-Administrators are instructed by the Fund not to
register Shares in a particular jurisdiction, the
Co-Administrators will use their best efforts to cause any
sales in such jurisdictions to be blocked, and such sales will
not be reported to the Co-Administrators as sales of Shares of
the Fund.
(l) Performing corporate secretarial services including the following:
- Assist in maintaining corporate records and good standing
status of Fund in its state of organization
- Develop and maintain calendar of annual and quarterly board
approvals and regulatory filings
- Prepare notice, agenda, memoranda, resolutions and background
materials for legal approvals at quarterly and special board
meetings and committee meetings; assemble and distribute board
materials for board meetings and committee meetings; attend
meetings; make presentations where appropriate; prepare
minutes; follow up on issues; prepare such periodic and
special reports as the Board Members may reasonably request
- Provide support for written consent votes where needed
(m) Monitoring the Fund's arrangements with respect to services
provided by institutions ("Servicing Agents") to their customers who are the
beneficial owners of Shares, pursuant to agreements ("Servicing Agreements")
between the Fund and such Servicing Agents including:
- Review the qualifications of Servicing Agents wishing to enter
into Servicing Agreements
- Assist in the execution and delivery of Servicing Agreements
- 20 -
<PAGE> 21
- Report to the Board of Directors with respect to the
amounts paid or payable by the Fund from time to time under
the Servicing Agreements and the nature of the services
provided by Servicing Agents
- Maintain appropriate records in connection with their
monitoring duties
(n) Performing the following legal services:
- Prepare and file annual Post-Effective Amendments to the
Fund's Registration Statement
- Prepare and file Rule 24f-2 Notices
- Prepare and file Forms N-SAR
- Prepare and file Annual and Semi-Annual Financial Reports
- Communicate significant regulatory or legislative developments
to Fund management and Board Members and provide related
planning assistance where needed
- Consult with Fund management regarding portfolio compliance
and Fund corporate and regulatory issues as needed
- Maintain effective communication with outside counsel
- Arrange D&O/E&O insurance and fidelity bond coverage for Fund
- Assist in monitoring Fund Code of Ethics reporting and provide
such reports to the person designated under the Fund's Code
- Monitor handling of litigation by outside counsel and
non-routine regulatory matters
- Assist in managing Commission audits of the Fund at the
investment adviser's principal place of business
- Review sales material and advertising for Fund Prospectus
compliance
- Assist in developing compliance guidelines and procedures to
improve overall compliance by Fund and service providers
- Prepare compliance manuals
- 21 -
<PAGE> 22
(o) Performing, in accordance with the Written Instructions of the
Fund, Special Legal Services in accordance with the pricing structure listed on
the Fee Schedule attached to this Agreement as Schedule C. Examples of such
Special Legal Services are:
- Assist in new Portfolio start-up (to the extent requested):
- Coordinate time and responsibility schedules
- Prepare Fund corporate documents
- Draft/file registration statement (including
investment objectives/policies and prospectuses)
- Respond to and negotiate Commission comments
- Draft notice, agenda and resolutions for
organizational meeting; attend board meeting; make
presentations where appropriate; prepare minutes and
follow up on issues
- Prepare proxy materials for special meetings of shareholders
(including fund merger documents)
- Prepare Post-Effective Amendments for special purposes (e.g.,
new funds or classes, changes in advisory relationships,
mergers, restructurings)
- Assist in extraordinary non-recurring projects, including
providing consultative legal services, such as:
- Arrange CDSC financial programs
- Prospectus simplification
- Profile prospectuses
- Exemptive order applications
- Requests for no-action letters
- 22 -
<PAGE> 23
EXHIBIT 1 TO SCHEDULE B
PERFORMANCE STANDARDS
The Co-Administrators' obligation to meet the following Performance Standards
shall be measured in the aggregate with respect to all Portfolios of the Fund.
The Co-Administrators will report to the Fund on a monthly basis the percent of
items completed within standard as well as a quality rating. Reporting will be
detailed to the transaction type level. A pass/fail determination for
contractual penalties will be based on the categories listed below. Note that
completion standards are measured in business days.
