<PAGE> 1
NORTHERN FUNDS
INVESTMENT ADVISERS:
The Northern Trust Company 50 S. LaSalle Street
Northern Trust Quantitative Advisors, Inc. Chicago, Illinois 60675
TRANSFER AGENT AND CUSTODIAN: 1-800-595-9111
The Northern Trust Company
The shares offered by this Prospectus represent interests in Northern
Funds, a no-load management investment company consisting of twenty-seven funds
(the "Funds") designed to offer investors a range of investment opportunities.
Each Fund, other than the Stock Index, Small Cap Index and Small Cap
Funds, is advised by The Northern Trust Company ("Northern Trust"). The Stock
Index, Small Cap Index and Small Cap Funds are advised by Northern Trust
Quantitative Advisors, Inc. ("NTQA" and, together with Northern Trust, the
"Investment Advisers"). Shares are sold and redeemed without any purchase or
redemption charge by Northern Funds, although Northern Trust and other
institutions may charge their customers for their services in connection with
investments.
Northern Funds consists of the following portfolios:
MONEY MARKET FUNDS:
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
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
Mid Cap Growth Fund
Small Cap Index Fund
-i-
<PAGE> 2
Small Cap Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
-ii-
<PAGE> 3
This Prospectus provides information about the Funds that you should
know before investing. It should be read and retained for future reference.
Further information is included in a statement of additional information dated
November 30, 1998 (the "Additional Statement"), which is incorporated by
reference herein. For a free copy, write to Northern Funds' distributor,
Sunstone Distribution Services, LLC, at 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 or call 1-800-595-9111. The Securities and Exchange
Commission maintains a World Wide Web Site (http://www.sec.gov) that contains
the Additional Statement and other information regarding Northern Funds. 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
availability in your state.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET FUND, U.S. GOVERNMENT
MONEY MARKET FUND, U.S. GOVERNMENT SELECT MONEY MARKET FUND, MUNICIPAL MONEY
MARKET FUND OR CALIFORNIA MUNICIPAL MONEY MARKET FUND (TOGETHER, THE "MONEY
MARKET FUNDS") WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THE CALIFORNIA MUNICIPAL MONEY MARKET FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER AND, THEREFORE, INVESTMENTS IN THIS
FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
THE HIGH YIELD MUNICIPAL FUND AND HIGH YIELD FIXED INCOME FUND INVEST IN
LOWER QUALITY BONDS COMMONLY REFERRED TO AS "JUNK BONDS." INVESTMENTS OF THIS
TYPE ARE SUBJECT TO GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF
PRINCIPAL AND INTEREST THAN INVESTMENTS IN HIGHER QUALITY SECURITIES. INVESTORS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH INVESTMENT IN THESE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 30, 1998, revised
January 15, 1999.
-iii-
<PAGE> 4
TABLE OF CONTENTS
PAGE
HIGHLIGHTS...................................................................1
EXPENSE SUMMARY..............................................................8
FINANCIAL HIGHLIGHTS........................................................13
INVESTMENT INFORMATION......................................................24
Money Market Funds.....................................................24
Money Market Fund.....................................................24
U.S. Government Money Market Fund.....................................24
U.S. Government Select Money Market Fund..............................25
Municipal Money Market Fund...........................................25
California Municipal Money Market Fund................................26
Other Information.....................................................26
Fixed Income Funds.....................................................27
U.S. Government Fund, Short-Intermediate U.S. Government Fund and
Fixed Income Fund.....................................................27
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................28
International Fixed Income Fund.......................................29
High Yield Municipal Fund.............................................30
High Yield Fixed Income Fund..........................................31
Equity Funds...........................................................32
Income Equity Fund....................................................32
Stock Index Fund......................................................33
Growth Equity Fund....................................................34
Select Equity Fund....................................................34
Mid Cap Growth Fund...................................................34
Small Cap Index Fund..................................................35
Small Cap Fund........................................................36
International Growth Equity Fund......................................37
International Select Equity Fund......................................38
Technology Fund.......................................................38
Other Information.....................................................39
California Funds, Florida Intermediate Tax-Exempt Fund, Arizona
Tax-Exempt Fund -- Additional Risks and Considerations................39
Technology Fund -- Additional Risks and Considerations.................40
High Yield Funds -- Additional Risks and Considerations................41
-i-
<PAGE> 5
International Funds -- Further Information.............................42
Fundamentals of Fixed Income Investing.................................44
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS.................44
Description of Securities and Investment Techniques...................44
Investment Restrictions...............................................62
OPENING AN ACCOUNT AND PURCHASING SHARES....................................64
Purchasing Shares Directly from the Funds.............................64
Purchasing Shares Through Northern Trust and Other Institutions.......66
Additional Purchase Information.......................................67
REDEEMING AND EXCHANGING SHARES.............................................68
Redeeming and Exchanging Directly from the Funds......................68
Redeeming and Exchanging Through Northern Trust and Other
Institutions..........................................................71
Additional Redemption and Exchange Information........................71
DISTRIBUTIONS AND TAXES.....................................................73
Distributions.........................................................73
Taxes.................................................................74
Tax Table.............................................................79
MANAGEMENT..................................................................79
Board of Trustees.....................................................79
Investment Advisers, Transfer Agent and Custodian.....................79
Year 2000.............................................................83
Administrator and Distributor.........................................84
Service Organizations.................................................85
Expenses..............................................................86
FURTHER INFORMATION.........................................................87
Determining Share Price...............................................87
Advertising Performance...............................................87
Voting Rights.........................................................89
Shareholder Reports...................................................90
Retirement Plans......................................................90
Miscellaneous.........................................................90
-ii-
<PAGE> 6
HIGHLIGHTS
Q. WHAT IS NORTHERN FUNDS?
A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to invest in
different investment portfolios, each having separate investment
objectives and policies. Northern Funds presently consists of twenty-seven
portfolios, including money market, domestic and international fixed
income and equity portfolios.
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 exclusively in high-quality money market instruments.
U.S. GOVERNMENT 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 obligations of the U.S.
government, its agencies and 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 solely in obligations of the U.S.
government, its agencies and instrumentalities.
MUNICIPAL MONEY MARKET FUND seeks, to the extent consistent with the
preservation of capital and prescribed portfolio standards, a high level
of income exempt from regular federal income tax by investing primarily in
municipal instruments.
CALIFORNIA MUNICIPAL MONEY MARKET FUND seeks to provide to its
shareholders, to the extent consistent with the preservation of capital
and prescribed portfolio standards, a high level of income exempt from
regular federal income tax and California state personal income tax.
FIXED INCOME FUNDS
U.S. GOVERNMENT FUND seeks a high level of current income from
investment in U.S. government securities while maintaining a
dollar-weighted average maturity between one and ten years.
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND seeks a high level of current
income from investment in a broad range of U.S. government securities
while maintaining a dollar-weighted average maturity between two and five
years.
-1-
<PAGE> 7
INTERMEDIATE TAX-EXEMPT FUND seeks a high level of current income exempt
from regular federal income tax by investing in municipal instruments
while maintaining a dollar-weighted average maturity between three and ten
years.
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND seeks a high level of current
income exempt from regular federal income tax and California state
personal income tax by investing in municipal instruments while
maintaining a dollar-weighted average maturity between three and ten
years.
FLORIDA INTERMEDIATE TAX-EXEMPT FUND seeks a high level of current income
exempt from regular federal income tax by investing in municipal
instruments while maintaining a dollar-weighted average maturity between
three and ten years. The Fund intends, but cannot guarantee, that its
shares will qualify for exemption from the Florida intangibles tax.
FIXED INCOME FUND seeks a high level of current income from investment in
fixed income securities while maintaining a dollar-weighted average
maturity between seven and twelve years.
TAX-EXEMPT FUND seeks a high level of current income exempt from regular
federal income tax by investing in municipal instruments while maintaining
a dollar-weighted average maturity between ten and thirty years.
ARIZONA TAX-EXEMPT FUND seeks a high level of current income exempt from
regular federal income tax and Arizona state personal income tax by
investing in municipal instruments while maintaining a dollar-weighted
average maturity between ten and thirty years.
CALIFORNIA TAX-EXEMPT FUND seeks a high level of current income exempt
from regular federal income tax and California state personal income tax
by investing in municipal instruments while maintaining a dollar-weighted
average maturity between ten and thirty years.
INTERNATIONAL FIXED INCOME FUND seeks to maximize total return consistent
with reasonable risk by investing primarily in bonds and other fixed
income securities of foreign issuers while maintaining a dollar-weighted
average maturity between three and eleven years.
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.
-2-
<PAGE> 8
EQUITY FUNDS
INCOME EQUITY FUND seeks a high level of current income by investing
principally in convertible and other equity securities with long-term
capital appreciation as a secondary objective.
STOCK INDEX FUND seeks investment results, before expenses, approximating
the aggregate price and dividend performance of the securities included in
the Standard & Poor's 500(R) Composite Stock Price Index (the "S&P 500
Index").
GROWTH EQUITY FUND seeks long-term capital appreciation by investing
principally in common and preferred stocks and convertible securities of
growth companies.
SELECT EQUITY FUND seeks long-term capital appreciation by investing
principally in common stocks of growth companies.
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 ("S&P MidCap 400 Index") at the time of investment.
SMALL CAP INDEX FUND seeks investment results, before expenses,
approximating the aggregate price and dividend performance of the
securities included in the Russell 2000 Small Stock Index (the "Russell
Index").
SMALL CAP FUND seeks long-term capital appreciation by investing
principally in equity securities of companies with market capitalizations
that are below the median capitalization of stocks listed on the New York
Stock Exchange.
INTERNATIONAL GROWTH EQUITY FUND seeks long-term capital appreciation by
investing principally in equity securities of foreign issuers.
INTERNATIONAL SELECT EQUITY FUND seeks long-term capital appreciation by
investing principally in common stocks of foreign issuers that Northern
Trust believes to be growing more rapidly than their respective markets.
TECHNOLOGY FUND seeks long-term capital appreciation by investing
principally in equity securities and securities convertible into common
stock.
Each portfolio is described in further detail in this Prospectus.
Q. WHO ADVISES THE FUNDS?
A. The Northern Trust Company ("Northern Trust"), the principal subsidiary
of Northern Trust Corporation, serves as investment adviser to each
Fund, other than the Stock Index, Small Cap Index and Small Cap Funds.
Northern Trust also serves as the Funds' transfer
-3-
<PAGE> 9
agent and custodian. The Stock Index, Small Cap Index and Small Cap Funds
are advised by Northern Trust Quantitative Advisors, Inc. ("NTQA" and,
together with Northern Trust, the "Investment Advisers"). Northern Trust
and its affiliates administered $1.13 trillion in assets as of September
30, 1998 in various capacities, including $220.7 billion for which
Northern Trust and its affiliates had investment management
responsibility. See "Management."
Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUNDS' INVESTMENT
PRACTICES?
A. Investing in the Funds involves the risks common to any investment in
securities. The market value of fixed income securities, which
constitutes a major part of the investments of several of the Funds,
will generally vary inversely with changes in prevailing interest rates
as described below under "Investment Information -- Fundamentals of
Fixed Income Investing." The Fixed Income Funds (other than the High
Yield Municipal Fund and High Yield Fixed Income Fund) will invest in
securities rated investment grade or higher, or unrated securities of
comparable quality. The High Yield Municipal Fund will invest
primarily in medium and lower quality securities, and the High Yield
Fixed Income Fund will invest primarily in lower quality securities.
Lower quality securities are commonly referred to as "junk bonds." In
addition, the International Funds may invest up to 5% of their total
assets, and the Equity Funds may invest up to 10% of their total assets
(35% for the Income Equity Fund), in convertible securities that are
lower quality. Investments in lower quality securities involve greater
price volatility and risk of loss.
Several of the Funds may invest a substantial portion of their assets in
foreign securities directly, and indirectly through the purchase of
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs")
and American Depository Receipts ("ADRs"). Certain of these Funds may also
enter into foreign currency exchange contracts. Foreign securities may be
subject to certain risks in addition to those inherent in U.S.
investments, including the possible imposition of exchange control
regulations, freezes on convertibility of currency and adverse changes in
foreign currency exchange rates. The International Fixed Income Fund, as
well as Northern Funds' two other international investment portfolios, may
concentrate investments in issuers located in certain industrialized
countries and may also invest in issuers located in emerging countries.
Certain risks are presented by the California Municipal Money Market Fund,
the California Intermediate Tax-Exempt Fund, the California Tax-Exempt
Fund (the "California Funds"), the Arizona Tax-Exempt Fund and the Florida
Intermediate Tax-Exempt Fund as a result of their investments in Municipal
Instruments of issuers located in particular states. See "California
Funds, Arizona Tax-Exempt Fund and Florida Intermediate Tax-Exempt Fund -
Additional Risks and Considerations." In addition, the California Funds,
the Arizona Tax-Exempt Fund, the Florida Intermediate Tax-Exempt Fund and
International Fixed Income Fund are non-diversified funds, which means
their portfolios can be dependent upon the performance of securities of a
smaller number of issuers than is the case with the other Funds, which are
diversified funds. The Funds may engage in certain transactions involving
puts and calls. Further, certain of the Funds may invest in the stocks of
smaller companies which present greater risk and price volatility.
-4-
<PAGE> 10
The Funds may lend their securities and enter into repurchase agreements
and reverse repurchase agreements with qualifying banks and broker/dealers
which may involve leveraging. The Funds may also purchase eligible
securities on a "when-issued" basis and may purchase or sell securities on
a "forward commitment" or "delayed settlement" basis. The Funds may invest
up to 15% (10% in the case of the Money Market Funds) of their net assets
in illiquid securities.
The Funds may also purchase "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
underlying assets, interest or currency exchange rates, or indices, and
include (but are not limited to) interest rate, currency and equity swaps,
futures contracts, options, 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 "inverse" floaters). Derivative instruments
present, to varying degrees, market risk that the performance of the
underlying assets, exchange rates or indices will decline; credit risk
that the dealer or other counterparty to the transaction will fail to pay
its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the "derivative" instrument
will decline more than the assets, rates or indices on which it is based;
liquidity risk that a Fund will be unable to sell a "derivative"
instrument when it wants because of lack of market depth or market
disruption; pricing risk that the value of a "derivative" instrument (such
as an option) will not correlate exactly to the value of the underlying
assets, rates or indices on which it is based; and operations risk that
loss will occur as a result of inadequate systems and controls, human
error or otherwise. Some "derivative" instruments are more complex than
others, and for those instruments that have been developed recently,
complete information is lacking regarding their actual performance over
entire market cycles. The Investment Advisers will evaluate the risks
presented by the "derivative" instruments purchased by the Funds, and will
determine, in connection with their day-to-day management of the Funds,
how they will be used in furtherance of the Funds' investment objectives.
It is possible, however, that the Investment Advisers' evaluations will
prove to be inaccurate or incomplete and, even when accurate and complete,
it is possible that the Funds will, because of the risks discussed above,
incur loss as a result of their investments in "derivative" instruments.
The foregoing is a summary of certain of the potential risks presented by
the Funds' investment practices. Details regarding these and other risks
presented by the policies of the Funds are described under "Additional
Investment Information, Risks and Considerations."
Q. HOW DOES ONE BUY AND REDEEM SHARES?
A. Shares of the Funds are distributed by Sunstone Distribution Services,
LLC. Shares may be purchased directly from Northern Funds or through a
qualified account at Northern Trust or certain other institutions.
Shares are sold and redeemed without any purchase or redemption charge
by Northern Funds, although Northern Trust and other institutions may
charge their customers for their services in connection with
investments. The
-5-
<PAGE> 11
minimum initial investment for purchases directly with Northern Funds is
$2,500 ($500 for an IRA and $250 under the Automatic Investment Plan). The
minimum for subsequent investments is $50. Northern Trust or other
organizations may impose particular customer account requirements such as
minimum account sizes.
As of the date of this Prospectus, shares of the Short-Intermediate U.S.
Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and
Small Cap Index Funds are not being offered.
Additional share purchase and redemption information for both purchases
and redemptions directly with Northern Funds or through qualified accounts
is provided below under "Opening an Account and Purchasing Shares" and
"Redeeming and Exchanging Shares."
Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?
A. Northern Funds offers the advantage of automatic dividend reinvestment
in shares of the same Fund or in another Northern Fund, exchange
privileges among Northern Funds should your investment goals change,
telephone exchange and redemption privileges, an Automatic Investment
Plan (with a reduced minimum initial investment) and a Systematic
Withdrawal Plan. See "Opening an Account and Purchasing Shares" and
"Redeeming and Exchanging Shares." Shares of Northern Funds may be
purchased in connection with a variety of tax-sheltered retirement
plans. See "Further Information -- Retirement Plans."
Q. WHEN ARE DISTRIBUTIONS MADE?
A. Dividends from the net investment income of the Money Market Funds, the
U.S. Government Fund, the Short-Intermediate U.S. Government Fund, the
Intermediate Tax-Exempt Fund, the California Intermediate Tax-Exempt
Fund, the Florida Intermediate Tax-Exempt Fund, the Fixed Income Fund,
the Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the California
Tax-Exempt Fund are declared daily and paid monthly. Dividends from
the net investment income of the International Fixed Income Fund are
declared and paid quarterly. Dividends of the other Funds are declared
and paid as follows: Income Equity Fund, High Yield Municipal Fund and
High Yield Fixed Income Fund -- monthly; Stock Index Fund, Growth
Equity Fund and Mid Cap Growth Fund -- quarterly; Select Equity Fund,
Small Cap Index Fund, Small Cap Fund, International Growth Equity Fund,
International Select Equity Fund and Technology Fund -- annually.
Net realized capital gains of each Fund are distributed at least
annually. See "Distributions and Taxes."
-6-
<PAGE> 12
EXPENSE SUMMARY
The following tables will help you understand the expenses you will bear
directly or indirectly as a shareholder of the Funds. SHAREHOLDER
TRANSACTION EXPENSES are charges you pay when buying or selling Fund
shares. ANNUAL OPERATING EXPENSES are paid out of a Fund's assets and
include fees for portfolio management, maintenance of shareholder
accounts, general Fund administration, accounting and other services.