Fund Administration (Treasury and Reporting)/Tax/Compliance
The following standards will be met 100% of the time:
- All Commission and Internal Revenue Service ("IRS") regulatory
requirements will be met according to the deadlines set forth
by the Commission and the IRS
- Notification to the Fund's investment adviser within two (2)
business days with compliance violations based on procedures
established by and among the Co-Administrators and the Fund
- Directors & Officers Errors & Omissions Insurance Coverage
will be reviewed annually
- Rule 17g-1 Fidelity Bond filings will be made as required by
the regulations of the Commission
The following standard will be met 98% of the time:
- Code of Ethics reporting forms will be circulated at least
seven (7) business days before each quarter end
BLUE SKY
The following standards will be met 98% of the time:
- Annual renewal filings will be submitted at least thirty (30)
business days prior to expiration
- Filings of Prospectus and Annual Reports will be submitted
within fifteen (15) business days of printing/release
- 23 -
<PAGE> 24
Legal Administration
The following standards will be met 98% of the time as measured on a quarterly
basis:
- Board materials will be sent to the Fund for review at least
fourteen (14) business days prior to the Board meeting,
provided that all requested information has been received by
the Co-Administrators within agreed-upon time frames
- Board materials will be sent to the Board Members at least
seven (7) business days prior to the Board meeting, provided
that all requested information has been received by the
Co-Administrators within agreed-upon time frames
- Timely submission of sales literature to NASD, provided that
copies of such materials are provided to the Co-Administrators
or their affiliates on a timely basis
- 24 -
<PAGE> 25
SCHEDULE C
FEE SCHEDULE
For the services rendered, expenses assumed, facilities furnished and
payments made by the Co-Administrators, as provided for in this Agreement, the
Fund, on behalf of each Portfolio, on the first business day of each month, will
pay to Northern, as agent for itself and Investor Services Group, a fee for the
previous month at the annualized rates listed below.
1. Standard Annual Fees: .15% of each Portfolio's average daily net
assets
The foregoing fee will be computed based on net assets on each day.
2. Fees for Special Legal Services: The Co-Administrators shall be
entitled to the following fee for the performance of any Special Legal
Services as described in Schedule B in accordance with the Written
Instructions of the Fund: $185 per hour subject to certain project caps
as may be agreed to by the Co-Administrators and the Fund. Services and
charges may vary based on volume.
- 25 -
<PAGE> 26
SCHEDULE D
FUND DOCUMENTS
- - Certified copy of the Articles of Incorporation of the Fund
- - Certified copy of the By-Laws of the Fund
- - Copy of the resolution of the Board of Directors authorizing the
execution and delivery of this Agreement
- - Copies of all agreements between the Fund and its service providers
- - A listing of all jurisdictions in which each Portfolio is registered
and lawfully available for sale as of the date of this Agreement and
all information relative to the monitoring of sales and registrations
of the Shares in such jurisdictions
- - The Fund's most recent post-effective amendment to its registration
statement
- - The Fund's Prospectus
- 26 -
<PAGE> 1
EXHIBIT (h)(13)
AMENDED AND RESTATED
SCHEDULE A
TO THE
CO-ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS,
THE NORTHERN TRUST COMPANY
AND
FIRST DATA INVESTOR SERVICES GROUP, INC.
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:
Money Market Fund International Fixed Income Fund
U.S. Government Money Market Fund High Yield Municipal Fund
U.S. Government Select Money Market Fund High Yield Fixed Income Fund
Tax-Exempt Money Market Fund Income Equity Fund
Municipal Money Market Fund Stock Index Fund
California Municipal Money Market Fund Growth Equity Fund
U.S. Government Fund Select Equity Fund
Short-Intermediate U.S. Government Fund Mid Cap Growth Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
California Intermediate Tax-Exempt Fund Small Cap Fund
Florida Intermediate Tax-Exempt Fund Small Cap Growth Fund
Fixed Income Fund International Growth Equity Fund
Tax-Exempt Fund International Select Equity Fund
Arizona Tax-Exempt Fund Technology Fund
California Tax-Exempt Fund MarketPower Fund
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS NORTHERN TRUST COMPANY
By: _________________________ By: _________________________
Title: ______________________ Title: ______________________
Date: _______________________ Date: _______________________
FIRST DATA INVESTOR SERVICES 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. 27 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
October 15, 1999
<PAGE> 1
EXHIBIT (j)(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated May 14, 1999, and 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 consisting of the Money Market Fund, U.S.
Government Money Market Fund, U.S. Government Select Money Market Fund,
Municipal Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt
Fund, Fixed Income Fund, Tax-Exempt Fund, California Tax-Exempt Fund,
International Fixed Income Fund, High Yield Municipal Fund, High Yield Fixed
Income Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select
Equity Fund, Mid Cap Growth Fund, Small Cap Fund, International Growth Equity
Fund, International Select Equity Fund and Technology Fund).
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
- ----------------------------------
Chicago, Illinois
October 15, 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 Small Cap Index 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 September 3, 1999.
NORTHERN FUNDS
By:/s/ Mary M. Tenwinkel
-----------------------------------------
MIRIAM M. ALLISON
/s/ Miriam M. Allison
--------------------------------------------
<PAGE> 1
EXHIBIT (l)(7)
PURCHASE AGREEMENT
(Equity Funds)
Agreement dated as of September 3, 1999 between Northern Funds, a
Massachusetts business trust (the "Trust"), and The Northern Trust Company
("Northern"), acting on behalf of certain common trust funds named below that
are maintained by Northern (the "Common Funds") in a fiduciary capacity.
BACKGROUND
1. The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, consisting of twenty-seven separate
investment portfolios advised by Northern (the "Portfolios").
2. Northern also maintains, in a fiduciary capacity, the Common
Funds in accordance with Section 584 of the Internal Revenue Code of 1996, as
amended (the "Code").
3. Northern believes that it is in the interests of the accounts
that are invested in the Common Funds (the "Accounts") to transfer their
investments from the Common Funds to the Portfolios. As fiduciary of the Common
Funds and the Accounts, Northern has, therefore, determined that each Common
Fund should transfer its assets to a Portfolio of the Trust with corresponding
investment objectives and policies in exchange solely for shares of the
Portfolio, and then distribute the shares to its participants solely in exchange
for and in cancellation of their interests in the Common Fund pursuant to
Section 584(h) of the Code. Northern believes that the foregoing procedure for
transferring the investments of the Accounts in the Common Funds to the
Portfolios will be beneficial to both the Accounts and the Portfolios, and will
minimize brokerage and other costs associated with the transfer of the Assets.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto, intending to be legally bound,
agree as follows:
AGREEMENT
1. Purchase of Portfolio Shares.
Effective as of 3:00 p.m. (Central Time) on September 3, 1999
(the "Transfer Time"), the Common Funds named below shall purchase, and the
Trust shall issue to the Common Funds, for subsequent distribution to the
participants in the Common Funds, shares of the corresponding Portfolios, as
listed below, with an aggregate net asset value equal to the aggregate market
value of the Assets transferred to the Portfolios determined in accordance with
Sections 3 and 4 hereof.
<PAGE> 2
<TABLE>
<CAPTION>
Corresponding Portfolios
Common Funds of the Trust
------------ ------------
<S> <C>
Income Equity Income Equity
Market Equity Stock Index
Growth Equity Growth Equity
Focused Growth Technology Technology
Global Growth International Growth Equity
Small Capitalization Equity Small Cap Index
</TABLE>
2. Purchase Price. In consideration of the issuance of shares of the
Portfolios pursuant to this Agreement, Northern shall transfer those Assets held
by the Common Funds that are set forth in Exhibit A, attached hereto and made a
part hereof; provided that the Assets so transferred shall constitute
permissible investments under the Portfolios' respective investment policies and
limitations as set forth in the Trust's registration statement. No brokerage
commissions, fees (except for customary transfer fees) or other remuneration
will be paid by the Portfolios, the Common Funds or the Accounts in connection
with the transactions contemplated hereby. The number of shares of each
Portfolio to be issued to the Common Funds shall be determined by dividing the
aggregate market value (computed as set forth below) of the Assets being
transferred to the Portfolio, determined as of the Transfer Time, by the
Portfolio's per share value, determined as of the Transfer Time.