Examples based on this information are also provided.
-7-
<PAGE> 13
<TABLE>
<CAPTION>
CALI-
U.S. FORNIA
U.S. GOV'T MUNI- MUNI-
GOV'T SELECT CIPAL CIPAL
MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases.............................. None None None None None
Sales Charge Imposed on Reinvested
Distributions.......................... None None None None None
Deferred Sales Charge Imposed on
Redemptions............................ None None None None None
Redemption Fees(1)...................... None None None None None
Exchange Fees........................... None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers)................. 0.40% 0.40% 0.40% 0.40% 0.40%
12b-1 Fees.............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee
reductions and reimbursements).......... 0.15% 0.15% 0.15% 0.15% 0.15%
----- ----- ----- ----- -----
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions, Waivers
and Reimbursements)..................... 0.55% 0.55% 0.55% 0.55% 0.55%
===== ===== ===== ===== =====
EXAMPLE OF EXPENSES(3)
Based on the foregoing table,
you would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return and redemption
at the end of each time period:
One Year................................ $6 $6 $6 $6 $6
Three Years............................. $18 $18 $18 $18 $18
Five Years.............................. $31 $31 $31 $31 $31
Ten Years............................... $69 $69 $69 $69 $69
</TABLE>
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.
(3) The example should not be considered a representation of past or future
expenses or rates of return. Actual operating expenses and investment
return may be more or less than those shown.
Except as noted in the next sentence, the above information reflects the
expenses these Funds incurred for Northern Funds' fiscal year ended March 31,
1998. The figures shown for the U.S. Government Select Money Market and
California Municipal Money Market Funds have been restated to reflect
anticipated fees during the next twelve months. Without voluntary fee
reductions, waivers and reimbursements, "Management Fees" would have been 0.60%
for each Fund; "Other Expenses" would have been 0.30%, 0.33%, 0.33%, 0.29% and
0.34%, respectively, for the Money Market, U.S. Government Money Market, U.S.
Government Select Money Market, Municipal Money Market and California Municipal
Money Market Funds; and "Total Operating Expenses" would have been 0.90%, 0.93%,
0.93%, 0.89% and 0.94%, respectively. In addition, during the last fiscal year
these Funds did not, and during the current fiscal year do not expect to, pay
any 12b-1 fees (otherwise payable at an annual rate of up to 0.25%) under
Northern Funds' Distribution and Service Plan. For more expense information, see
"Management."
-8-
<PAGE> 14
<TABLE>
<CAPTION>
EXPENSE SUMMARY (CONTINUED) SHORT- CALIFORNIA FLORIDA
U.S. INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE FIXED
GOVERNMENT U.S. GOVERNMENT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases None None None None None None
Sales Charge Imposed on
Reinvested Distributions None None None None None None
Deferred Sales Charge Imposed
on Redemptions None None None None None None
Redemption Fees(1) None None None None None None
Exchange Fees None None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers) 0.75% 0.75% 0.70% 0.70% 0.70% 0.75%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee
reductions and reimbursements) 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
-------- -------- -------- -------- -------- --------
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions, Waivers and
Reimbursements) 0.90% 0.90% 0.85% 0.85% 0.85% 0.90%
======== ======== ======== ======== ======== ========
EXAMPLE OF EXPENSES(3) Based on the
foregoing table, you would pay the
following expenses on a $1,000
investment, assuming a 5% annual
return and redemption at
the end of each time period:
One Year $ 9 $ 9 $ 9 $ 9 $ 9 $ 9
Three Years $ 29 $ 29 $ 27 $ 27 $ 27 $ 29
Five Years $ 50 N/A $ 47 N/A $ 47 $ 50
Ten Years $ 111 N/A $ 105 N/A $ 105 $ 111
</TABLE>
<TABLE>
<CAPTION>
ARIZONA CALIFORNIA INTERNATIONAL HIGH YIELD HIGH YIELD
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT FIXED INCOME MUNICIPAL FIXED INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases None None None None None None
Sales Charge Imposed on
Reinvested Distributions None None None None None None
Deferred Sales Charge Imposed
on Redemptions None None None None None None
Redemption Fees(1) None None None None None None
Exchange Fees None None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers) 0.70% 0.70% 0.70% 0.90% 0.70% 0.75%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee
reductions and reimbursements) 0.15% 0.15% 0.15% 0.25% 0 .15% 0 .15%
-------- -------- -------- -------- ---------- --------
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions, Waivers and
Reimbursements) 0.85% 0.85% 0.85% 1.15% 0.85% 0.90%
======== ======== ======== ======== ======== ========
EXAMPLE OF EXPENSES(3) Based on the
foregoing table, you would pay the
following expenses on a $1,000
investment, assuming a 5% annual
return and redemption at
the end of each time period:
One Year $ 9 $ 9 $ 9 $ 12 $ 9 $ 9
Three Years $ 27 $ 27 $ 27 $ 37 $ 27 $ 29
Five Years $ 47 N/A $ 47 $ 64 N/A N/A
Ten Years $ 105 N/A $ 105 $ 140 N/A N/A
</TABLE>
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.
(3) The example should not be considered a representation of past or future
expenses or rates of return. Actual operating expenses and investment
return may be more or less than those shown.
-9-
<PAGE> 15
Except as noted below, the above information reflects the expenses these Funds
incurred for Northern Funds' fiscal year ended March 31, 1998. Since the
Short-Intermediate U.S. Government, California Intermediate Tax-Exempt, Arizona
Tax-Exempt, High Yield Municipal and High Yield Fixed Income Funds had not
commenced operations as of the date of this prospectus, "Other Expenses" for
those Funds is based on estimated amounts the Funds expect to pay during the
current fiscal year. Without voluntary fee reductions, waivers and
reimbursements, "Management Fees" would have been 0.75% for the Intermediate
Tax-Exempt, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt,
Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt and High Yield Municipal
Funds; "Other Expenses" would have been 0.32%, 0.42%, 0.32%, 0.37%, 0.66%,
0.34%, 0.34%, 0.50%, 0.85%, 0.97%, 1.94% and 1.95%, respectively, for 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 and High Yield Fixed Income Funds; and "Total
Operating Expenses" would have been 1.07%, 1.17%, 1.07%, 1.12%, 1.41%, 1.09%,
1.09%, 1.25%, 1.60%, 1.87%, 2.69% and 2.70%, respectively. In addition, during
the last fiscal year these Funds did not, and during the current fiscal year do
not expect to, pay any 12b-1 fees (otherwise payable at an annual rate of up to
0.25%) under Northern Funds' Distribution and Service Plan. For more expense
information, see "Management."
-10-
<PAGE> 16
<TABLE>
<CAPTION>
SMALL
INCOME STOCK GROWTH SELECT MID CAP CAP SMALL
EQUITY INDEX EQUITY EQUITY GROWTH INDEX CAP
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases ......... None None None None None None None
Sales Charge Imposed on
Reinvested Distributions ..... None None None None None None None
Deferred Sales Charge
Imposed on Redemptions ....... None None None None None None None
Redemption Fees(1) ............ None None None None None None None
Exchange Fees ................. None None None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (after fee
reductions and waivers) ..... 0.85% 0.40% 0.85% 0.85% 0.85% 0.50% 0.85%
12b-1 Fees .................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after
fee reductions and
reimbursements) ............. 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
----- ----- ----- ----- ---- ---- -----
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions,
Waivers and Reimbursements) ... 1.00% 0.55% 1.00% 1.00% 1.00% 0.65% 1.00%
===== ===== ===== ===== ==== ==== =====
EXAMPLE OF EXPENSES(3)
Based on the foregoing table,
you would pay the following
expenses on a $1,000
investment, assuming a 5%
annual return and redemption
at the end of each time period:
One Year ...................... $ 10 $ 6 $ 10 $ 10 $ 10 $ 7 $ 10
Three Years ................... $ 32 $ 18 $ 32 $ 32 $ 32 $ 21 $ 32
Five Years .................... $ 55 $ 31 $ 55 $ 55 N/A N/A $ 55
Ten Years ..................... $ 123 $ 69 $ 123 $ 123 N/A N/A $ 123
</TABLE>
<TABLE>
<CAPTION>
INTER- INTER-
NATIONAL NATIONAL
GROWTH SELECT TECH-
EQUITY EQUITY NOLOGY
------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases ........ None None None
Sales Charge Imposed on
Reinvested Distributions .... None None None
Deferred Sales Charge
Imposed on Redemptions ...... None None None
Redemption Fees(1) ............ None None None
Exchange Fees ................. None None None
ANNUAL OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (after fee
reductions and waivers) ..... 1.00% 1.00% 1.00%
12b-1 Fees .................... 0.00% 0.00% 0.00%
Other Expenses (after
fee reductions and
reimbursements) ............. 0.25% 0.25% 0.25%
----- -------- -------
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions,
Waivers and Reimbursements) ... 1.25% 1.25% 1.25%
===== ======= =======
EXAMPLE OF EXPENSES(3)
Based on the foregoing table,
you would pay the following
expenses on a $1,000
investment, assuming a 5%
annual return and redemption
at the end of each time period:
One Year ...................... $ 13 $ 13 $ 13
Three Years ................... $ 40 $ 40 $ 40
Five Years .................... $ 69 $ 69 $ 69
Ten Years ..................... $ 152 $ 152 $ 152
</TABLE>
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.
(3) The example should not be considered a representation of past or future
expenses or rates of return. Actual operating expenses and investment
return may be more or less than those shown.
Except as noted below, the above information reflects the expenses these Funds
incurred for Northern Funds' fiscal year ended March 31, 1998. Since the Mid Cap
Growth and Small Cap Index Funds had not commenced investment operations during
the last fiscal year, "Other Expenses" for those Funds is based on estimated
amounts the Funds expect to pay during the current fiscal year. Without
voluntary fee reductions, waivers and reimbursements, "Management Fees" would
have been 1.00%, 0.60%, 1.00%, 1.20%, 1.00%, 0.65%, 1.20%, 1.20%, 1.20% and
1.20%, respectively, of the average daily net assets of the Income Equity, Stock
Index, Growth Equity, Select Equity, Mid Cap Growth, Small Cap Index, Small Cap,
International Growth Equity, International Select Equity and Technology Funds;
"Other Expenses" would have been 0.37%, 0.58%, 0.30%, 0.38%, 0.46%, 0.36%,
0.33%, 0.42%, 0.44% and 0.39%, respectively; and "Total Operating Expenses"
would have been 1.37%, 1.18%, 1.30%, 1.58%, 1.46%, 1.01%, 1.53%, 1.62%, 1.64%
and 1.59%, respectively. In addition, during the last fiscal year these Funds
did not, and during the current fiscal year do not expect to, pay any 12b-1 fees
(otherwise payable at an annual rate of up to 0.25%) under Northern Funds'
Distribution and Service Plan. For more expense information, see "Management."
-11-
<PAGE> 17
FINANCIAL HIGHLIGHTS
The following financial information has been derived from the financial
statements incorporated by reference into the Additional Statement and has been
audited by Northern Funds' independent accountant. This financial information
should be read together with those financial statements. Further information
about the performance of the Funds is contained in Northern Funds' annual
shareholder reports. Both the Additional Statement and the annual shareholder
reports may be obtained without charge by calling the Northern Funds Center at
1-800-595-9111 or writing P.O. Box 75986, Chicago, Illinois 60690-6319.
-12-
<PAGE> 18
FINANCIAL HIGHLIGHTS
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
MONEY MARKET
FUND
----------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.05 0.05 0.05 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income .... (0.05) (0.05) (0.05) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 5.31% 5.05% 5.57% 4.55%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $ 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% 0.49% 0.45%
Expenses, before waivers
and reimbursements ......... 0.90% 0.90% 0.91% 0.96%
Net investment income,
net of waivers and
reimbursements ............. 5.19% 4.94% 5.42% 4.94%
Net investment income,
before waivers and
reimbursements ............. 4.84% 4.59% 5.00% 4.43%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
FUND
---------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH. 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.05 0.05 0.05 0.04
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income .... (0.05) (0.05) (0.05) (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 5.22% 4.93% 5.46% 4.47%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $ 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% 0.49% 0.45%
Expenses, before waivers
and reimbursements ......... 0.93% 0.96% 0.94% 1.01%
Net investment income,
net of waivers and
reimbursements ............. 5.10% 4.82% 5.33% 4.93%
Net investment income,
before waivers and
reimbursements ............. 4.72% 4.41% 4.88% 4.37%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
SELECT
MONEY MARKET
FUND
---------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ......... 0.05 0.05 0.05 0.02
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income .... (0.05) (0.05) (0.05) (0.02)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 5.24% 5.07% 5.55% 1.75%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $ 306,425 $ 168,128 $ 85,400 $ 82,162
Ratio to average net assets of:(4)
Expenses, net of waivers
and reimbursements ......... 0.46% 0.40% 0.33% 0.30%
Expenses, before waivers
and reimbursements ......... 0.93% 0.97% 1.00% 1.32%
Net investment income,
net of waivers and
reimbursements ............. 5.13% 4.95% 5.43% 5.84%
Net investment income,
before waivers and
reimbursements ............. 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 period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
-13-
<PAGE> 19
FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
MUNICIPAL
MONEY MARKET
FUND
----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.03 0.03 0.03 0.03
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income ..... (0.03) (0.03) (0.03) (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 3.27% 3.14% 3.54% 2.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .................... $ 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% 0.49% 0.45%
Expenses, before waivers
and reimbursements ........... 0.89% 0.90% 0.91% 0.95%
Net investment income,
net of waivers and
reimbursements ............... 3.20% 3.08% 3.46% 3.10%
Net investment income,
before waivers and
reimbursements ............... 2.86% 2.73% 3.04% 2.60%
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
MUNICIPAL
MONEY MARKET
FUND
-----------------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .......... 0.03 0.03 0.04 0.01
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income ..... (0.03) (0.03) (0.04) (0.01)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 3.20% 3.19% 3.63% 1.27%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .................... $ 224,843 $ 200,989 $ 165,087 $ 161,316
Ratio to average net assets of:(4)
Expenses, net of waivers
and reimbursements ........... 0.49% 0.45% 0.39% 0.35%
Expenses, before waivers
and reimbursements ........... 0.94% 0.94% 0.94% 1.07%
Net investment income,
net of waivers and
reimbursements ............... 3.14% 3.13% 3.55% 3.78%
Net investment income,
before waivers and
reimbursements ............... 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 period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
-14-
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
INTERMEDIATE
U.S. GOVERNMENT TAX-EXEMPT
FUND 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,
1998 1997 1996 1995 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............... $ 9.88 $ 10.06 $ 9.84 $ 10.00 $ 10.07 $ 10.22
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ........... 0.54 0.51 0.51 0.50 0.40 0.40
Net realized and unrealized
gains (losses) on invest-
meanest, forward foreign cur-
rency contracts and foreign
currency transactions ......... 0.32 (0.11) 0.29 (0.16) 0.29 (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income from Investment
Operations ...................... 0.86 0.40 0.80 0.34 0.69 0.34
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ........................ (0.53) (0.51) (0.51) (0.50) (0.40) (0.40)
From net realized gains ......... (0.01) (0.05) (0.07) -- -- (0.07)
In excess of net
investment income ............ -- -- -- -- -- --
In excess of net realized gains.. -- (0.02) -- -- -- (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .......... (0.54) (0.58) (0.58) (0.50) (0.40) (0.49)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ..................... $ 10.20 $ 9.88 $ 10.06 $ 9.84 $ 10.36 $ 10.07
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) ................... 8.90% 3.98% 7.65% 3.49% 6.95% 3.39%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ..................... $ 229,352 $ 181,921 $ 149,062 $ 116,443 $ 298,529 $ 264,630
Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements ............ 0.90% 0.90% 0.90% 0.90% 0.85% 0.85%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA
INTERMEDIATE INTERMEDIATE
TAX-EXEMPT TAX-EXEMPT
FUND FUND
-------------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1995 1998 1997(1)
- ---------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ 10.03 $ 10.00 $ 10.03 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... 0.41 0.40 0.40 0.24
Net realized and unrealized
gains (losses) on invest-
meanest, forward foreign cur-
rency contracts and foreign
currency transactions ........ 0.26 0.03 0.44 0.03
- ----------------------------------------------------------------------------------------------------------------
Total Income from Investment
Operations ..................... 0.67 0.43 0.84 0.27
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ....................... (0.41) (0.40) (0.40) (0.24)
From net realized gains ........ (0.07) -- -- --
In excess of net
investment income ............ -- -- -- --
In excess of net realized gains -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total Distributions Paid ......... (0.48) (0.40) (0.40) (0.24)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 10.22 $ 10.03 $ 10.47 $ 10.03
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) .................. 6.81% 4.38% 8.51% 2.63%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .................... $ 244,139 $ 221,251 $ 25,329 $ 14,807
Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements ........... 0.85% 0.85% 0.85% 0.85%
</TABLE>
-15-
<PAGE> 21
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
U.S. GOVERNMENT
FUND
----------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses, before waivers
and reimbursements......... 1.07% 1.09% 1.10% 1.12%
Net investment income,
net of waivers and
reimbursements............. 5.24% 5.19% 5.07% 5.20%
Net investment income,
before waivers
and reimbursements......... 5.07% 5.00% 4.87% 4.98%
PORTFOLIO TURNOVER
RATE......................... 47.41% 83.41% 112.00% 42.29%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA
INTERMEDIATE INTERMEDIATE
TAX-EXEMPT TAX-EXEMPT
FUND 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,
1998 1997 1996 1995 1998 1997(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expenses, before waivers
and reimbursements......... 1.07% 1.07% 1.08% 1.09% 1.41% 2.31%
Net investment income,
net of waivers and
reimbursements............. 3.84% 3.90% 4.01% 4.09% 3.86% 3.84%
Net investment income,
before waivers
and reimbursements......... 3.62% 3.68% 3.78% 3.85% 3.30% 2.38%
PORTFOLIO TURNOVER
RATE......................... 61.83% 61.39% 137.85% 78.87% 46.12% 50.77%
</TABLE>
(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 period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
-16-
<PAGE> 22
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
FIXED
INCOME
FUND
-----------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ................................ $ 9.86 $ 10.10 $ 9.78 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ............................ 0.59 0.57 0.58 0.62
Net realized and unrealized
gains (losses) on invest-
ments, forward foreign cur-
rency contracts and foreign
currency transactions ........................ 0.56 (0.12) 0.50 (0.22)
----------- ----------- ----------- -----------
Total Income from Investment
Operations ....................................... 1.15 0.45 1.08 0.40
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment
income ....................................... (0.58) (0.56) (0.59) (0.62)
From net realized gains .......................... (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 ............................. (0.59) (0.69) (0.76) (0.62)
----------- ----------- ----------- -----------
NET ASSET VALUE,
END OF YEAR ...................................... $ 10.42 $ 9.86 $ 10.10 $ 9.78
----------- ----------- ----------- -----------
TOTAL RETURN(2) ...................................... 11.90% 4.59% 11.18% 4.16%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ...................................... $ 181,917 $ 122,444 $ 101,339 $ 65,929
</TABLE>
<TABLE>
<CAPTION>
TAX-EXEMPT
FUND
-----------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ................................ $ 10.24 $ 10.35 $ 10.08 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ............................ 0.47 0.50 0.48 0.48
Net realized and unrealized
gains (losses) on invest-
ments, forward foreign cur-
rency contracts and foreign
currency transactions ........................ 0.57 (0.06) 0.29 0.08
----------- ----------- ----------- -----------
Total Income from Investment
Operations ....................................... 1.04 0.44 0.77 0.56
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment
income ....................................... (0.47) (0.47) (0.48) (0.48)
From net realized gains .......................... (0.08) (0.05) (0.02) --
In excess of net
investment income ............................ -- (0.03) -- --
In excess of net realized gains................... -- -- -- --
----------- ----------- ----------- -----------
Total Distributions Paid ............................. (0.55) (0.55) (0.50) (0.48)
----------- ----------- ----------- -----------
NET ASSET VALUE,
END OF YEAR ...................................... $ 10.73 $ 10.24 $ 10.35 $ 10.08
----------- ----------- ----------- -----------
TOTAL RETURN(2) ...................................... 10.39% 4.32% 7.80% 5.78%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ...................................... $ 167,220 $ 136,372 $ 125,113 $ 118,690
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA INTERNATIONAL
TAX-EXEMPT FIXED INCOME
FUND FUND
---------- --------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998(1) 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ................................ $ 10.00 $ 10.08 $ 10.62 $ 10.64 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ............................ 0.41 0.43 0.56 0.78 0.58
Net realized and unrealized
gains (losses) on invest-
ments, forward foreign cur-
rency contracts and foreign
currency transactions ........................ 0.76 0.02 (0.40) (0.16) 0.64
----------- ----------- ----------- ----------- -----------
Total Income from Investment
Operations ....................................... 1.17 0.45 0.16 0.62 1.22
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment
income ....................................... (0.41) (0.59) (0.58) (0.62) (0.56)
From net realized gains .......................... -- (0.09) (0.11) (0.02) --
In excess of net
investment income ............................ -- -- -- -- (0.02)
In excess of net realized gains................... -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Total Distributions Paid ............................. (0.41) (0.68) (0.70) (0.64) (0.58)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE,
END OF YEAR ...................................... $ 10.76 $ 9.85 $ 10.08 $ 10.62 $ 10.64
----------- ----------- ----------- ----------- -----------
TOTAL RETURN(2) ...................................... 11.86% 4.61% 1.39% 5.84% 12.77%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ...................................... $ 39,943 $ 13,675 $ 16,426 $ 15,665 $ 13,028
</TABLE>
-17-
<PAGE> 23
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
FIXED
INCOME
FUND
---------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements............................ 0.90% 0.90% 0.90% 0.90%
Expenses, before waivers
and reimbursements............................ 1.09% 1.12% 1.14% 1.18%
Net investment income,
net of waivers and
reimbursements................................ 5.71% 5.69% 5.79% 6.48%
Net investment income,
before waivers
and reimbursements............................ 5.52% 5.47% 5.55% 6.20%
PORTFOLIO TURNOVER
RATE .............................................. 33.55% 87.64% 116.22% 55.27%
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
TAX-EXEMPT TAX-EXEMPT
FUND FUND
---------------------------------------------- ----
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1998(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
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............................ 1.09% 1.10% 1.10% 1.11% 1.60%
Net investment income,
net of waivers and
reimbursements................................ 4.42% 4.61% 4.62% 4.95% 4.01%
Net investment income,
before waivers
and reimbursements............................ 4.18% 4.36% 4.37% 4.69% 3.26%
PORTFOLIO TURNOVER
RATE .............................................. 74.32% 8.10% 60.50% 54.94% 22.22%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
FIXED INCOME
FUND
----------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements............................ 1.15% 1.15% 1.15% 1.15%
Expenses, before waivers
and reimbursements............................ 1.87% 1.96% 2.00% 2.42%
Net investment income,
net of waivers and
reimbursements................................ 4.98% 5.49% 5.75% 5.96%
Net investment income,
before waivers
and reimbursements............................ 4.26% 4.68% 4.90% 4.69%
PORTFOLIO TURNOVER
RATE .............................................. 30.26% 37.76% 52.05% 43.24%
</TABLE>
(1) For the period April 8, 1997 (commencement of operations) through March
31, 1998.