3. Determination of Market Value. The aggregate market value of the
Assets of a Common Fund shall be any cash plus the sum of the independent
current market price of each security being purchased hereunder. For purposes of
this Agreement, the "current market price" shall be determined pursuant to
paragraph (b) of Rule 17a-7 under the Investment Company Act of 1940 as
interpreted and applied by the staff of the Securities and Exchange Commission.
Securities may be valued on the basis of prices provided by independent
pricing services when such prices are believed by Northern to reflect the fair
market value of such securities.
4. Representation of Northern. Northern hereby represents and
warrants as follows:
(a) Northern is entering into this Agreement as fiduciary of
the Common Funds. The execution and delivery of this Agreement by Northern has
been duly authorized by all requisite corporate action and (assuming the due
authorization, execution and delivery hereof by the Trust) constitutes the valid
and binding obligation of Northern, as fiduciary, enforceable in accordance with
its terms.
(b) At the time of the transfer of the Assets to the Trust,
the Common Funds will have good title to the Assets, free and clear of all
mortgages, security interests, liens, charges, pledges and encumbrances
whatsoever. Upon transfer of the Assets to the Trust, the Trust will acquire
good title thereto, free and clear of all such mortgages, security interests,
liens, charges, pledges and encumbrances whatsoever.
- 2 -
<PAGE> 3
5. Representations of the Trust. The Trust hereby represents and
warrants as follows:
(a) The Trust is entering into this Agreement on behalf of the
Portfolios. The execution and delivery of this Agreement by the Trust has been
duly authorized by all requisite action and (assuming the due authorization,
execution and delivery hereof by Northern) constitutes the valid and binding
obligation of the Trust, enforceable in accordance with its terms.
(b) The issuance, sale and delivery of shares of the
Portfolios in accordance with the terms of this Agreement have been duly
authorized by all requisite action and such shares, when so issued, sold and
delivered against payment therefor in accordance with the provisions hereof,
will be duly and validly issued, fully paid and nonassessable by the Trust.
6. Names. The Trust's Agreement and Declaration of Trust is on file
with the Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by or on behalf of the Trust and the obligations hereunder are not
binding upon any of the Trustees, Officers or Shareholders of the Trust
individually but are binding only upon the Trust and its assets and property.
All obligations of the Trust under this Agreement shall apply only on a
Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be
liable for the obligations of another Portfolio.
7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers designated below as of the day,
month and year first above written.
Attest: NORTHERN FUNDS
/s/ Mary M. Tenwinkel By: /s/ Miriam M. Allison
- ---------------------------------- -------------------------------------
Attest: THE NORTHERN TRUST COMPANY, acting
as Fiduciary for the Common Trust Funds
Named Above
/s/ Lloyd Wennlund By: /s/ Archibald E. King
- ---------------------------------- -------------------------------------
- 3 -
<PAGE> 4
Exhibit A
to Agreement between
Northern Funds and
The Northern Trust Company
Dated as of September 3, 1999
The following is a List of Assets for transfer to the investment
portfolios of Northern Funds from Common Trust Funds maintained by The Northern
Trust Company:
- 4 -
<PAGE> 1
EXHIBIT (l)(8)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Martin
C. Gawne hereby agree as follows:
1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby
purchases, five shares of the Trust's Small Cap Growth Fund (the "Shares") at
$10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of
funds in full payment for the foregoing Shares.
2. Martin C. Gawne 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 September 30, 1999.
NORTHERN FUNDS
By:/s/ Mary M. Tenwinkel
-----------------------------------
MARTIN C. GAWNE
/s/ Martin C. Gawne
--------------------------------------
<PAGE> 1
EXHIBIT (l)(9)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Martin
C. Gawne hereby agree as follows:
1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby
purchases, five shares of the Trust's Short-Intermediate U.S. Government Fund
(the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from
Martin C. Gawne of funds in full payment for the foregoing Shares.
2. Martin C. Gawne 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 September 30, 1999.
NORTHERN FUNDS
By:/s/ Mary M. Tenwinkel
-----------------------------------
MARTIN C. GAWNE
/s/ Martin C. Gawne
--------------------------------------
<PAGE> 1
EXHIBIT (l)(10)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Martin
C. Gawne hereby agree as follows:
1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby
purchases, five shares of the Trust's California Intermediate Tax-Exempt Fund
(the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from
Martin C. Gawne of funds in full payment for the foregoing Shares.
2. Martin C. Gawne 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 September 30, 1999.
NORTHERN FUNDS
By:/s/ Mary M. Tenwinkel
-----------------------------------
MARTIN C. GAWNE
/s/ Martin C. Gawne
--------------------------------------
<PAGE> 1
EXHIBIT (l)(11)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Martin
C. Gawne hereby agree as follows:
1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby
purchases, five shares of the Trust's Arizona Tax-Exempt Fund (the "Shares") at
$10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of
funds in full payment for the foregoing Shares.
2. Martin C. Gawne 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 September 30, 1999.
NORTHERN FUNDS
By:/s/ Mary M. Tenwinkel
-----------------------------------
MARTIN C. GAWNE
/s/ Martin C. Gawne
--------------------------------------
<PAGE> 1
EXHIBIT (l)(12)
PURCHASE AGREEMENT
(Fixed Income Funds)
Agreement dated as of October 1, 1999 between Northern Funds,
a Massachusetts business trust (the "Trust"), and The Northern Trust Company
("Northern"), acting on behalf of certain common trust funds named below that
are maintained by Northern (the "Common Funds") in a fiduciary capacity.
BACKGROUND
1. The Trust is an open-end management investment company
registered under the Investment Company Act of 1940, consisting of twenty-nine
separate investment portfolios advised by Northern (the "Portfolios").
2. Northern also maintains, in a fiduciary capacity, the
Common Funds in accordance with Section 584 of the Internal Revenue Code of
1996, as amended (the "Code").
3. Northern believes that it is in the interests of the
accounts that are invested in the Common Funds (the "Accounts") to transfer
their investments from the Common Funds to the Portfolios. As fiduciary of the
Common Funds and the Accounts, Northern has, therefore, determined that each
Common Fund should transfer its assets to a Portfolio of the Trust with
corresponding investment objectives and policies in exchange solely for shares
of the Portfolio, and then distribute the shares to its participants solely in
exchange for and in cancellation of their interests in the Common Fund pursuant
to Section 584(h) of the Code. Northern believes that the foregoing procedure
for transferring the investments of the Accounts in the Common Funds to the
Portfolios will be beneficial to both the Accounts and the Portfolios, and will
minimize brokerage and other costs associated with the transfer of the Assets.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto, intending to be legally bound,
agree as follows:
AGREEMENT
1. Purchase of Portfolio Shares.
Effective as of 3:00 p.m. (Central Time) on October 1, 1999
(the "Transfer Time"), the Common Funds named below shall purchase, and the
Trust shall issue to the Common Funds, for subsequent distribution to the
participants in the Common Funds, shares of the corresponding Portfolios, as
listed below, with an aggregate net asset value equal to the aggregate market
value of the Assets transferred to the Portfolios determined in accordance with
Sections 3 and 4 hereof.
- 1 -
<PAGE> 2
<TABLE>
<CAPTION>
Corresponding Portfolios
Common Funds of the Trust
------------ ------------
<S> <C>
1986 Government Bond U.S. Government
Government Bond U.S. Government
Intermediate Tax-Exempt Bond Intermediate Tax-Exempt
Taxable Bond Fixed Income
Tax-Exempt Bond Tax-Exempt
California Tax-Exempt Bond California Tax-Exempt
International Government Bond International Fixed Income
Arizona Tax-Exempt Bond Arizona Tax-Exempt
Intermediate California Tax-Exempt Bond California Intermediate Tax-Exempt
Intermediate Government Bond Short-Intermediate U.S. Government
</TABLE>
2. Purchase Price. In consideration of the issuance of shares
of the Portfolios pursuant to this Agreement, Northern shall transfer those
Assets held by the Common Funds that are set forth in Exhibit A, attached hereto
and made a part hereof; provided that the Assets so transferred shall constitute
permissible investments under the Portfolios' respective investment policies and
limitations as set forth in the Trust's registration statement. No brokerage
commissions, fees (except for customary transfer fees) or other remuneration
will be paid by the Portfolios, the Common Funds or the Accounts in connection
with the transactions contemplated hereby. The number of shares of each
Portfolio to be issued to the Common Funds shall be determined by dividing the
aggregate market value (computed as set forth below) of the Assets being
transferred to the Portfolio, determined as of the Transfer Time, by the
Portfolio's per share value, determined as of the Transfer Time.