(2) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
-18-
<PAGE> 24
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INCOME EQUITY
FUND
-----------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 11.81 $ 11.59 $ 9.95 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................. 0.45 0.44 0.34 0.29
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions ................. 3.02 1.19 1.66 (0.08)
----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ............................ 3.47 1.63 2.00 0.21
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment income ............ (0.44) (0.44) (0.36) (0.26)
From net realized gains .............. (1.03) (0.97) -- --
In excess of net investment income .... -- -- -- --
In excess of net realized gains ...... -- -- -- --
----------- ----------- ----------- -----------
Total Distributions Paid .............. (1.47) (1.41) (0.36) (0.26)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 13.81 $ 11.81 $ 11.59 $ 9.95
----------- ----------- ----------- -----------
TOTAL RETURN(4) ........................ 31.00% 14.42% 20.41% 2.21%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .......................... $ 117,562 $ 77,102 $ 55,919 $ 38,954
Ratio to average net assets of: (5)
Expenses, net of waivers and
reimbursements ................ 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements ................ 1.37% 1.42% 1.48% 1.55%
Net investment income, net of
waivers and reimbursements .......... 3.53% 3.71% 3.17% 3.08%
Net investment income (loss),
before waivers and
reimbursements ................ 3.16% 3.29% 2.69% 2.53%
PORTFOLIO TURNOVER RATE ................. 81.24% 72.04% 67.32% 45.68%
</TABLE>
<TABLE>
<CAPTION>
STOCK INDEX GROWTH EQUITY
FUND 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,
1998 1997(1) 1998 1997 1996 1995
---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 10.74 $ 10.00 $ 13.93 $ 13.15 $ 10.61 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................. 0.15 0.08 0.03 0.08 0.08 0.08
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions ................. 4.80 0.74 6.36 1.49 2.59 0.60
----------- ----------- ----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ............................ 4.95 0.82 6.39 1.57 2.67 0.68
----------- ----------- ----------- ----------- ---------- -----------
LESS DISTRIBUTIONS PAID:
From net investment income ............ (0.15) (0.07) (0.03) (0.08) (0.08) (0.07)
From net realized gains .............. (0.51) (0.01) (1.67) (0.71) (0.05) --
In excess of net investment income .... -- -- -- -- -- --
In excess of net realized gains ...... -- -- -- -- -- --
----------- ----------- ----------- ----------- ---------- -----------
Total Distributions Paid .............. (0.66) (0.08) (1.70) (0.79) (0.13) (0.07)
----------- ----------- ----------- ----------- ---------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 15.03 $ 10.74 $ 18.62 $ 13.93 $ 13.15 $ 10.61
----------- ----------- ----------- ----------- ---------- -----------
TOTAL RETURN(4) ........................ 47.11% 8.21% 48.06% 11.72% 25.13% 6.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .......................... $ 93,907 $ 35,840 $ 479,782 $ 302,605 $ 224,571 $ 113,185
Ratio to average net assets of: (5)
Expenses, net of waivers and
reimbursements ................ 0.55% 0.55% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements ................ 1.18% 2.23% 1.30% 1.33% 1.36% 1.40%
Net investment income, net of
waivers and reimbursements .......... 1.23% 1.92% 0.18% 0.56% 0.70% 0.86%
Net investment income (loss),
before waivers and
reimbursements ................ 0.60% 0.24% (0.12)% 0.23% 0.34% 0.46%
PORTFOLIO TURNOVER RATE ................. 32.06% 64.94% 73.85% 67.34% 73.20% 82.90%
</TABLE>
-19-
<PAGE> 25
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
SELECT EQUITY
FUND
-----------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 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 .............. 6.81 2.05 2.73 0.75
----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ......................... 6.83 2.07 2.75 0.81
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment income ........... (0.02) (0.02) (0.03) (0.04)
From net realized gains .............. (2.20) (0.62) (0.37) --
In excess of net investment income ... -- -- -- --
In excess of net realized gains ...... -- -- -- --
----------- ----------- ----------- -----------
Total Distributions Paid ................ (2.22) (0.64) (0.40) (0.04)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 19.16 $ 14.55 $ 13.12 $ 10.77
----------- ----------- ----------- -----------
TOTAL RETURN(4) ......................... 49.71% 15.64% 25.70% 8.18%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .......................... $ 126,536 $ 63,677 $ 33,842 $ 15,123
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements ..................... 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements ..................... 1.58% 1.67% 1.91% 2.61%
Net investment income, net of
waivers and reimbursements ......... 0.15% 0.21% 0.22% 0.82%
Net investment income (loss),
before waivers and
reimbursements ..................... (0.43)% (0.46)% (0.69)% (0.79)%
PORTFOLIO TURNOVER RATE ................. 148.55% 72.68% 137.99% 48.88%
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP
FUND
-----------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1995(2) 1998 1997 1996
------- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 12.31 $ 11.58 $ 9.98 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................ 0.03 0.07 0.05 0.11
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions .............. 5.14 1.37 2.29 (0.05)
----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ......................... 5.17 1.44 2.34 0.06
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment income ........... (0.04) (0.06) (0.07) (0.08)
From net realized gains .............. (0.68) (0.65) (0.67) --
In excess of net investment income ... -- -- -- --
In excess of net realized gains ...... -- -- -- --
----------- ----------- ----------- -----------
Total Distributions Paid ................ (0.72) (0.71) (0.74) (0.08)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 16.76 $ 12.31 $ 11.58 $ 9.98
----------- ----------- ----------- -----------
TOTAL RETURN(4) ......................... 42.71% 12.48% 24.09% 0.57%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .......................... $ 368,579 $ 197,113 $ 155,238 $ 76,627
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements ..................... 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers and
reimbursements ..................... 1.53% 1.54% 1.61% 1.76%
Net investment income, net of
waivers and reimbursements ......... 0.28% 0.54% 0.65% 1.36%
Net investment income (loss),
before waivers and
reimbursements ..................... (0.25)% 0.00% 0.04% 0.60%
PORTFOLIO TURNOVER RATE ................. 18.59% 18.92% 46.59% 82.46%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH EQUITY
FUND
-----------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 10.05 $ 10.23 $ 9.61 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................ 0.09 0.09 0.17 0.04
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions .............. 1.98 0.18 0.65 (0.31)
----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ......................... 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 .............. (0.29) (0.23) -- --
In excess of net investment income ... (0.10) -- (0.09) --
In excess of net realized gains ...... -- (0.13) -- (0.09)
----------- ----------- ----------- -----------
Total Distributions Paid ................ (0.46) (0.45) (0.20) (0.12)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 11.66 $ 10.05 $ 10.23 $ 9.61
----------- ----------- ----------- -----------
TOTAL RETURN(4) ......................... 21.34% 2.61% 8.61% (2.65)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .......................... $ 178,210 $ 165,892 $ 181,237 $ 114,673
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements ..................... 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers and
reimbursements ..................... 1.62% 1.63% 1.65% 1.71%
Net investment income, net of
waivers and reimbursements ......... 0.79% 0.78% 0.92% 0.47%
Net investment income (loss),
before waivers and
reimbursements ..................... 0.42% 0.40% 0.52% 0.01%
PORTFOLIO TURNOVER RATE ................. 145.02% 190.94% 216.86% 158.31%
</TABLE>
-20-
<PAGE> 26
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INTERNATIONAL
SELECT EQUITY
FUND
-----------------------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(3)
---- ---- ---- -------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 10.37 $ 10.73 $ 9.78 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.22 0.04 0.01 0.04
Net realized and unrealized gains
(losses) on investments, options,
futures contracts and foreign
currency transactions ................. 2.19 (0.25) 0.99 (0.23)
----------- ----------- ----------- -----------
Total Income (Loss) from Investment
Operations ............................ 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 ................ -- -- -- --
In excess of net investment income ..... (0.10) (0.04) (0.03) --
In excess of net realized gains ........ -- (0.08) -- --
----------- ----------- ----------- -----------
Total Distributions Paid ............... (0.26) (0.15) (0.05) (0.03)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 12.52 $ 10.37 $ 10.73 $ 9.78
----------- ----------- ----------- -----------
TOTAL RETURN(4) ......................... 23.74% (1.95)% 10.20% (1.95)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period ......................... $ 117,618 $ 108,944 $ 102,719 $ 71,958
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements ...................... 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers and
reimbursements ...................... 1.64% 1.66% 1.71% 1.75%
Net investment income, net of
waivers and reimbursements .......... 0.29% 0.47% 0.12% 0.47%
Net investment income (loss),
before waivers and
reimbursements ...................... (0.10)% 0.06% (0.34)% (0.03)%
PORTFOLIO TURNOVER RATE ................. 98.22% 97.60% 176.71% 97.69%
</TABLE>
<TABLE>
<CAPTION>
TECHNOLOGY
FUND
-------------------------------
YEAR YEAR
ENDED ENDED
MARCH 31, MARCH 31,
1998 1997
---- ----
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ...... $ 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 ................. 6.06 2.10
----------- -----------
Total Income (Loss) from Investment
Operations ............................ 6.06 2.10
----------- -----------
LESS DISTRIBUTIONS PAID:
From net investment income ............. -- --
From net realized gains ................ (0.90) (0.15)
In excess of net investment income ..... -- --
In excess of net realized gains ........ -- --
----------- -----------
Total Distributions Paid ............... (0.90) (0.15)
----------- -----------
NET ASSET VALUE, END OF YEAR ............ $ 17.11 $ 11.95
----------- -----------
TOTAL RETURN(4) ......................... 52.62% 20.82%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period ......................... $ 104,389 $ 43,754
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements ...................... 1.25% 1.25%
Expenses, before waivers and
reimbursements ...................... 1.59% 2.02%
Net investment income, net of
waivers and reimbursements .......... (0.96)% (0.75)%
Net investment income (loss),
before waivers and
reimbursements ...................... (1.30)% (1.52)%
PORTFOLIO TURNOVER RATE ................. 74.75% 67.89%
</TABLE>
-21-
<PAGE> 27
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
(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) For the period April 5, 1994 (commencement of operations) through March
31, 1995.
(4) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(5) Annualized for periods less than a full year.
-22-
<PAGE> 28
INVESTMENT INFORMATION
The investment objectives and policies of each of the Funds are described below.
Additional information regarding the securities, investment techniques and
restrictions of each Fund are described under "Additional Investment
Information, Risks and Considerations."
MONEY MARKET FUNDS
MONEY MARKET FUND. The investment objective of the Money Market Fund is to seek
to maximize current income to the extent consistent with the preservation of
capital and the maintenance of liquidity by investing exclusively in
high-quality money market instruments. In pursuing its investment objective, the
Money Market Fund may invest in a broad range of government, bank and commercial
obligations that are available in the money markets. In particular, the Fund may
invest in:
(A) U.S. dollar-denominated obligations of U.S. banks with total assets
in excess of $1 billion (including obligations of foreign branches of such
banks);
(B) U.S. dollar-denominated obligations of foreign commercial banks
with total assets in excess of $5 billion;
(C) high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers rated (at the time
of purchase) A-2 or higher by Standard & Poor's Ratings Services ("S&P"),
Prime-2 or higher by Moody's Investors Service, Inc. ("Moody's"), D-2 or higher
by Duff & Phelps Credit Co. ("Duff"), F-2 or higher by Fitch IBCA, Inc.
("Fitch") or TBW-2 or higher by Thomson BankWatch, Inc. ("TBW");
(D) rated and unrated corporate bonds, notes, paper and other
instruments that are of comparable quality to the commercial paper permitted to
be purchased by the Fund;
(E) asset-backed securities (including interests in pools of assets
such as mortgages, installment purchase obligations and credit card
receivables);
(F) securities issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities and custodial receipts
with respect thereto;
(G) dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or instrumentalities
thereof;
(H) repurchase agreements relating to the above instruments; and
(I) securities issued or guaranteed by state or local governmental
bodies.
U.S. GOVERNMENT MONEY MARKET FUND. The investment objective of the U.S.
Government Money Market Fund is also to seek to maximize current income to the
extent consistent with the
-23-
<PAGE> 29
preservation of capital and the maintenance of liquidity by investing
exclusively in high-quality money market instruments. The U.S. Government Money
Market Fund seeks to achieve its investment objective by investing in:
(A) securities issued or guaranteed as to principal and interest by the
U.S. government or by any of its agencies or instrumentalities (including the
International Bank for Reconstruction and Development);
(B) repurchase agreements relating to the above instruments; and
(C) custodial receipts with respect to securities issued or guaranteed
as to principal and interest by the U.S. Government or by any of its agencies or
instrumentalities.
U.S. GOVERNMENT SELECT MONEY MARKET FUND. The investment objective of the U.S.
Government Select Money Market Fund is to seek to maximize current income to the
extent consistent with the preservation of capital and maintenance of liquidity
by investing exclusively in high-quality money market instruments. The U.S.