3. Determination of Market Value. The aggregate market value
of the Assets of a Common Fund shall be any cash plus the sum of the independent
current market price of each security being purchased hereunder. For purposes of
this Agreement, the "current market price" shall be determined pursuant to
paragraph (b) of Rule 17a-7 under the Investment Company Act of 1940 as
interpreted and applied by the staff of the Securities and Exchange Commission.
Securities may be valued on the basis of prices provided by independent
pricing services when such prices are believed by Northern to reflect the fair
market value of such securities.
4. Representation of Northern. Northern hereby represents and
warrants as follows:
(a) Northern is entering into this Agreement as
fiduciary of the Common Funds. The execution and delivery of this Agreement by
Northern has been duly authorized by all requisite corporate action and
(assuming the due authorization, execution and delivery hereof by the Trust)
constitutes the valid and binding obligation of Northern, as fiduciary,
enforceable in accordance with its terms.
- 2 -
<PAGE> 3
(b) At the time of the transfer of the Assets to the
Trust, the Common Funds will have good title to the Assets, free and clear of
all mortgages, security interests, liens, charges, pledges and encumbrances
whatsoever. Upon transfer of the Assets to the Trust, the Trust will acquire
good title thereto, free and clear of all such mortgages, security interests,
liens, charges, pledges and encumbrances whatsoever.
5. Representations of the Trust. The Trust hereby represents
and warrants as follows:
(a) The Trust is entering into this Agreement on
behalf of the Portfolios. The execution and delivery of this Agreement by the
Trust has been duly authorized by all requisite action and (assuming the due
authorization, execution and delivery hereof by Northern) constitutes the valid
and binding obligation of the Trust, enforceable in accordance with its terms.
(b) The issuance, sale and delivery of shares of the
Portfolios in accordance with the terms of this Agreement have been duly
authorized by all requisite action and such shares, when so issued, sold and
delivered against payment therefor in accordance with the provisions hereof,
will be duly and validly issued, fully paid and nonassessable by the Trust.
6. Names. The Trust's Agreement and Declaration of Trust is on
file with the Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by or on behalf of the Trust and the obligations hereunder are not
binding upon any of the Trustees, Officers or Shareholders of the Trust
individually but are binding only upon the Trust and its assets and property.
All obligations of the Trust under this Agreement shall apply only on a
Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be
liable for the obligations of another Portfolio.
7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers designated below as
of the day, month and year first above written.
Attest: NORTHERN FUNDS
By: /s/ Jylanne Dunne
- -------------------------- -----------------------------------
Attest: THE NORTHERN TRUST COMPANY, acting
as Fiduciary for the Common Trust Funds
Named Above
/s/ Diane Anderson By: /s/ Archibald E. King
- -------------------------- -----------------------------------
- 4 -
<PAGE> 5
Exhibit A
to Agreement between
Northern Funds and
The Northern Trust Company
Dated as of October 1, 1999
The following is a List of Assets for transfer to the investment
portfolios of Northern Funds from Common Trust Funds maintained by The Northern
Trust Company:
- 5 -
<PAGE> 1
EXHIBIT (m)
NORTHERN FUNDS
AMENDED AND RESTATED DISTRIBUTION AND SERVICE PLAN
This Distribution and Service Plan (the "Plan") has been adopted by
the Board of Trustees of Northern Funds in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Act").
Section 1. Upon the recommendation of Northern Funds Distributors,
LLC, the distributor of Northern Funds, any officer of Northern Funds is
authorized to execute and deliver, in the name and on behalf of Northern Funds,
written agreements based on the form attached hereto as Appendix A or any other
form duly approved by the Board of Trustees ("Agreements") with securities
dealers, financial institutions and other industry professionals that are
shareholders or dealers of record or which have a servicing relationship with
the beneficial owners of Shares of Northern Funds ("Shareholder Organizations").
Pursuant to such Agreements, Shareholder Organizations shall provide
distribution and support services as set forth therein to their clients who
acquire and beneficially own Shares of any Fund offered by Northern Funds in
consideration of a fee, computed monthly in the manner set forth in the
Agreements, at an annual rate of up to .25% of the average daily net asset value
of the Shares beneficially owned by such clients. The Northern Trust Company and
its affiliates are eligible to become Shareholder Organizations and to receive
fees under this Plan.
Section 2. The co-administrators of Northern Funds shall monitor the
arrangements pertaining to Northern Funds' Agreements with Shareholder
Organizations in accordance with the terms of their co-administration agreement
with Northern Funds. Northern Funds Distributors, LLC shall not, however, be
obliged by this Plan to recommend, and Northern Funds shall not be obliged to
execute, any Agreement with any qualifying Shareholder Organization.
Section 3. So long as this Plan is in effect, the co-administrators
shall provide to Northern Funds' Board of Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts expended pursuant to
this Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately with respect
to each particular Fund upon the approval of the Plan (and the form of Agreement
attached hereto) by a majority of the Board of Trustees, including a majority of
the Trustees who are not "interested persons," as defined in the Act, of
Northern Funds and have no direct or indirect financial interest in the
operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees"), pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of this Plan (and form of Agreement).
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EXHIBIT (m)
Section 5. Unless sooner terminated, this Plan shall continue until
March 31, 2000 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4(a).
Section 6. This Plan may be amended at any time with respect to any
Fund by the Board of Trustees, provided that (a) any amendment to increase
materially the costs (whether for distribution or any other purpose) which such
Fund may bear pursuant to this Plan shall be effective only upon the favorable
vote of a majority (as defined in the Act) of the outstanding Shares of such
Fund, and (b) any material amendment of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4(a).
Section 7. This Plan is terminable at any time with respect to any
Fund by (a) vote of a majority of the Disinterested Trustees, or (b) vote of a
majority (as defined in the Act) of the Shares of such Fund.
Section 8. While this Plan is in effect, the selection and
nomination of those Trustees who are not "interested persons" (as defined in the
Act) of Northern Funds shall be committed to the discretion of such
non-interested Trustees.
Section 9. All expenses incurred by Northern Funds with respect to
the Shares of a particular Fund in connection with Agreements and the
implementation of this Plan shall be borne entirely by such Fund.
Section 10. This Plan was originally adopted by Northern Funds as of
April 1, 1994 and most recently revised as of September 15, 1999.
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Appendix A
DISTRIBUTION AND SERVICING AGREEMENT
Gentlemen:
We wish to enter into this Distribution and Servicing Agreement
("Agreement") with you concerning the provision of distribution services (and,
to the extent provided below, support services) to your clients ("Clients") who
may from time to time acquire and beneficially own shares of any Fund ("Shares")
offered by Northern Funds.
The terms and conditions of this Agreement are as follows:
Section 1. You will provide reasonable assistance in connection with
the distribution of Shares to Clients as requested from time to time by our
distributor, which assistance may include forwarding sales literature and
advertising provided by our distributor for Clients. In addition, you agree to
provide one or more of the following support services to Clients who may from
time to time acquire and beneficially own Shares: (i) processing dividend and
distribution payments from us on behalf of Clients; (ii) providing information
periodically to Clients showing their positions in Shares; (iii) arranging for
bank wires; (iv) responding to Client inquiries relating to the services
performed by you; (v) providing subaccounting with respect to Shares
beneficially owned by Clients or the information to us necessary for
subaccounting; (vi) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Clients; (vii)
assisting in processing purchase, exchange and redemption requests from Clients
and in placing such orders with our service contractors; (viii) assisting
Clients in changing dividend options, account designations and addresses; and
(ix) providing such other similar services as we may reasonably request to the
extent you are permitted to do so under applicable statutes, rules and
regulations.