Government Select Money Market Fund seeks to achieve its investment objective by
investing solely in securities issued or guaranteed as to principal and interest
by the U.S. government or by any of its agencies or instrumentalities.
In making investment decisions, Northern Trust will seek to acquire,
during normal market conditions, only those U.S. government securities the
interest on which is generally exempt from state income taxation. Securities
generally eligible for this exemption include, but are not limited to, those
issued by the U.S. Treasury and certain U.S. government agencies and
instrumentalities, including the Tennessee Valley Authority, Federal Home Loan
Bank and Federal Farm Credit Bank Funding Corp. The Fund intends to limit
investments to only exempt U.S. government securities. However, under
extraordinary circumstances, such as when appropriate exempt securities are
unavailable, the Fund may make investments in non-exempt U.S. government
securities and cash equivalents, and may hold uninvested cash. See
"Distributions and Taxes" below for certain tax considerations.
MUNICIPAL MONEY MARKET FUND. The investment objective of the Municipal Money
Market Fund is to seek, to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of income exempt from
regular federal income tax by investing primarily in municipal instruments. The
Municipal Money Market Fund seeks to achieve its investment objective by
investing in:
(A) fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, D-2
or higher by Duff or F-2 or higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or F-2
or higher by Fitch;
-24-
<PAGE> 30
(C) rated and unrated municipal bonds, notes, paper or other
instruments that are of comparable quality to the tax-exempt commercial paper
permitted to be purchased by the Fund; and
(D) municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. government or an agency or instrumentality thereof or which
otherwise depend directly or indirectly on the credit of the United States.
CALIFORNIA MUNICIPAL MONEY MARKET FUND. The investment objective of the
California Municipal Money Market Fund is to seek to provide, to the extent
consistent with the preservation of capital and prescribed portfolio standards,
a high level of income exempt from regular federal income tax and California
state personal income tax. The California Municipal Money Market Fund seeks to
achieve its investment objective by investing in:
(A) fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, D-2
or higher by Duff or F-2 or higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments rated
Prime-2 or higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or F-2
or higher by Fitch;
(C) rated and unrated municipal bonds, notes, paper or other
instruments that are of comparable quality to the tax-exempt commercial paper
permitted to be purchased by the Fund; and
(D) municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. government or an agency or instrumentality thereof or which
otherwise depend directly or indirectly on the credit of the United States.
Because the California Municipal Money Market Fund concentrates its
investments in obligations issued by California and its political subdivisions,
an investment in this Fund may be riskier than an investment in the other Money
Market Funds.
OTHER INFORMATION. All securities acquired by the Money Market Funds will be
determined at the time of purchase by Northern Trust to present minimal credit
risks and will be "Eligible Securities" as defined by the Securities and
Exchange Commission (the "SEC"). Eligible Securities include, generally, (i)
securities that either (a) have short-term debt ratings at the time of purchase
in the two highest rating categories by at least two unaffiliated nationally
recognized statistical rating organizations ("NRSROs") (or one NRSRO if the
security is rated by only one NRSRO), or (b) are issued or guaranteed by, or
otherwise allow a Fund under specified conditions to demand payment from, a
person with such ratings, and (ii) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are
determined to be of comparable quality. The Additional Statement includes a
description of applicable NRSRO ratings.
-25-
<PAGE> 31
Each Money Market Fund is managed so that the average maturity of all
instruments in the Fund (on a dollar-weighted basis) will not exceed 90 days. In
no event will the Money Market Funds purchase any securities which mature more
than 397 days from the date of purchase (except for certain variable and
floating rate instruments and securities collateralizing repurchase agreements).
Securities in which the Money Market Funds invest may not earn as high a level
of income as longer term or lower quality securities, which generally have
greater market risk and more fluctuation in market value.
As a matter of fundamental policy, changeable only with the approval of
the holders of a majority of the outstanding shares of a Fund, at least 80% of
the annual gross income of the Municipal Money Market Fund and the California
Municipal Money Market Fund will be derived from debt instruments, the interest
on which is, in the opinion of bond counsel or counsel for the issuers, exempt
from regular income tax ("Municipal Instruments"), except in extraordinary
circumstances such as when Northern Trust believes that market conditions
indicate that the Fund should adopt a temporary defensive posture by holding
uninvested cash or investing in taxable short-term securities ("Taxable
Investments"). In addition, as a non-fundamental policy, under normal market
conditions at least 65% of the value of the California Municipal Money Market
Fund's total assets will be invested in Municipal Instruments the interest on
which, in the opinion of bond counsel for the issuers, is exempt from California
state personal income tax ("California Municipal Instruments"). These opinions
may contain various assumptions, qualifications or exceptions that are
reasonably acceptable to Northern Trust. The Municipal Money Market and
California Municipal Money Market Funds are not limited in the amount of their
assets that may be invested in "private activity bonds" the interest on which
may be treated as an item of tax preference to shareholders under the federal
alternative minimum tax. Taxable Investments will consist exclusively of
instruments that may be purchased by the Money Market Fund. Under normal market
conditions, Taxable Investments will not exceed 20% of the value of the total
assets of either Fund; during temporary defensive periods, however, all or any
portion of a Fund's assets may be invested in such instruments.
FIXED INCOME FUNDS
U.S. GOVERNMENT FUND, SHORT-INTERMEDIATE U.S. GOVERNMENT FUND AND FIXED INCOME
FUND. The investment objective of the U.S. Government Fund, the
Short-Intermediate U.S. Government Fund and the Fixed Income Fund is to seek a
high level of current income.
Both the U.S. Government Fund and the Short-Intermediate U.S.
Government Fund seek to achieve their objective by investing primarily (at least
65% of the value of their respective total assets during normal market
conditions) in securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities and repurchase agreements relating to such
securities. These securities may include mortgage-related securities issued by
agencies of the U.S. government. The U.S. Government Fund's dollar-weighted
average maturity will be between one and ten years. The Short-Intermediate U.S.
Government Fund's dollar-weighted average maturity will be between two and five
years.
-26-
<PAGE> 32
The Fixed Income Fund seeks to achieve its objective by investing in a
broad range of fixed income securities while maintaining its dollar-weighted
average maturity between seven and twelve years. The Fund will invest primarily
(at least 65% of the value of its total assets during normal market conditions)
in fixed income securities rated investment grade or better at the time of
purchase by at least one major rating agency (within the four highest rating
categories of S&P, Duff, Fitch or Moody's) or, if unrated, of comparable quality
as determined by Northern Trust. These securities may be of all types and in any
proportion, including obligations of the U.S. government, its agencies or
instrumentalities, obligations of foreign, state and local governments,
obligations of U.S. and foreign corporations, obligations of U.S. and foreign
banks and repurchase agreements relating to such obligations. The Fund may
purchase bonds, debentures, mortgage and other asset-related securities,
convertible debentures and zero coupon, pay-in-kind and capital appreciation
bonds. The Fund may also invest in short-term obligations that are permissible
investments for the Money Market Fund. The obligations of a foreign issuer will
not be purchased by the Fixed Income Fund if, as a result of the purchase, more
than 20% of the Fund's total assets will be invested in the obligations of
issuers within a single foreign country.
Each Fund will normally maintain the dollar-weighted average maturity
of its portfolio within the specified range described above. The maturities of
certain instruments, however, such as those subject to prepayment or redemption
by the issuers, are subject to estimation. There can be no assurance that the
estimations used by a Fund for such instruments will, in fact, be accurate or
that, if inaccurate, a Fund's dollar-weighted average maturity will remain
within the specified limits.
Each Fund may utilize options, interest rate swaps and futures
contracts and the Fixed Income Fund may enter into forward currency contracts as
described more fully under "Additional Investment Information, Risks and
Considerations."
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 investment objective of the Intermediate
Tax-Exempt Fund and the Florida Intermediate Tax-Exempt Fund is to seek a high
level of current income exempt from regular federal income tax by investing in
Municipal Instruments while maintaining a dollar-weighted average maturity
between three and ten years. The California Intermediate Tax-Exempt Fund seeks a
high level of current income exempt from regular federal income tax and
California state personal income tax by investing in Municipal Instruments while
maintaining a dollar-weighted average maturity between three and ten years. The
Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund seek a
high level of current income exempt from regular federal income tax and, in the
case of the Arizona Tax-Exempt and California Tax-Exempt Funds, personal income
tax of the particular state in which the Fund concentrates, by investing in
Municipal Instruments while maintaining a dollar-weighted average maturity
between ten and thirty years.
Municipal Instruments purchased by the Funds will be investment grade
or better at the time of purchase by at least one major rating agency (within
the four highest rating categories of
-27-
<PAGE> 33
S&P, Duff, Fitch or Moody's) or, if unrated, of comparable quality as determined
by Northern Trust. Short-term obligations will be limited to those obligations
that are permissible investments for the Municipal Money Market Fund.
As a matter of fundamental policy, changeable only with the approval of
the holders of a majority of the outstanding shares of a Fund, at least 80% of
the annual gross income of each of these Funds will be derived from Municipal
Instruments, 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
Investments. Interest earned by these Funds on "private activity bonds" (if any)
that is treated as an item of tax preference under the federal alternative
minimum tax ("AMT obligations") will not be deemed to have been derived from
Municipal Instruments for purposes of determining whether these Funds meet this
fundamental policy.
In addition, as a matter of non-fundamental policy which may be changed
by the Board of Trustees, under normal market conditions, at least 65% of the
value of the Florida Intermediate Tax-Exempt 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"); at
least 65% of the value of each of the California Intermediate Tax-Exempt and
California Tax-Exempt Funds' total assets will be invested in California
Municipal Instruments; and at least 65% of the value of the Arizona Tax-Exempt
Fund's total assets will be invested in Municipal Instruments the interest on
which is exempt from Arizona state personal income tax ("Arizona Municipal
Instruments"), in the opinion of bond counsel for the issuers. These opinions
may contain various assumptions, qualifications or exceptions that are
reasonably acceptable to Northern Trust.
Under normal market conditions, Taxable Investments will not exceed 20%
of the value of the total assets of a Fund; during temporary defensive periods,
however, all or any portion of a Fund's assets may be invested in such
instruments. Taxable Investments will consist exclusively of instruments that
may be purchased by the Fixed Income Fund. Certain Municipal Instruments
purchased by the Funds (such as "moral obligation" bonds) may be issued by
issuers with a "moral" but not legal obligation to provide for the payment of
the bonds. See "Additional Investment Information, Risks and Considerations --
Description of Securities and Investment Techniques -- Municipal Securities."
The California Intermediate Tax-Exempt, Florida Intermediate
Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt Funds are each
classified as a non-diversified investment company under the Investment Company
Act of 1940 (the "1940 Act"). Investment return on a non-diversified portfolio
typically is dependent upon the performance of securities of a smaller number of
issuers relative to the number held in a diversified portfolio. Consequently,
the change in value of any one security may affect the overall value of a
non-diversified portfolio more than it would a diversified portfolio.
INTERNATIONAL FIXED INCOME FUND. The investment objective of the International
Fixed Income Fund is to seek to maximize total return consistent with reasonable
risk. In pursuing its
-28-
<PAGE> 34
investment objective, the Fund invests primarily (at least 65% of the value of
its total assets under normal market conditions) in a broad range of fixed
income securities of foreign issuers. The Fund's dollar-weighted average
maturity will range between three and eleven years.
Securities purchased by the Fund will generally be rated investment
grade or better at the time of purchase (within the four highest rating
categories of S&P, Duff, Fitch or Moody's) or, if unrated, be of comparable
quality as determined by Northern Trust. These securities may include bonds,
debentures, mortgage and other asset-related securities, zero coupon bonds and
convertible debentures (i.e., debentures that may convert into other fixed
income debt) of foreign governments, their agencies, instrumentalities and
political subdivisions; supranational organizations (e.g., the European
Investment Bank and Inter-American Development Bank); and foreign corporations
and banks. The Fund may also invest in obligations of the U.S. government, its
agencies and instrumentalities (including repurchase agreements collateralized
by such obligations) and of U.S. corporations and banks. Currently, a
substantial portion of the Fund's assets is invested in foreign governmental
obligations. Commercial paper and other short-term obligations acquired by the
Fund will be rated within the two highest rating categories at the time of
purchase or, if unrated, will be determined by Northern Trust to be of
comparable quality.
The International Fixed Income Fund may invest up to 5% of its total
assets in non-investment grade convertible securities that are rated "B" or
higher by at least one major rating agency at the time of purchase or, if
unrated, are determined to be of comparable quality by Northern Trust. See
"Additional Investment Information, Risks and Considerations -- Description of
Securities and Investment Techniques -- Convertible Securities." The
International Fixed Income Fund may make indirect investments in foreign
securities through the purchase of EDRs, GDRs and ADRs and may enter into
forward currency contracts and utilize options, swaps and futures contracts as
more fully described under "Additional Investment Information, Risks and
Considerations." Pending investment, as a temporary defensive measure and to
meet anticipated redemption requests, the International Fixed Income Fund may
also invest, in accordance with its investment policies, in various short-term
obligations that are permissible investments for the Money Market Fund, as well
as other similar foreign denominated short-term obligations.
The International Fixed Income Fund is classified as a non-diversified
investment company under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of securities of a smaller
number of issuers relative to the number held in a diversified portfolio.
Consequently, the change in value of any one security may affect the overall
value of the International Fixed Income Fund more than it would the other Funds.
HIGH YIELD MUNICIPAL FUND. The investment objective of the High Yield Municipal
Fund is to seek a high level of current income exempt from regular federal
income tax. In pursuing its investment objective, the Fund invests primarily (at
least 65% of the value of its total assets under normal market conditions) in
rated and unrated Municipal Instruments that are of low, medium or upper medium
quality. Upper medium quality securities are rated A by an NRSRO,
-29-
<PAGE> 35
and medium quality securities are rated BBB or Baa by an NRSRO. Lower quality
securities, also commonly referred to as "non-investment grade" or "junk bonds,"
are rated BB, Ba or lower by an NRSRO. Unrated Municipal Instruments purchased
by the Fund will be of comparable quality as determined by Northern Trust. Lower
quality securities tend to offer higher yields than higher rated securities with
similar maturities, but present greater risk of loss. There is no minimum rating
for a Municipal Instrument purchased or held by the Fund, and the Fund may
purchase or hold securities rated in the lowest rating category or securities in
default. Although under normal market conditions the Fund invests primarily in
low, medium or upper medium quality securities, it may invest a portion of its
assets in securities of higher quality when Northern Trust believes it is
appropriate to do so in pursuance of the Fund's investment objective, and may
invest all of its assets in higher quality securities during temporary defensive
periods.
As a matter of fundamental policy, changeable only with the approval of the
holders of a majority of the outstanding shares of the Fund, at least 80% of the
Fund's annual gross income will be derived from Municipal Instruments, except in
extraordinary circumstances, such as when Northern Trust believes the market
conditions indicate that a Fund should adopt a temporary defensive posture by
holding uninvested cash or investing in Taxable Investments. Under normal market
conditions, Taxable Investments will not exceed 20% of the value of the total
assets of the Fund; during temporary defensive periods, however, all or any
portion of the Fund's assets may be invested in such instruments. Taxable
Investments will consist of 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 "private activity bonds" the interest on which may be treated as
an item of tax preference to shareholders under the federal alternative minimum
tax.
The Fund does not have any minimum portfolio maturity limitation, and may invest
its assets from time to time primarily in instruments with short, medium or long
maturities. The types of Municipal Instruments held by the Fund are considered
speculative, and an investment in the Fund presents substantial risks. See "High
Yield Funds - Additional Risks and Considerations."
HIGH YIELD FIXED INCOME FUND. The investment objective of the High Yield Fixed
Income Fund is to seek 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 primarily (at least 65% of
the value of its total assets under normal market conditions) in rated and
unrated fixed income instruments that are of lower quality. Lower quality
securities, also commonly referred to as "non-investment grade" or "junk bonds,"
are rated BB, Ba or lower by an NRSRO or, if unrated, of comparable quality as
determined by Northern Trust. Lower quality securities tend to offer higher
yields than higher rated securities with similar maturities, but present greater
risk of loss. There is no minimum rating for a security purchased or held by the
Fund, and the Fund may purchase or hold securities rated in the lowest rating
category or securities in default. Although under normal market conditions the
Fund invests primarily in lower quality securities, it may invest a portion of
its assets in securities of higher quality when Northern Trust believes it is
appropriate to do so in pursuance of the Fund's investment objectives, and may
invest all of its assets in higher quality securities during temporary defensive
periods.
-30-
<PAGE> 36
The Fund may purchase securities of all types and in any proportion, including
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, and repurchase agreements relating to such obligations. The
Fund may purchase 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. The Fund may also invest in common stocks,
warrants, rights and other equity securities, but will generally hold such
equity investments only when the Fund holds debt or preferred stock of the same
issuer. Foreign issuers whose securities are held by the Fund may be located in
countries with emerging markets or securities markets, which present special
risks. The securities of a foreign issuer will not be purchased by the Fund if,
as a result of the purchase, more than 20% of the Fund's total assets will be
invested in the securities of issuers within a single foreign country.
The Fund does not have any minimum or maximum portfolio maturity limitation, and
may invest its assets from time to time primarily in securities with short,
medium or long maturities.
The Fund may utilize options, interest rate swaps, futures contracts and forward
currency contracts as described more fully under "Additional Investment
Information, Risks and Considerations." The lower quality fixed income
securities held by the Fund are considered speculative, and an investment in the
Fund presents substantial risks. See "High Yield Funds - Additional Risks and
Considerations."
EQUITY FUNDS
INCOME EQUITY FUND. The investment objective of the Income Equity Fund is to
seek a high level of current income with long-term capital appreciation as a
secondary objective. The Fund seeks to achieve its objective by investing, under
normal market conditions, at least 65% of the value of its total assets in
income-producing equity securities (i.e., common and preferred stocks,
convertible securities and other equity or equity-related securities).
Investments are selected based on factors such as current income, prospects for
growth and possible capital appreciation. The Fund expects to make significant
investments in convertible securities and, at times, may be fully invested in
such securities. Generally, convertible securities will be rated investment
grade or better at the time of purchase by at least one major rating agency or,
if unrated, will be determined to be of comparable quality by Northern Trust.