Section 2. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned assistance and services to Clients.
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Section 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in our then current prospectuses and statements of additional
information for Shares, copies of which will be supplied by us to you, or in
such supplemental literature or advertising as may be authorized by us in
writing.
Section 4. For all purposes of this Agreement you will be deemed to
be an independent contractor, and will have no authority to act as agent for us
in any matter or in any respect. By your written acceptance of this Agreement,
you agree to and do release, indemnify and hold us harmless from and against any
and all direct or indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of Shares (or orders relating to the same) by or on
behalf of Clients. You and your employees will, upon request, be available
during normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided
by you hereunder, we will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of _______% of the average daily net asset
value of the Shares beneficially owned by your Clients for whom you are the
dealer of record or holder of record or with whom you have a servicing
relationship (the "Clients' Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this Section
5, the average daily net asset value of the Clients' Shares will be computed in
the manner specified in our Registration Statement (as the same is in effect
from time to time) in connection with the computation of the net asset value of
Shares for purposes of purchases and redemptions. The fee rate stated above may
be prospectively increased or decreased by us, in our sole discretion, at any
time upon notice to you. Further, we may, in our discretion and without notice,
suspend or withdraw the sale of Shares, including the sale of Shares to you for
the account of any Client or Clients. All fees payable by Northern Funds under
this Agreement with respect to the Shares of a particular Fund shall be borne
by, and be payable entirely out of the assets allocable to, said Shares; and no
other class of Shares of any other Fund offered by Northern Funds shall be
responsible for such fees.
Section 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to our Board of
Trustees, and our Trustees will review, at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures were made.
In addition, you will furnish us or our designees with such information as we or
they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Trustees concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
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Section 7. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you
represent, warrant and agree that: (i) the compensation payable to you
hereunder, together with any other compensation you receive from Clients for
services contemplated by this Agreement, will not be excessive or unreasonable
under the laws and instruments governing your relationships with Clients; and
(ii) you will provide to Clients a schedule of any fees that you may charge to
them relating to the investment of their assets in Shares. In addition, you
understand that this Agreement has been entered into pursuant to Rule 12b-l
under the Investment Company Act of 1940 (the "Act"), and is subject to the
provisions of said Rule, as well as any other applicable rules or regulations
promulgated by the Securities and Exchange Commission.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until the next March 31, and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by us in the manner
described in Section 12. This Agreement is terminable with respect to the Shares
of any Fund, without penalty, at any time by us (which termination may be by a
vote of a majority of the Disinterested Trustees as defined in Section 12 or by
vote of the holders of a majority of the outstanding Shares of such Fund) or by
you upon notice to the other party hereto. This Agreement will also terminate
automatically in the event of its assignment (as defined in the Act).
Section 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein.
Section 11. This Agreement will be construed in accordance with the
laws of the State of Illinois.
Section 12. This Agreement has been approved by vote of a majority
of (i) our Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of us and have no
direct or indirect financial interest in the operation of the Distribution and
Service Plan adopted by us or in any agreement related thereto cast in person at
a meeting called for the purpose of voting on such approval ("Disinterested
Trustees"). This Agreement is executed by or on behalf of the Trust and the
obligations hereunder are not binding upon any of the Trustees, Officers or
Shareholders of the Trust individually but are binding only upon the Trust and
its assets and property. All obligations of the Trust under this Agreement shall
apply only on a Fund by Fund basis, and the assets of one Fund shall not be
liable for the obligations of another Fund. The Trust's Agreement and
Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts.
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If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and promptly
return it to us, c/o The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois, 60675.
Very truly yours,
NORTHERN FUNDS
Date: ___________________ By:_____________________________
(Authorized Officer)
Accepted and Agreed to:
Date: ___________________ By:_____________________________
(Authorized Officer)
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