Investment-grade securities are rated BBB or higher by S&P, Duff or Fitch or Baa
or higher by Moody's. Up to 35% of the Fund's total assets may, however, be
invested in non-investment grade convertible securities (commonly referred to as
"high risk" or "junk" bonds) that are rated "B" or higher by at least one major
rating agency or, if unrated, are determined to be of comparable quality by
Northern Trust. See "Additional Investment Information, Risks and Considerations
- -- Description of Securities and Investment Techniques -- Convertible
Securities."
The Fund may also invest, under normal market conditions, up to 35% of
its total assets in a broad range of bonds and other fixed income securities
rated investment grade or better at the time of purchase. These fixed income
securities will be limited to the types that are
-31-
<PAGE> 37
permissible investments for the Fixed Income Fund. The Fund may utilize interest
rate swaps as described more fully under "Additional Investment Information,
Risks and Considerations."
STOCK INDEX FUND. The investment objective of the Stock Index Fund is to seek
investment results approximating the aggregate price and dividend performance of
the securities included in the S&P 500 Index. Although the Fund may not always
hold securities of all 500 issuers included in the S&P 500 Index, it will
normally invest at least 65% of its total assets in the issues included in the
S&P 500 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 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 Fund is managed through the use of a "passive" or "indexing"
investment approach, which attempts to duplicate the investment composition and
performance of the S&P 500 Index through statistical procedures. As a result, in
this Fund, NTQA does not employ traditional methods of fund investment
management, such as selecting securities on the basis of economic, financial and
market analysis.
NTQA believes that under normal market conditions, the quarterly
performance of the Fund, before expenses, will be within a .95 correlation with
the S&P 500 Index. However, there is no assurance that the Fund will be able to
do so on a consistent basis. Deviations from the performance of the S&P 500
Index ("tracking variance") may result from shareholder purchases and
redemptions of shares of the Fund that occur daily, as well as from the expenses
borne by the Fund. Such purchases and redemptions may necessitate the purchase
and sale of securities by the Fund, and the resulting transaction costs may be
substantial because of the number and the characteristics of the securities
held. In addition, transaction costs may be incurred because sales of securities
received in connection with spin-offs and other corporate reorganizations will
be made to conform the Fund's holdings with its investment objective. Tracking
variance may also occur due to factors such as the size of the Fund, the
maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the S&P 500 Index or the manner in which the S&P
500 Index is calculated or because NTQA's indexing and investment approach does
not produce the intended goal of the Fund. In the event the performance of the
Fund is not comparable to the performance of the S&P 500 Index, the Board of
Trustees will evaluate the reasons for the deviation and the availability of
corrective measures. If substantial deviation in
-32-
<PAGE> 38
the Fund's performance were to continue for extended periods, it is expected
that the Board of Trustees would consider possible changes to the Fund's
investment objective.
The Fund may invest in options, futures contracts and securities issued
by other investment companies (such as Standard & Poor's Depository Receipts -
"SPDRs") in a manner designed to achieve returns comparable to the S&P 500
Index. The Fund may also invest in certain short-term fixed income securities as
cash reserves. The Fund does not anticipate that it would use cash reserves,
options or futures contracts and related options as part of a temporary
defensive strategy such as lowering its investment in common stocks to protect
against potential stock market declines.
GROWTH EQUITY FUND. The investment objective of the Growth Equity Fund is to
seek long-term capital appreciation. Any income received is incidental to this
objective. The Fund seeks to achieve its objective by investing primarily (at
least 65% of the value of its total assets under normal market conditions) in
equity securities of "growth companies" that Northern Trust believes have
demonstrated above average sales and earnings growth and return on equity
relative to their peers and the general market. Investments are selected based
on factors such as financial condition, market share, product leadership,
earnings growth rates as compared with those of relevant competitors, market
valuation in comparison to other stocks and the stock's own historical norms,
improving relative price trend and other investment criteria. The Fund will have
broad sector exposure and emphasis will be on issue selection rather than sector
rotation.
SELECT EQUITY FUND. The investment objective of the Select Equity Fund is to
seek long-term capital appreciation. Any income received is incidental to this
objective. The Fund pursues its objective by investing, under normal market
conditions, at least 65% of the value of its total assets in common stocks of
companies believed by Northern Trust to have superior quality and growth
characteristics. The Fund is not sector-weighted, and will purchase securities
of companies primarily based on their performance in the following areas over a
five-year period: growth of sales, growth of earnings per share, consistency of
earnings per share growth and return on equity. As companies which perform
relatively well in some or all of these categories often retain their earnings
to finance current and future growth, they generally pay low or no dividends.
The Fund intends to invest primarily in the securities of companies which
together with their predecessors have been in continuous operation for at least
five years and have stock market capitalizations in excess of $750 million. In
addition, the debt relative to capital total return is reviewed over a one-year
period.
MID CAP GROWTH FUND. The investment objective of the Mid Cap Growth Fund is to
seek long-term capital appreciation. Any income received is incidental to this
objective. The Fund seeks to achieve its objective by investing primarily (at
least 65% of the value of its total assets under normal market conditions) in
equity securities of companies with market capitalizations that are within the
capitalization range of the S&P MidCap 400 Index at the time of investment. The
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
-33-
<PAGE> 39
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 June 1, 1998, the approximate market capitalization
range of the companies included in the S&P MidCap 400 Index was between $328
million and $17.5 billion. The stocks in which the Fund invests may or may not
be included in the S&P MidCap 400 Index.
The Fund will invest in companies with intermediate market
capitalizations which Northern Trust believes have demonstrated above-average
sales and earnings growth and return on equity relative to their peers.
Investments are selected based on factors such as financial condition, market
share, product leadership, earnings growth rates as compared with those of
relevant competitors, market valuation in comparison to other stocks and the
stock's own historical norms, improving relative price trend and other
investment criteria. The Fund will have broad sector exposure and emphasis will
be on issue selection rather than sector rotation. The Fund may also invest in
securities issued by other investment companies (such as Mid-Cap SPDRs) that
invest in medium capitalized companies.
Because medium capitalized companies normally have more limited product
lines, markets, distribution channels and financial and managerial resources,
investments in such companies entail greater risk and portfolio price volatility
than investments in larger capitalized companies.
SMALL CAP INDEX FUND. The investment objective of the Small Cap Index Fund is to
seek investment results approximating the aggregate price and dividend
performance of the securities included in the Russell Index. Under normal market
conditions, the Fund will invest at least 65% of its total assets in the
securities included in the Russell Index. The Russell Index is a market
value-weighted index composed of the stocks of the smallest 2,000 companies in
the Russell 3000 Index, which is composed of the stocks of 3,000 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 2,000 companies, the Russell Index represents approximately 10%
of the total market capitalization of the Russell 3000 Index. As of May 31, 1998
the average market capitalization of the companies included in the Russell Index
was approximately $467.3 million. The Russell Index is reconstituted annually to
reflect changes in market capitalization. The primary criteria used by Frank
Russell & Company ("Russell") to determine the initial list of securities
eligible for inclusion in the Russell 3000 Index (and, accordingly, the Russell
Index) is total market capitalization adjusted for large private holdings and
cross-ownership. However, companies are not selected by Russell for inclusion in
the Russell Index because they are expected to have superior stock price
performance relative to the market in general or other stocks in particular.
Russell makes no representation or warranty, implied or express, to purchasers
of Fund shares or any member of the public regarding the advisability of
investing in the Fund or the ability of the Russell Index to track general
market performance of small capitalization stocks.
The Fund will be constructed to have aggregate investment
characteristics similar to those of the Russell Index as a whole. The Fund will
invest in securities which will be selected on the basis of such factors as
market capitalization, beta, industry sectors and economic factors. The
-34-
<PAGE> 40
number of issues included will be a function of the Fund's liquidity and size.
The Fund will be restructured annually when the Russell Index is reconstituted.
The Fund will use a proprietary rebalancing algorithm that attempts to screen
out extremely illiquid issues while minimizing portfolio turnover and related
expenses.
It should be noted that small companies in which the Fund may invest
may have limited product lines, markets, or financial resources, or may be
dependent upon a small management group, and their securities may be subject to
more abrupt or erratic market movements than larger, more established companies,
both because their securities typically are traded in lower volume and because
the issuers typically are subject to a greater degree of change in their
earnings and prospects. (See the description of the Small Cap Fund for more
information about the risks of investing in small companies.)
NTQA believes that under normal market conditions, the quarterly
performance of the Fund, before expenses, will be within a .95 correlation with
the Russell Index. However, there is no assurance that the Fund will be able to
do so on a consistent basis. Deviations from the performance of the Russell
Index ("tracking variance") may result from shareholder purchases and
redemptions of shares of the Fund that occur daily, as well as from the expenses
borne by the Fund. Such purchases and redemptions may necessitate the purchase
and sale of securities by the Fund, and the resulting transaction costs may be
substantial because of the number and the characteristics of the securities
held. In addition, transaction costs may be incurred because sales of securities
received in connection with spin-offs and other corporate reorganizations will
be made to conform the Fund's holdings to its investment objective. Tracking
variance may also occur due to factors such as the size of the Fund, the
maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Russell Index or the manner in which the
Russell Index is calculated or because NTQA's indexing and investment approach
does not produce the intended goal of the Fund. In the event the performance of
the Fund is not comparable to the performance of the Russell Index, the Board of
Trustees will evaluate the reasons for the deviation and the availability of
corrective measures. These measures may include adjustments to NTQA's portfolio
management practices. If substantial deviation in the Fund's performance were to
continue for extended periods, it is expected that the Board of Trustees would
consider possible changes to the Fund's investment objective.
The Fund may invest in options, futures contracts and securities issued
by other investment companies. The Fund may also invest in certain short-term
fixed income securities as cash reserves. However, the Fund will not invest in
cash reserves, options or futures contracts and related options as part of a
temporary defensive strategy such as lowering its investment in common stocks to
protect against potential stock market declines.
SMALL CAP FUND. The investment objective of the Small Cap Fund is to seek
long-term capital appreciation. Any income received is incidental to this
objective. In seeking to attain its investment objective, the Fund will invest,
under normal market conditions, at least 65% of the value of its total assets in
equity securities of companies with market capitalizations, at the time of
purchase, that are below the median capitalization of stocks listed on the New
York Stock Exchange. In selecting stocks, NTQA will consider the relationship
between price and book
-35-
<PAGE> 41
value, and other factors such as trading volume and bid-ask spreads in an effort
to allow the Fund to achieve cost-effective diversification.
While NTQA believes that smaller companies can provide greater growth
potential than larger, more mature firms, investing in the securities of such
companies also involves greater risk, portfolio price volatility and cost.
Historically, small capitalization stocks, which will be the Fund's primary
investments, and stocks of recently organized companies, in which the Fund may
also invest, have been more volatile in price than the larger capitalization
stocks included in the S&P 500 Index. Among the reasons for this greater price
volatility are the lower degree of market liquidity (the securities of companies
with small stock market capitalizations may trade less frequently and in limited
volume) and the greater sensitivity of small companies to changing economic
conditions. For example, these companies are associated with higher investment
risk due to the greater business risks of small size and limited product lines,
markets, distribution channels and financial and managerial resources.
The values of small company stocks will frequently fluctuate
independently of the values of larger company stocks. Small company stocks may
decline in price as large company stock prices rise, or rise in price as large
company stock prices decline. You should, therefore, expect that the net asset
value of the Fund's shares will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the 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.
INTERNATIONAL GROWTH EQUITY FUND. The investment objective of the International
Growth Equity Fund is to seek long-term capital appreciation. Any income
received is incidental to this objective. The Fund seeks to achieve its
objective by investing principally in common and preferred stocks and securities
convertible into common stock of foreign issuers. The Fund will, under normal
market conditions, invest at least 65% of the value of its total assets in
equity securities. The Fund emphasizes stocks of companies that Northern Trust
believes to be growing more rapidly than their respective markets and that have
low debt ratios and above-average returns on equity. The Fund is
country-weighted but not sector-weighted and selects investments based on such
factors as financial condition, market share, product leadership, earnings
growth rates as compared with those of relevant competitors in the same local
market, market valuation in comparison to other stocks and the stock's own
historical norms, improving relative price trend and other investment criteria.
The Fund will normally limit its equity investments to the securities of
companies which together with their predecessors have been in continuous
operation for at least five years and have stock market capitalizations in
excess of $750 million. The Fund invests in securities listed on foreign and
domestic securities exchanges and securities traded in foreign and domestic
over-the-counter markets. See "International Funds -- Further Information."
-36-
<PAGE> 42
INTERNATIONAL SELECT EQUITY FUND. The investment objective of the International
Select Equity Fund is to seek long-term capital appreciation. Any income
received is incidental to this objective. The Fund will pursue its objective by
investing primarily (at least 65% of the value of its total assets under normal
market conditions) in equity securities of foreign issuers that Northern Trust
believes to be growing more rapidly than their respective markets, including
stocks of companies that have medium to smaller stock market capitalizations
(generally less than $1 billion) and that transact a significant level of their
business in countries growing in excess of the world averages. The Fund is
neither country-weighted nor sector-weighted and will invest in stocks of
companies primarily based on their performance in the following areas over a
five-year period: growth of sales, growth of earnings per share, consistency of
earnings per share growth, return on equity and low debt relative to total
capital. As companies which perform relatively well in some or all of these
categories often retain their earnings to finance current and future growth,
they generally pay low or no dividends. The Fund will normally limit its equity
investments to the securities of companies which together with their
predecessors have been in continuous operation for at least five years and have
stock market capitalizations in excess of $750 million. The Fund invests in
securities listed on foreign and domestic securities exchanges and securities
traded in foreign and domestic over-the-counter markets. See "International
Funds -- Further Information."
TECHNOLOGY FUND. The Technology Fund's investment objective is to seek 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. In addition,
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. Northern Trust will consider an issuer 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
"SoundView Index"), the technology grouping of the S&P 500 Index or any other
comparable technology index. The Morgan Stanley Index is a broad-market
technology indicator dedicated exclusively to the electronics-based technology
sector. The 35 stocks in the Morgan Stanley Index include the most highly
capitalized American companies drawn from nine technology subsectors: computer
services/design software, server software, PC software and new media, networking
and telecom equipment, server hardware, PC hardware and peripherals, specialized
systems and semi-conductors. The H&Q Index is an index of computer and chip
makers, biotechnology concerns and other high-tech companies, and the SoundView
Index is an unweighted index consisting of more than 100 technology companies.
The Fund emphasizes stocks of companies that Northern Trust believes
have the potential to outperform the market over the next one-to two-year
period. Investments are selected based on factors such as financial condition,
market share, product leadership or market niches, earnings growth rates as
compared with those of relevant competitors, market valuation in comparison to
other stocks and the stock's own historical norms, improving relative price
trend and other investment criteria. Companies in which the Fund may invest
include industrial and business machines; communications; computers, software
and peripheral products; electronics; electronic media; environmental services;
office equipment and supplies; television and video
-37-
<PAGE> 43
equipment and services; and satellite technology and equipment. For the purposes
of the Fund's industry concentration policy all of the foregoing companies will
be deemed part of the technology industry. See "Additional Investment
Information, Risks and Considerations -- Investment Restrictions." Certain of
the policies of the Fund present additional risks which are described under
"Technology Fund -- Additional Risks and Considerations."
OTHER INFORMATION. The Income Equity, Growth Equity, Select Equity, Mid Cap
Growth, Small Cap, International Growth Equity, International Select Equity and
Technology Funds may purchase warrants and rights that entitle the holder to buy
equity securities at a specific price for a specific period of time. (Warrants
and rights will not be counted in determining a Fund's investments in equity
securities.) In addition to investing in foreign securities directly, the
International Growth Equity and International Select Equity Funds may make
indirect investments in foreign securities through the purchase of EDRs, GDRs
and ADRs. Each of the Income Equity, Stock Index, Growth Equity, Select Equity,
Mid Cap Growth, Small Cap Index, Small Cap and Technology Funds may invest up to
10% of its net assets in foreign securities directly and indirectly through the
purchase of EDRs and GDRs and up to 25% of its net assets in ADRs, in addition
to short-term investments in foreign time deposits as discussed below. The
Income Equity Fund may enter into interest rate swaps and the International
Growth Equity and International Select Equity Funds may enter into currency
swaps. The Funds may purchase convertible securities, enter into forward
currency contracts and equity swaps and utilize options and futures contracts as
more fully described under "Additional Investment Information, Risks and
Considerations." Pending investment, as a temporary defensive measure and to
meet anticipated redemption requests, the Funds may also invest, in accordance
with their respective investment policies, in various short-term obligations
that are permissible investments for the Money Market Fund and, with respect to
the International Growth Equity and International Select Equity Funds, other
similar foreign denominated short-term obligations.
CALIFORNIA FUNDS, FLORIDA INTERMEDIATE TAX-EXEMPT FUND, ARIZONA TAX-EXEMPT FUND
- -- ADDITIONAL RISKS AND CONSIDERATIONS
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.
The California Funds' investments include obligations of California
governmental issuers which rely in whole or in part, directly or indirectly, on
real property taxes as a source of revenue. "Proposition Thirteen" and similar
California constitutional and statutory amendments and initiatives in recent
years have restricted the ability of California taxing entities to increase real
property tax revenues. Other initiative measures approved by California voters
in recent years, through limiting various other taxes, have resulted in a
substantial reduction in state revenues. Decreased state revenues may result in
reductions in allocations of state revenues to local governments.
-38-
<PAGE> 44
Because of the complex nature of the various initiatives mentioned
above and certain possible ambiguities and inconsistencies in their terms and
the scope of various exemptions and exceptions, as well as the impossibility of
predicting the level of future appropriations for state and local California
governmental entities, the impact of these initiatives and related measures on
the ability of California governmental issuers to pay interest or repay
principal on their obligations is difficult to determine. There have, however,
been certain adverse developments with respect to California Municipal
Instruments over the past several years.
In addition to the various initiatives discussed above, economic
factors such as the reduction in defense spending, a decline in tourism and high
levels of unemployment have had an adverse impact on the economy of California.
In recent years, these economic factors reduced revenues to the state government
at a time when expenses of state government such as education costs, various
welfare costs and other expenses were rising. Such economic factors adversely
impacted the ability of state and local California governmental entities to
repay debt, and these factors, and others that cannot be predicted, may have an
adverse impact in the future.
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 on California, Florida or Arizona
Municipal Instruments, if these obligations decline in quality and are
downgraded by the NRSROs, 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.
Investors should consider the greater risk inherent in the
concentration of the California Funds, the Florida Intermediate Tax-Exempt Fund
and the Arizona Tax-Exempt Fund in such obligations versus the relative safety
that comes with a less geographically concentrated investment portfolio, and
should compare the yield available on a portfolio of California, Florida or
Arizona Municipal Instruments with the yield of a more diversified portfolio
including other Municipal Instruments before making an investment decision.
A more detailed description of special factors affecting investments in
California, Florida and Arizona Municipal Instruments is provided in the
Additional Statement.
TECHNOLOGY FUND -- ADDITIONAL RISKS AND CONSIDERATIONS
The Technology Fund's concentration in technology securities presents
special risk considerations. 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
-39-
<PAGE> 45
certain instances, technology securities may experience dramatic price movements
precipitated by investors' excessive 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. Investors 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.
In addition, it is expected that more than 25% of the Technology Fund's
total assets will normally be invested in technology companies which develop or
sell computers, software and peripheral products. In addition to the risks
associated with other technology companies, 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.
The Technology Fund may invest in the stocks of both large and small
companies. While Northern Trust believes that smaller companies can provide
greater growth potential than larger, more mature firms, investing in the
securities of small companies also involves greater risk and portfolio price
volatility as described above under "Investment Information -- Small Cap Fund."
HIGH YIELD FUNDS - ADDITIONAL RISKS AND CONSIDERATIONS
The investments of the High Yield Municipal Fund and High Yield Fixed Income
Fund (the "High Yield Funds") 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 standing. Lower quality
securities are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities may also be subject to
greater price volatility due to such factors as specific corporate developments,
interest rate sensitivity, subordination to the issuer's other obligations,
negative perceptions of the junk bond markets generally and less secondary
market liquidity.
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. Issuers of lower quality securities may not be able to make use
of more traditional methods of financing and their ability to service debt
obligations may be more adversely affected than issuers of higher quality
securities by economic downturns, specific corporate developments or the
issuer's inability to meet specific projected business forecasts. Negative
publicity about the junk bond market and investor perceptions regarding lower
quality securities, whether or not based or fundamental analysis, may depress
the prices for such securities.
-40-
<PAGE> 46
Lower quality securities are often issued in connection with a corporate
reorganization or restructuring or as 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 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 recovery on defaulted securities.
The secondary market for lower quality securities is concentrated in relatively
few market makers and is dominated by institutional investors, including mutual
funds, insurance companies and other financial institutions. Accordingly, the
secondary market for such securities is not as liquid as, and is more volatile
than, the secondary market for higher quality securities. In addition, market
trading volume for high yield fixed income securities is generally lower and the
secondary market for such securities could contract under adverse market or
economic conditions, independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the market price and a Fund's ability to dispose of particular portfolio
investments. A less developed secondary market also may make it more difficult
for a Fund to obtain precise valuations of the high yield securities in its
portfolio.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of a security. Consequently, credit ratings should be used only as one
indicator of investment quality. 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.
INTERNATIONAL FUNDS -- FURTHER INFORMATION
The International Fixed Income, International Growth Equity and International
Select Equity Funds (the "International Funds") will be invested at all times in
the securities of issuers located in at least three different foreign countries.
These countries may include, but are not limited to, Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, Columbia, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland,
-41-
<PAGE> 47
Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, New
Zealand, Norway, Peru, the Philippines, Poland, Portugal, Singapore, South
Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the
United Kingdom and Venezuela. Criteria for determining the appropriate
distribution of investments among various countries and regions include
prospects for relative economic growth, expected levels of inflation, government
policies influencing business conditions, the outlook for currency
relationships, and the range of investment opportunities available to
international investors.
Because the securities markets in the following countries are highly
developed, liquid and subject to extensive regulation, the International Growth
Equity and the International Select Equity Funds may invest more than 25% of
their respective total assets in the securities of issuers located in Japan and
the United Kingdom, and the International Fixed Income Fund may invest more than
25% of its total assets in the securities of issuers located in Canada, France,
Germany, Japan, the United Kingdom and the United States. Investment in a
particular country of 25% or more of a Fund's total assets will make a Fund's
performance more dependent upon the political and economic circumstances of a
particular country than a mutual fund that is more widely diversified among
issuers in different countries. For example, the expected introduction of a
single currency, the euro, on January 1, 1999 for participating European nations
in the Economic and Monetary Union presents unique risks and uncertainties,
including whether the payment and operational systems of banks and other
financial institutions will be ready by the scheduled launch date; the creation
of suitable clearing and settlement payment schemes for the euro; the legal
treatment of outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the euro; the establishment and maintenance of
exchange rates for existing currencies being converted into the euro and the
euro; the 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 the European countries participating
in the euro will converge over time; and whether the conversion of the
currencies of other Economic and Monetary Union countries, such as the United
Kingdom, Denmark and Greece, into the euro and the admission of other
non-Economic and Monetary Union countries, such as Poland, Latvia and Lithuania,
as members of the Economic and Monetary Union, may have an adverse impact on the
euro. These or other factors, including political risks, could cause market
disruptions before or after the introduction of the euro, and could adversely
affect the value of securities and foreign currencies held by the Funds.
Moreover, the reunification of the former German Democratic Republic (East
Germany) with the Federal Republic of Germany (West Germany) and other political
and social events in Europe have caused considerable economic and social
dislocations. Similarly, events in the Japanese economy as well as social and
political developments and natural disasters 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 can be expected to produce continuing effects on securities
and currency markets. Investment in foreign securities, including securities of
issuers located in the countries listed above, involves other risks which are
described under "Additional Investment Information, Risks and Considerations."
Certain investments by the International Funds will involve risks
associated with investments in emerging market countries. In addition,
securities issued in certain countries are
-42-
<PAGE> 48
currently accessible to the International Funds only through investment in other
investment companies that are specifically authorized to invest in such
securities. Further information about these matters is provided under
"Additional Investment Information, Risks and Considerations."
FUNDAMENTALS OF FIXED INCOME INVESTING
Even though interest-bearing securities are investments which often
offer a stable stream of income, the prices of fixed income securities are
affected by changes in the prevailing level of interest rates. These securities
experience appreciation when interest rates decline and depreciation when
interest rates rise. A bond fund portfolio consisting of fixed income securities
will react in a similar manner. Generally, the longer the maturity of a fixed
income security, the higher its yield and the greater its price volatility.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. The values of fixed income securities also may be affected by
changes in the credit rating or financial condition of the issuing entities. A
security's rating normally depends on the likelihood that the borrower will meet
each interest and principal installment on a timely basis. As a result,
lower-rated bonds typically yield more than higher-rated bonds of the same
maturity. Credit ratings evaluate the safety of principal and interest payments,
not market risk, and rating agencies may or may not make timely changes in a
rating to reflect economic or company conditions that affect a security's market
value. As a result, the ratings of rating services are used by the Investment
Advisers only as indicators of investment quality. For a more complete
discussion of ratings, see Appendix A to the Additional Statement.
In addition, fixed income securities may be subject to both call risk
and extension risk. Call risk (i.e., where the issuer exercises its right to pay
principal on an obligation earlier than scheduled) causes cash flow to be
returned earlier than expected. This typically results when interest rates have
declined, and a Fund may be unable to recoup all of its initial investment and
will also suffer from having to reinvest in lower yielding securities. Extension
risk (i.e., where the issuer exercises its right to pay principal on an
obligation later than scheduled) causes cash flows to be returned later than
expected. This typically results when interest rates have increased and a Fund
will suffer from the inability to invest in higher yielding securities. As
stated above, certain Funds will normally maintain the average-weighted
maturities of their portfolios within specified ranges. The maturities of
certain instruments, however, such as variable and floating rate instruments, as
well as instruments subject to prepayment or redemption by the issuers, are
subject to estimation. There is no assurance that the estimations used by the
Funds for these instruments will, in fact, be accurate or that, if inaccurate, a
Fund's average-weighted maturity will remain within the specified limits.
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
CONVERTIBLE SECURITIES. Each Equity Fund (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 invest in convertible securities including
convertible bonds, debentures, and
-43-
<PAGE> 49
preferred stock. A convertible security may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, a Fund seeks the
opportunity, through the conversion feature, to participate in a portion of the
capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock. Convertible securities acquired by the High Yield Fixed Income
Fund will frequently be rated below investment grade. Convertible securities
acquired by the other Funds, will usually be rated investment grade by S&P,
Moody's, Duff or Fitch or, if unrated, will be of comparable quality as
determined by the Investment Advisers. Each of these other Funds, may, however,
acquire convertible securities rated below investment grade when the Investment
Advisers believe that their investment characteristics make them desirable, so
long as (a) under normal market and economic conditions, less than 10% of a
Fund's total assets (35% in the case of the Income Equity Fund and 5% in the
case of the International Fixed Income Fund, International Growth Equity Fund
and International Select Equity Fund) are invested in non-investment grade
convertible securities and (b) any such security is rated "B" or higher by at
least one major rating agency. As of March 31, 1998, the Income Equity Fund had
the following percentages of its portfolio assets invested in convertible
securities with the following ratings: 0.44% AAA, 1.58% AA, 23.47% A, 29.95%
BBB, 7.43% BB, 17.37% B and 19.75% unrated. For a description of applicable
securities ratings, see Appendix A to the Additional Statement. Non-investment
grade securities (those that are rated "Ba" or lower by Moody's or "BB" or lower
by S&P, Duff or Fitch) are commonly referred to as "junk bonds" and are
generally subject to the risks described under "High Yield Funds - Additional
Risks and Considerations."
WARRANTS. 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 in addition to
those that have been acquired in units or are attached to other securities.
Warrants represent rights to purchase securities at a specific price for a
specific period of time. A Fund may also purchase bonds that are issued in
tandem with warrants entitling the holder to purchase common stock at a
specified price during a specified period. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.
MUNICIPAL INSTRUMENTS. The Intermediate Tax-Exempt, California Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt and
California Tax-Exempt (the "Tax-Exempt Funds") and the Municipal Money Market,
California Municipal Money Market and High Yield Municipal Funds (the "Municipal
Funds") intend to invest primarily in Municipal Instruments. Municipal
Instruments include debt obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities.
Municipal Instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities
-44-
<PAGE> 50
and are not payable from the unrestricted revenues of the issuer. Consequently,
the credit quality of an industrial revenue bond is usually directly related to
the credit standing of the private user of the facility involved.
The Tax-Exempt Funds and the Municipal Funds may also invest in "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund (if
such a fund has been established), the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Within the principal classifications of Municipal Instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, custodial receipts and participation certificates.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities. Certain municipal lease obligations may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Participation certificates are obligations issued by state or local governments
or authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Municipal leases (and participations in such leases)
present the risk that a municipality will not appropriate funds for the lease
payments. Northern Trust, under the supervision of Northern Funds' Board of
Trustees, will determine the credit quality of any unrated municipal leases on
an ongoing basis, including an assessment of the likelihood that the leases will
not be cancelled.
The Tax-Exempt Funds 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. These derivative instruments represent
beneficial interests in Municipal Instruments that are marketed by investment
banking firms under various names such as FLOATs(SM), RITEs(SM), SAVRs(SM) and
RIBs(SM). 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. Because certain of these instruments are leveraged,
their market values may be more volatile than other types of Municipal
Instruments and may present greater potential for capital gain or loss. On the
other hand, the imbedded option features of other derivative instruments could
limit the amount of appreciation a Fund can realize on its investment, could
cause a Fund to hold a security it might otherwise sell or could force the sale
of a security at inopportune times or for prices that do not reflect current
market value. The possibility of default by the issuer or the issuer's credit
provider may be greater for these
-45-
<PAGE> 51
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. Neither the Funds nor
Northern Trust will review the municipal, corporate or other proceedings related
to the creation of any tax-exempt derivatives or the basis for such opinions.
Each Tax-Exempt Fund and Municipal Fund may acquire "stand-by
commitments" relating to the Municipal Instruments it holds. Under a standby
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.
Municipal Instruments purchased by the Tax-Exempt Funds and the
Municipal Funds may be backed by letters of credit or other forms of credit
enhancement issued by domestic or foreign banks and other financial
institutions. The credit quality of these banks and financial institutions
could, therefore, cause loss to a Fund that invests in Municipal Instruments and
affect its share price. Foreign letters of credit may involve certain risks in
addition to those of domestic obligations. Foreign banks and foreign branches of
domestic banks may be subject to less stringent reserve requirements, and to
different accounting, auditing and recordkeeping requirements than domestic
banks.
Neither the Tax-Exempt Funds nor the Municipal Funds intend to invest
25% or more of the value of their respective total assets in industrial
development bonds or similar obligations where the non-governmental entities
supplying the revenues from which such bonds or obligations are to be paid are
in the same industry. Each Fund may, however, invest 25% or more of its total
assets in Municipal Instruments the interest on which is paid solely from
revenues of similar projects. In addition, although the Funds, other than the
Florida Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the
California Funds, do not expect to do so during normal market conditions, each
may invest more than 25% of the value of its total assets in Municipal
Instruments whose issuers are in the same state. 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. When a substantial portion of a Fund's assets is
invested in instruments which are used to finance facilities involving a
particular industry, whose issuers are in the same state or which are otherwise
related, there is a possibility that an economic, business or political
development affecting one instrument would likewise affect the related
instruments.
Funds in addition to the Tax-Exempt Funds and the Municipal Funds may
invest from time to time in Municipal Instruments or other securities issued by
state and local governmental bodies when the Investment Advisers believe such an
investment strategy is in the best interest of
-46-
<PAGE> 52
Northern Funds' shareholders. Dividends paid by Funds other than the Tax-Exempt
Funds and the Municipal Funds on such investments will be taxable to
shareholders.
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)
designated 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 invest in fixed income securities will be sensitive to changes in
interest rates and the interest rate environment. Generally, the prices of bonds
and debt securities fluctuate inversely with interest rate changes. In addition,
the performance of investments in securities denominated in a foreign currency
will depend on the strength of the foreign currency against the U.S. dollar and
the interest rate environment in the country issuing the currency. Absent other
events which could otherwise affect the value of a foreign security (such as a
change in the political climate or an issuer's credit quality), appreciation in
the value of the foreign currency generally can be expected to increase the
value of a foreign currency-denominated security in terms of U.S. dollars. A
rise in foreign interest rates or decline in the value of the foreign currency
relative to the U.S. dollar generally can be expected to depress the value of a
foreign currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign
-47-
<PAGE> 53
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.
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 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 other instruments, the respective net currency
positions of the International Funds may expose them to
-48-
<PAGE> 54
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.
The International Fixed Income Fund may invest in debt securities
denominated in the European Currency Unit ("ECU"), which is a "basket"
consisting of specified amounts in the currencies of certain of the member
states of the European Community. The specific amounts of currencies comprising
the ECU may be adjusted by the Council of Ministers of the European Community
from time to time to reflect changes in relative values of the underlying
currencies. The Fund may also invest in securities denominated in other currency
"baskets."
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 cost 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 "Distributions
and Taxes."
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.
FORWARD CURRENCY EXCHANGE CONTRACTS. 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 in an effort to hedge all or any portion of their portfolio positions.
Specifically, foreign currency contracts may be used
-49-
<PAGE> 55
for this purpose to reduce the level of volatility caused by changes in foreign
currency exchange rates or when such transactions are economically appropriate
for the reduction of risks in the ongoing management of the Fund. The
International Funds and the High Yield Fixed Income Fund may also enter into
foreign currency exchange contracts to seek to increase total return when
Northern Trust anticipates that a foreign currency will appreciate or depreciate
in value, but securities denominated in that currency do not in Northern Trust's
view present attractive investment opportunities and are not held by the Fund.
In addition, 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.
A forward currency exchange contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of contract. Although these contracts may be used to minimize the risk of
loss due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of such
currency increase. Consequently, a Fund may choose to refrain from entering into
such contracts. In connection with its forward currency exchange contracts, a
Fund will segregate liquid assets, such as cash, U.S. government securities or
other liquid securities, or will otherwise cover its position in accordance with
applicable requirements of the SEC.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, each Fund (other than the Money Market Funds) may write covered call
options, buy put options, buy call options and write secured put options for the
purpose of hedging or earning additional income, which may be deemed speculative
or, with respect to the International Funds, cross-hedging. These options may
relate to particular securities, financial instruments, foreign currencies,
stock or bond indices or (in the case of the International Fixed Income Fund and
High Yield Income Fund) the yield differential between two securities, and may
or may not be listed on a securities exchange and may or may not be issued by
the Options Clearing Corporation. A Fund will not purchase put and call options
where the aggregate premiums on outstanding options exceed 5% of its net assets
at the time of purchase, and will not write options on more than 25% of the
value of its net assets (measured at the time an option is written). Options
trading is a highly specialized activity that entails greater than ordinary
investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Fund
(other than the Money Market Funds) may also invest in futures contracts and
options on futures contracts for hedging purposes or to maintain liquidity to
meet potential shareholder redemptions, invest cash balances or dividends or
minimize trading costs. The Funds may also invest in futures contracts and
options in futures contracts to increase total return (i.e. for speculative
purposes). The value of a Fund's futures contracts may equal up to 100% of the
Fund's total assets, although a Fund will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of
-50-
<PAGE> 56
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its total assets.
Futures contracts obligate a Fund, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a stated
quantity of a foreign currency. When used as a hedge, a Fund may sell a futures
contract in order to offset an expected decrease in the value of its portfolio
that might otherwise result from a market decline or currency exchange
fluctuation. A Fund may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales of
securities in the value of the securities to be sold. Conversely, 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 holdings or in currency exchange rates.
A Fund may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or a
seller of a futures contract at a specified exercise price anytime during the
option period. When a Fund sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In
connection with 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.
The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value of
the instruments held by a Fund and the price of the futures contract or option;
(b) the possible inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; and
(d) the Investment Advisers' ability to predict correctly the direction of
securities prices, interest rates, currency exchange rates and other economic
factors. For further discussion of risks involved with domestic and foreign
futures and options, see "Futures Contracts and Related Options" and Appendix B
in the Additional Statement.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a "commodity
pool operator."
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. In order to protect
their value from interest rate fluctuations and to hedge against fluctuations in
the floating rate market, each Fixed Income Fund 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. The
Funds expect to enter into these hedging transactions primarily to preserve a
return or spread of a particular investment or portion of their respective
holdings and to protect against an increase in the price of securities the Funds
anticipate purchasing at a later date. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (e.g., an exchange of floating rate payments for fixed rate payments).
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls
-51-
<PAGE> 57
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. In order to protect against currency fluctuations, the International
Funds and the High Yield Fixed Income Fund may also enter into currency swaps.
Currency swaps involve the exchange of the rights of a Fund and another party to
make or receive payments in specified currencies.
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate or currency swap will be accrued
on a daily basis and the Fund will segregate liquid assets having an aggregate
net asset value at least equal to such accrued excess. Except for the High Yield
Municipal and High Yield Fixed Income Funds (which are not subject to any
minimum rating criteria), a Fund will not enter into any interest rate swap,
floor or cap transaction or any currency swap 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 S&P, Duff or Fitch, or A or P-1 or better by Moody's.
EQUITY SWAPS. Each Equity Fund may invest in 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. An equity swap may be used by a Fund 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. They may also be used for hedging purposes or to seek to
increase total return. A Fund will normally enter into equity swaps on a net
basis whereby the two returns are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two returns. Equity swaps are
derivatives and their values can be very volatile. To the extent that the
Investment Advisers do 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. A Fund will not enter into any equity swap 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 S&P, Duff or Fitch or A or P-1 or
better by Moody's. In connection with its investments in equity swaps, a Fund
will segregate cash or liquid assets or otherwise cover its obligations in a
manner required by the SEC.
UNITED STATES GOVERNMENT OBLIGATIONS. To the extent consistent with their
respective investment objectives, the Funds may invest in a variety of U.S.
Treasury obligations consisting of bills, notes and bonds, which principally
differ only in their interest rates, maturities and time of issuance. The Funds
may also invest in other securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Obligations of certain agencies and
instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the
-52-
<PAGE> 58
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others are supported only by the credit
of the instrumentalities. No assurance can be given that the U.S. government
would provide financial support to its agencies or instrumentalities if it is
not obligated to do so by law.
Securities guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities are deemed to include: (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or an agency or
instrumentality thereof; and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations will therefore
be regarded as illiquid.
STRIPPED OBLIGATIONS. To the extent consistent with their respective investment
objectives, the Funds may purchase Treasury receipts and other "stripped"
securities that evidence ownership in either the future interest payments or the
future principal payments on U.S. government and other domestic and foreign
obligations. These participations, which may be issued by the U.S. government
(or a U.S. government agency or instrumentality), foreign governments or private
issuers such as banks and other institutions, are issued at a discount to their
"face value," and may include stripped mortgage-backed securities ("SMBS"),
which are derivative multi-class mortgage securities. Stripped securities,
particularly SMBS, may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal.
However, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped.
SMBS issued by the U.S. government (or a U.S. government agency or
instrumentality) may be considered liquid under guidelines established by
Northern Funds' Board of Trustees if they can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of a Fund's per share net asset value.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. To the extent consistent with their
respective investment objectives, the Funds, other than the U.S. Government
Select Money Market Fund, may also purchase participations in trusts that hold
U.S. Treasury securities (such as TIGRs and
-53-
<PAGE> 59
CATS) or other obligations where the trust participations evidence ownership in
either the future interest payments or the future principal payments on the
obligations. Like other stripped obligations, these participations are also
normally issued at a discount to their "face value," and can exhibit greater
price volatility than ordinary debt securities because of the way in which their
principal and interest are returned to investors. Investments by the U.S.
Government Money Market Fund in such participations will not exceed 35% of the
value of that Fund's total assets.
ASSET-BACKED SECURITIES. The U.S. Government Money Market Fund, 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 by the
U.S. government, its agencies or instrumentalities. The other Funds may purchase
asset-backed securities that are secured or backed by mortgages or other assets
(e.g., automobile loans, credit card receivables and other financial assets) and
are issued by the U.S. government, GNMA, FNMA, Federal Home Loan Mortgage
Corporation, and private issuers such as commercial banks, financial companies,
finance subsidiaries of industrial companies, savings and loan associations,
mortgage banks, investment banks and certain special purpose entities. Except
for the two High Yield Funds, the Funds will not purchase non-mortgage
asset-backed securities that are not rated investment grade by S&P, Duff, Fitch
or Moody's.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
The Funds may acquire several types of mortgage-backed securities,
including guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. The
Funds will not purchase "residual" CMO interests, which normally exhibit greater
price volatility.
-54-
<PAGE> 60
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity. In calculating the average weighted maturity of a
Fund (other than a Money Market Fund), the maturity of asset-backed securities
will be based on estimates of average life. There can be no assurance that these
estimates will be accurate.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise the
value of an asset-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their respective
investment objectives, the Funds, other than the U.S. Government Select Money
Market Fund, may invest in debt obligations of domestic or foreign corporations
and banks, and may acquire commercial obligations issued by Canadian
corporations and Canadian counterparts of U.S. corporations, as well as
Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of specific obligation or by government regulation. For
purposes of determining the permissibility of an investment in bank obligations,
the total assets of a bank are determined on the basis of the bank's most recent
annual financial statements.
EXCHANGE RATE-RELATED SECURITIES. The Fixed Income, International Fixed Income,
High Yield Fixed Income and Income Equity Funds may each invest in securities
for which the principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange Rate-Related Securities").
The interest payable on these securities is denominated in U.S. dollars and is
not subject to foreign currency risk and, in most cases, is paid at rates higher
than most other similarly rated securities in recognition of the foreign
currency risk component of Exchange Rate-Related Securities.
Investments in Exchange Rate-Related Securities entail certain risks.
There is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related Security
is linked. In addition, there is no
-55-
<PAGE> 61
assurance that sufficient trading interest to create a liquid secondary market
will exist for a particular Exchange Rate-Related Security due to conditions in
the debt and foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign exchange market may, from
time to time, combine to make it difficult to sell an Exchange Rate-Related
Security prior to maturity without incurring a significant price loss.
INSURANCE FUNDING AGREEMENTS. The Money Market Fund, the Fixed Income Fund and
the High Yield Fixed Income Fund may make limited investments in insurance
funding agreements ("IFAs") issued by U.S. and foreign insurance companies.
Pursuant to these contracts, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the Fund, on a monthly basis, interest which is based on an index (such as
the Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. The Money Market Fund 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 does not currently 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. See "Illiquid Securities."
STRUCTURED SECURITIES. To the extent consistent with their respective investment
objectives, the Funds may invest in 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. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
result in the loss of a Fund's 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 rise
than other types of fixed-income securities. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex securities.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, the Funds may invest in
zero coupon and capital appreciation bonds. These are securities issued at a
discount from their face value because interest payments are typically postponed
until maturity. The amount of the discount rate varies depending on factors
including the time remaining until maturity, prevailing interest rates, the
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. The Funds may also invest in pay-in-kind securities which are
securities that have interest payable by the delivery of additional securities.
A portion of the discount with respect to stripped tax-exempt securities or
their coupons may be taxable. The market prices of zero coupon, pay-in-kind and
capital appreciation
-56-
<PAGE> 62
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 certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements.
LOAN PARTICIPATIONS. The High Yield Fixed Income Fund may invest in 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. 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 act 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.
VARIABLE AND FLOATING RATE INSTRUMENTS. In accordance with their respective
investment objectives, the Funds may purchase rated and unrated variable and
floating rate instruments. These instruments may include variable amount master
demand notes that permit the indebtedness to vary in addition to providing for
periodic adjustments in the interest rate and long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where the Fund obtains at the
time of purchase the right to put the bond back to the issuer or a third party
at
-57-
<PAGE> 63
par at a specified date. A Fund 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 subject to applicable SEC
regulations. Unrated instruments will be determined by the Investment Advisers
to be of comparable quality at the time of purchase to rated instruments
purchasable by the Funds.
The Funds (other than the Money Market Funds) may also invest in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and a
Fund could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments (including inverse floaters)
will be subject to a Fund's limitation on illiquid investments when the Fund may
not demand payment of the principal amount within seven days and a reliable
trading market is absent. See "Illiquid Securities."
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio securities from
financial institutions subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after a Fund's acquisition of the securities and normally will be within a
shorter period of time. Securities subject to repurchase agreements are held
either by Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to maintain the value of the securities subject to the agreement in
an amount exceeding the repurchase price (including accrued interest). Default
by the seller would, however, expose a Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Fund is authorized to
make borrowings as described below under "Investment Restrictions." If the
securities held by a Fund should decline in value while borrowings are
outstanding, the market value of the Fund's portfolio will decline
proportionately more than the decline in value it would otherwise suffer.
Borrowings may be made through reverse repurchase agreements under which a Fund
sells portfolio securities to financial institutions such as banks and
broker/dealers and agrees to repurchase them at a particular date and price. The
Funds may use the proceeds of reverse repurchase agreements to purchase other
securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Funds (other than the Municipal Money Market, U.S. Government
Select Money Market,
-58-
<PAGE> 64
California Municipal Money Market, Income Equity, Growth Equity, Select Equity
and Small Cap Funds) may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds will
be less than the interest expense, that the market value of the securities sold
by a Fund may decline below the price of the securities the Fund is obligated to
repurchase and that the securities may not be returned to the Fund. During the
time a reverse repurchase agreement is outstanding, a Fund will segregate liquid
assets having a value at least equal to the repurchase price. A Fund's reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its total assets. In addition, whenever
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
investments.
SECURITIES LENDING. Each Fund may seek additional income from time to time by
lending securities on a short-term basis to banks, brokers and dealers. The
securities lending agreements will require that the loans be secured by
collateral in cash, cash equivalents, U.S. government securities or irrevocable
bank letters of credit maintained on a current basis equal in value to at least
the market value of the loaned securities. A Fund may not make such loans in
excess of 33 1/3% of the value of its total assets (including the loan
collateral). Securities loans involve risks of delay in receiving additional
collateral or in recovering the loaned securities, or possibly loss of rights in
the collateral if the borrower of the securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
Each Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of loss
if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although a Fund will
generally purchase securities with the intention of acquiring them, a Fund may
dispose of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate by the Investment
Advisers.
INVESTMENT COMPANIES. In connection with the management of its daily cash
positions, each Fund may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. In addition, each Fund may invest in
securities issued by other investment companies if otherwise consistent with its
investment objectives and policies, including shares of investment companies
investing primarily in foreign securities, including so-called "country funds."
Country funds have portfolios consisting exclusively of securities of issuers
located in one or more specified foreign countries. As a shareholder of another
investment company, a Fund will bear, along with other shareholders, its pro
rata portion of the other investment company's expenses including advisory fees.
These expenses would be in addition to the advisory fees and other expenses the
Fund bears directly in
-59-
<PAGE> 65
connection with its own operations. Investments in other investment companies
will be subject to the limits imposed by the 1940 Act.
REAL ESTATE INVESTMENT TRUSTS. The High Yield Fixed Income, Income Equity, Small
Cap Index and Small Cap Funds may invest in real estate investment trusts
("REITs"), which are pooled investment vehicles that invest primarily in either
real estate or real estate related loans. 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 the REITs' 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.
ILLIQUID SECURITIES. Each Fund may invest up to 15% (10% in the case of the
Money Market Funds) of the value of its net assets in illiquid securities.
Illiquid securities generally include repurchase agreements and time deposits
with notice/termination dates in excess of seven days, SMBS issued by private
issuers, certain unlisted over-the-counter options, certain IFAs and other
securities which are subject to trading restrictions because they are not
registered under the Securities Act of 1933 (the "1933 Act").
If otherwise consistent with its investment objective and policies,
each Fund may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so long as the
Investment Advisers determine, under guidelines approved by Northern Funds'
Board of Trustees, that an adequate trading market exists. This practice could
increase the level of illiquidity during any period that qualified institutional
buyers become uninterested in purchasing these securities.
PORTFOLIO TRANSACTIONS AND TURNOVER. Northern Funds' Advisory Agreement provides
that in selecting brokers or dealers to place orders for transactions (a)
involving common and preferred stocks, the Investment Advisers shall use their
best judgment to obtain the best overall terms available and (b) involving bonds
and other fixed income obligations, the Investment Advisers shall attempt to
obtain best net price and execution. 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 exercises investment discretion. These
brokerage and research services may include industry and company analyses,
portfolio services, quantitative data, market information systems and economic
and political consulting and analytical services.
-60-
<PAGE> 66
The portfolio turnover rates of the Funds will vary from year to year,
and may be affected by changes in country and currency weightings, as well as
changes in the holdings of specific issuers. Investments in issuers in smaller
or emerging markets may also contribute to portfolio turnover for the
International Funds. High portfolio turnover (100% or more) may result in the
realization of short-term capital gains which are taxable to shareholders as
ordinary income. In addition, higher turnover rates can result in corresponding
increases in commissions and other transaction costs. The Investment Advisers
will not consider turnover rate a limiting factor in making investment
decisions. The portfolio turnover rate of each Fund (other than the Money Market
Funds, the Short-Intermediate U.S. Government Fund, the California Intermediate
Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the Mid Cap Growth Fund and the
Small Cap Index Fund) is stated under "Financial Highlights." Northern Funds
expects that the annual 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 and the Small Cap Index Fund
will generally not exceed 100%, and the annual portfolio turnover rate of High
Yield Municipal Fund and the High Yield Fixed Income Fund will generally not
exceed 300%.
MISCELLANEOUS. A security will be considered to be a permissible investment for
a Fund if it has received the minimum permitted rating for that Fund from one
major rating agency, even though it has received a lower rating from other
rating agencies. After its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Investment Advisers will consider such an event in
determining whether the Fund should continue to hold the security. Except with
respect to each of the two High Yield Funds, and except for the convertible
securities described above, the Investment Advisers expect to sell promptly any
fixed income securities that are non-investment grade which exceed 5% of a
Fund's net assets, or are below the minimum rating described above in the case
of the Money Market Funds, where it has determined that such sale is in the best
interest of the Fund.
For a description of applicable securities ratings, see Appendix A to
the Additional Statement. Investment grade securities rated BBB by S&P, Duff or
Fitch, or Baa by Moody's have certain speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
rated securities.
Each Fund may also 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 investment policies discussed
above.
INVESTMENT RESTRICTIONS
A Fund's investment objective may be changed by Northern Funds' Board of
Trustees without shareholder approval. Shareholders will, however, be notified
of any changes. Any such change may result in a Fund having an investment
objective different from the objective which the
-61-
<PAGE> 67
shareholder considered appropriate at the time of investment in the Fund. No
assurance can be provided that a Fund will achieve its investment objective.
Each Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of a Fund's outstanding
shares. The following description summarizes several of the Funds' fundamental
restrictions, which are set forth in full in the Additional Statement.
No Fund may:
1. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry (a) with certain limited exceptions set forth in the Additional
Statement and (b) except that the Technology Fund may not invest less than 25%
of its total assets at the time of purchase in the securities of issuers
principally engaged in technology business activities, other than during
temporary defensive periods;
2. borrow money except in amounts up to 33 1/3% of the value of its
total assets at the time of borrowing;
3. purchase securities (with certain limited exceptions stated in the
Additional Statement) if more than 5% of its total assets at the time of
purchase will be invested in the securities of any one issuer, except that up to
25% (50% for the California Municipal Money Market Fund) of a Fund's total
assets may be invested without regard to this 5% limitation; or
4. subject to the foregoing 25% exception (and certain other limited
exceptions as stated in the Additional Statement), purchase more than 10% of the
outstanding voting securities of any issuer.
Restrictions 3 and 4 do not apply to the California Intermediate
Tax-Exempt Fund, the Florida Intermediate Tax-Exempt Fund, the Arizona
Tax-Exempt Fund, the California Tax-Exempt Fund or the International Fixed
Income Fund. Instead, 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).
In accordance with current SEC regulations, the Money Market, U.S.
Government Money Market, U.S. Government Select Money Market, Municipal Money
Market and California Municipal Money Market Funds intend, as a non-fundamental
policy, to limit investments in the securities of any single issuer (excluding
cash, cash items, certain repurchase agreements, U.S. government securities or
securities of other investment companies) to not more than 5% of the value of
their respective total assets at the time of purchase, except that (a) 25% of
the value of
-62-
<PAGE> 68
the total assets of the California Municipal Money Market Fund may be invested
in fewer than five issuers; (b) 25% of the value of the total assets of the
other Money Market Funds may be invested in any one issuer for a period of up to
three Business Days; and (c) securities subject to certain unconditional
guarantees are subject to different diversification requirements as described in
the Additional Statement. In addition, the Money Market, U.S. Government Money
Market and U.S. Government Select Money Market Funds will limit their
investments in all securities, and the Municipal Money Market and California
Municipal Money Market Funds will limit their investments in certain conduit
securities as described in the Additional Statement, that are not in the highest
rating category as prescribed by SEC regulations.
OPENING AN ACCOUNT AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from
Northern Funds by following the instructions below under "Purchasing Shares
Directly from the Funds." If you maintain certain accounts at Northern Trust or
another institution (such as a bank or broker/dealer) that has entered into an
agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in accordance with its procedures. See
"Purchasing Shares Through Northern Trust and Other Institutions" below for more
details. If you have any questions or need any assistance in opening an
investment account or purchasing shares, call 1-800-595-9111.
As of the date of this Prospectus, shares of the Short-Intermediate
U.S. Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and
Small Cap Index Funds are not being offered.
PURCHASING SHARES DIRECTLY FROM THE FUNDS
For your convenience, there are a number of ways to invest directly
with Northern Funds. When establishing an investment account directly with
Northern Funds, the minimum initial investment in a Fund is $2,500 ($500 for an
IRA; $250 under the Automatic Investment Plan; and $500 for employees of
Northern Trust and its affiliates). The minimum subsequent investment is $50
(except for reinvestments of distributions for which there is no minimum). The
Funds reserve the right to waive these minimums.
BY MAIL. You may purchase shares by mail by sending a Purchase Application, a
copy of which accompanies this Prospectus, together with a check or money order
payable to Northern Funds in the envelope provided or by addressing your
envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
Purchase orders on behalf of corporations and other entities must be accompanied
by a certified corporate resolution or other acceptable evidence of authority.
If using overnight delivery use the following address: 801 South Canal Street,
Chicago, Illinois 60607, Attn: Northern Funds. Your check must be drawn on a
bank located in the U.S. and must be payable in U.S. dollars. When making
subsequent investments, enclose your check with the return remittance portion of
the confirmation of your previous investment, or indicate on your check or a
separate piece of paper your name, address and account number.
-63-
<PAGE> 69
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by a Fund. If you purchase shares by check and subsequently request the
redemption of those shares, Northern Funds may delay the payment of redemption
proceeds until the Transfer Agent is satisfied that the check has cleared, which
may take up to 15 days from the purchase date. If you anticipate redemptions
soon after purchase, you may wish to wire funds to avoid delays. Northern Funds
will not accept payment in cash or third party checks for the purchase of
shares.
BY WIRE. You may make initial or subsequent investments in shares of the Funds
by wiring federal funds. If you are opening an account with a wire purchase, you
must call 1-800-595-9111 for instructions prior to wiring funds. You must
promptly complete a Purchase Application and forward it to the Transfer Agent in
the envelope provided herewith, or by addressing your envelope to Northern Funds
at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional requirements may be
imposed. Redemptions will not be paid until your completed application has been
received by the Transfer Agent. If you wish to add to an existing account by
wire purchase, you may wire federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)
DIRECT DEPOSIT. You may purchase additional shares through the Direct Payroll
Deposit Plan offered by Northern Funds. Through this plan, periodic investments
(minimum $50) are made automatically from your payroll check into your existing
Fund account. In order to participate in the plan, your employer must have
direct deposit capabilities through the Automated Clearing House ("ACH")
available to its employees. The plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments. Northern
Funds reserves the right, at any time and without prior notice, to limit or
terminate the Direct Payroll Deposit privilege or its use in any manner by any
person.
AUTOMATIC INVESTMENT. Northern Funds offers an Automatic Investment Plan that
allows you to automatically purchase shares on a regular, monthly basis ($250
initial minimum, $50 monthly minimum additions). Under this plan the Transfer
Agent originates an ACH request to your financial institution which forwards
funds periodically to the Transfer Agent to purchase shares. The plan can be
established with any financial institution that participates in the ACH funds
transfer system. No service fee is currently charged by Northern Funds for
participation in the plan. You may establish the plan by completing the
appropriate section on the Purchase Application when opening an account. You may
also establish the plan after an account is opened by completing an Automatic
Investment Plan Application which may be obtained by calling 1-800-595-9111. If
an investor discontinues participation in the plan, the Funds reserve the right
to redeem the investor's account involuntarily, upon 30 days' written notice, if
the account's net asset value is $1,000 or less. Involuntary redemptions will
not be made because the
-64-
<PAGE> 70
value of shares in an account falls below the minimum amount solely because of a
decline in the Fund's net asset value.
DIRECTED REINVESTMENTS. In addition to having your income dividends and/or
capital gains distributions reinvested in shares of the Fund from which such
distributions are paid, you may elect the directed reinvestment option and have
dividends and capital gains distributions automatically invested in another
Northern Fund. In addition, systematic withdrawals from one account and
reinvestments in another account may be established. See "Redeeming and
Exchanging Directly from the Funds -- Systematic Withdrawals." Reinvestments can
only be directed to an existing Northern Funds' account (which must meet the
minimum investment requirement). Directed reinvestments may be used to invest
funds from a regular account to another regular account, from a qualified plan
account to another qualified plan account, or from a qualified plan account to a
regular account. Directed reinvestments from a qualified plan account to a
regular account may have adverse tax consequences including imposition of a
penalty tax and, therefore, you should consult your own tax adviser before
commencing these transactions.
BY EXCHANGE. You may open a new account or add to an existing account by
exchanging shares of one Fund for shares of any other Fund offered by Northern
Funds. See "Redeeming and Exchanging Shares" for details.
PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
Northern Trust customers may purchase shares through their qualified accounts
and should consult with their account officer for additional information and
instructions. Customers of other institutions (together with Northern Trust,
"Service Organizations"), such as banks or broker-dealers that have entered into
agreements with Northern Funds, should contact their account officers for
appropriate purchase instructions. Northern Trust or another Service
Organization may impose particular customer account requirements in connection
with investments in the Funds, such as minimum account size or minimum account
thresholds above which excess cash balances may be invested in Fund shares. To
determine whether you may purchase shares through your institution, contact your
institution directly or call 1-800-595-9111. Purchases (and redemptions) placed
through Northern Trust or another Service Organization are processed only on
days that both Northern Funds and the particular institution are open for
business.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income. The charges will reduce the net return
on an investment in a Fund. For further discussion of Service Organizations and
the procedures for purchasing (and redeeming) shares through them, see
"Management --Service Organizations."
Northern Funds may authorize certain financial intermediaries
(including banks, trust companies, brokers and investment advisers) that provide
recordkeeping, reporting and
-65-
<PAGE> 71
processing services to their customers to accept on Northern Funds' behalf
purchase, redemption and exchange orders placed by or on behalf of such
customers and, if approved by Northern Funds, to designate other intermediaries
to accept such orders. In these cases, a Fund will be deemed to have received an
order by or on behalf of a customer when the order is accepted in proper form by
the authorized intermediary on a Business Day (as defined below). A customer
should contact its intermediary to learn whether it is authorized to accept
orders for Northern Funds.
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES -- NON-MONEY MARKET FUNDS. Except as
provided below under "Further Information -- Miscellaneous," a purchase order
for Fund shares accepted by the Transfer Agent or other authorized
intermediaries by 3:00 p.m. (Chicago Time) on a Business Day (as defined below)
will be priced at the net asset value determined on that day, provided that
either: (a) the order is in proper form and accompanied by payment of the
purchase price; (b) the order is placed by Northern Trust or a Service
Organization that is acting on behalf of itself or its qualified customer
accounts and undertakes to make payment on the next Business Day in the form of
federal funds or other immediately available funds; or (c) 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
after 3:00 p.m. will be effected at the next determined net asset value,
provided that payment is made as provided herein. If a Service Organization
accepts a purchase order from a Customer on a non-Business Day, the order will
not be executed until it is received and accepted by the Transfer Agent or other
authorized intermediary on a Business Day in accordance with the foregoing
procedures.
EFFECTIVE TIME AND PRICE OF PURCHASES -- MONEY MARKET FUNDS. Except as provided
below under "Further Information -- Miscellaneous," a purchase order for Fund
shares accepted by the Transfer Agent or other authorized intermediaries by 1:00
p.m. (Chicago Time) on a Business Day will be priced at the net asset value
determined that day, provided that either: (a) the order is in proper form and
payment in immediately available funds has been received by the Transfer Agent
by that time; (b) the order is placed by Northern Trust or a Service
Organization that is acting on behalf of itself or its qualified customer
accounts and undertakes to make payment by the close of the same Business Day in
the form of Federal funds or other immediately available funds; or (c) the order
is accepted by an authorized intermediary and payment is to be made by the close
of the same Business Day in accordance with procedures acceptable to the
Northern Funds. Purchase 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.
MISCELLANEOUS PURCHASE INFORMATION. You will be responsible for all losses and
expenses of the Funds as a result of a check that does not clear or an ACH
transfer that is rejected. Northern Funds may decline to accept a purchase order
when, in the judgment of Northern Funds or the Investment Advisers, it would not
be in the best interest of existing shareholders to accept the order. If payment
is not received as described above from a Service Organization on the next
Business Day following placement of an order (on the same Business Day for Money
Market
-66-
<PAGE> 72
Funds), or if payment is not received as described above from an authorized
intermediary on the Business Day following acceptance of an order (on the same
Business Day for Money Market Funds) by the authorized intermediary, the Service
Organization or authorized intermediary may be liable for resulting fees and
losses and the transactions may be cancelled.
Federal regulations require that you provide a social security number
or other certified taxpayer identification number upon opening or reopening an
account. Purchase Applications without such a number or an indication that a
number has been applied for will not be accepted. If a number has been applied
for, the number must be provided and certified within 60 days of the date of the
Purchase Application. Payment for shares of a Fund may, in the discretion of the
Transfer Agent, be made in the form of securities that are permissible
investments for the respective Fund. For further information, see the Additional
Statement. Additions or changes to any information in your account registration
(for example, a change in registration from a joint account to an individual
account) may be made by submitting a written request to the Transfer Agent
accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer Agent.
Additional requirements may be imposed. In the interests of economy and
convenience, certificates representing shares of the Funds are not issued.
Northern Funds may reproduce this Prospectus in an electronic format which may
be available on the Internet. If you have received this Prospectus in its
electronic format you, or your representative, may contact the Transfer Agent
for a free paper copy of this Prospectus by writing to Northern Funds Center at
P.O. Box 75986, Chicago, Illinois 60690-6319, calling 1-800-595-9111, or sending
an e-mail to: [email protected].
REDEEMING AND EXCHANGING SHARES
You can arrange to withdraw your investment in the Funds by selling some or all
of your shares. This process is known as "redeeming" your shares. The procedures
for redeeming shares differ depending on whether you purchase your shares
directly from Northern Funds or through Northern Trust or another Service
Organization. If you purchase your shares through an account at Northern Trust
or another Service Organization, you will redeem them in accordance with the
instructions pertaining to that account.
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS
When you purchase your shares directly from Northern Funds, you may redeem or
exchange shares by the methods described below. You may also use any of these
methods if you purchase your shares through an account at Northern Trust or
another Service Organization and you appear on Northern Funds' records as the
registered holder. You may call 1-800-595-9111 if you have any questions
regarding redemptions or exchanges.
Northern Funds imposes no charges when you redeem or exchange shares.
However, when shares of any Fund are purchased through Northern Trust or another
Service Organization, a fee may be charged by those institutions for providing
services in connection with your investment.
-67-
<PAGE> 73
BY MAIL. You may redeem shares in any number or dollar amount by sending a
written request to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319.
The redemption request must state the number of shares or the dollar amount to
be redeemed and identify the Fund account number. If the redemption proceeds are
to be sent elsewhere than the address of record, each request must be
accompanied by a signature guarantee by a financial institution that
participates in STAMP or such other means or evidence of authority as may be
acceptable to the Transfer Agent. In addition, written requests for redemptions
exceeding $50,000 must be accompanied by a signature guarantee by a financial
institution that participates in STAMP or such other means or evidence of
authority as may be acceptable to the Transfer Agent. Additional requirements
may be imposed. A signature notarized by a notary public is unacceptable.
Northern Funds reserves the right to require signature guarantees in other
circumstances based on the amount of the redemption request or other factors,
and may impose additional requirements.
BY WIRE. If you authorize wire redemptions on your Purchase Application, shares
can be redeemed and the proceeds sent by federal wire transfer to a previously
designated account. You will be charged $15 for each wire redemption unless the
designated account is maintained at Northern Trust or an affiliated bank. The
minimum amount that may be redeemed by this method is $250. Northern Funds
reserves the right to change this minimum or to terminate the wire redemption
privilege at any time without notice. To change bank instructions, a written
request accompanied by a signature guarantee by a financial institution that
participates in STAMP, or such other means or evidence of authority acceptable
to the Transfer Agent, must be sent to Northern Funds, P.O. Box 75986, Chicago,
Illinois 60690-6319. Additional requirements may be imposed.
BY CHECK. You may also redeem shares of the Money Market Funds by redemption
check in amounts of $250 or more once the checkwriting privilege has been
established. When the check is presented to the Transfer Agent for payment, the
Transfer Agent, as your agent, will cause the particular Fund involved to redeem
a sufficient number of your shares to cover the amount of the check. Dividends
are earned until the check clears the Transfer Agent. You can establish the
checkwriting privilege by checking the appropriate box on the Purchase
Application, or if your Fund account is already opened, by completing the
appropriate form which may be obtained by calling the Transfer Agent at
1-800-595-9111. When establishing checkwriting for an account that is already
opened, the form must be signed by each person whose name appears on the account
accompanied by signature guarantees by a financial institution that participates
in STAMP or such other means or evidence of authority as may be acceptable to
the Transfer Agent. Additional requirements may be imposed.
You may place stop payment requests on checks by calling the Transfer
Agent at 1-800-595-9111. A $20 fee will be charged for each stop payment
request. If there are insufficient shares in your account to cover the amount of
your redemption by check, the check will be returned, marked "insufficient
funds," and a fee of $20 will be charged to the account. You may not use checks
to close an account or redeem shares purchased within the past fifteen days.
Checks you write will not be returned to you, although copies are available upon
request.
-68-
<PAGE> 74
Northern Funds reserves the right, at any time without prior notice, to suspend,
limit or terminate the checkwriting privilege or its use in any manner by any
person.
SYSTEMATIC WITHDRAWALS. Northern Funds offers a Systematic Withdrawal Plan. If
you own shares of a Fund with a minimum value of $10,000, you may elect to have
a fixed sum redeemed at regular intervals ($250 minimum amount per withdrawal)
and distributed in cash or reinvested in one or more of the other Funds offered
by Northern Funds. See "Purchasing Shares Directly from the Funds -- Directed
Reinvestments." An application form and additional information may be obtained
from the Transfer Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE. Northern Funds offers an exchange privilege that permits you
to exchange shares of one Fund for shares of another Fund offered by Northern
Funds. To establish the exchange privilege, you must check the appropriate box
on the Purchase Application or, if your Fund account is already opened, you may
send a written request to the Transfer Agent, and must establish or maintain
accounts with an identical title in each Fund involved in an exchange
transaction. In addition, the shares being exchanged must have a value of at
least $1,000 ($2,500 if a new account is being established by the exchange).
Since an excessive number of exchanges may be disadvantageous to
Northern Funds, Northern Funds reserves the right, at any time without prior
notice, to suspend, limit or terminate the exchange privilege of any shareholder
who makes more than eight exchanges of shares in a year and/or two exchanges of
shares in a calendar quarter. A shareholder may continue making exchanges until
notified that the exchange privilege has been suspended, limited or terminated.
Northern Funds reserves the right to modify or terminate the exchange privilege
at any time and to reject any exchange request. Questions regarding the exchange
privilege may be directed to 1-800-595-9111 or to your account officer at your
Service Organization. Exchanges will be processed only when the shares being
acquired can be legally sold in the state of the investor's residence.
Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges. Northern Funds reserves, however, the
right to impose a charge in the future.
TELEPHONE PRIVILEGE. This privilege permits you to redeem or exchange shares by
telephone. To establish the telephone privilege, you must check the appropriate
box on the Purchase Application, or if your Fund account is already opened, you
may send a written request to the Transfer Agent. The request must be signed by
each owner of the account and accompanied by signature guarantees as provided
below or such other means or evidence of authority as may be acceptable to the
Transfer Agent. Once you have established the telephone privilege, you may use
the telephone privilege by calling the Transfer Agent at 1-800-595-9111.
The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
-69-
<PAGE> 75
shareholder's address of record. The address of record for redemption checks may
be changed only by a written request accompanied by signature guarantees by a
financial institution that participates in STAMP or such other means or evidence
of authority as may be acceptable to the Transfer Agent and sent to Northern
Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally, the Transfer
Agent utilizes recorded lines for telephone transactions and will request a form
of personal identification if such identification has been furnished to the
Transfer Agent. Neither Northern Funds nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. To the extent that Northern Funds fails to
use reasonable procedures to verify the genuineness of telephone instructions,
it or its service providers may be liable for instructions that prove to be
fraudulent or unauthorized. In all other cases, you will bear the risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the Transfer
Agent by telephone, shares may also be redeemed by mail as described above under
the discussion of redemptions by mail.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchase your shares through an account at Northern Trust or another
Service Organization, you will redeem or exchange them in accordance with the
instructions pertaining to that account. If you are listed on the books of
Northern Funds as the shareholder of record, you may also redeem and exchange
your shares using any of the methods described above under "Redeeming and
Exchanging Directly from the Funds." Questions regarding these redemptions or
exchanges should be directed to your account representative at Northern Trust or
another Service Organization. Although Northern Funds imposes no charges when
you redeem, when shares are purchased through Northern Trust or another Service
Organization a fee may be charged by those institutions for providing services
in connection with your account.
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES. Except as provided below
under "Further Information --Miscellaneous," redemption orders for shares of a
non-Money Market Fund are processed at the net asset value next determined at
3:00 p.m. (Chicago Time) after receipt in good order by the Transfer Agent or an
authorized intermediary (see "Opening an Account and Purchasing Shares -
Purchasing Shares Through Northern Trust and Other Institutions" above) by 3:00
p.m. (Chicago Time) on a Business Day, and redemption orders for shares of a
Money Market Fund are processed at the net asset value next determined at 1:00
p.m. (Chicago Time) after receipt in good order by the Transfer Agent or an
authorized intermediary by 1:00 p.m. (Chicago Time) on a Business Day. Good
order means that the request must include the following information: the account
number and Fund name; the amount of the transaction (as specified in dollars or
number of shares); the signatures of all account owners exactly as they are
registered on the account (except for telephone and wire redemptions);
-70-
<PAGE> 76
required signature guarantees (if applicable); and other supporting legal
documents that might be required in the case of estates, corporations, trusts
and certain other accounts. Call 1-800-595-9111 for the additional documentation
that may be required of these entities. Exchange orders are likewise processed
at the net asset value per share next determined after receipt in good order by
the Transfer Agent or an authorized intermediary on a Business Day.
PAYMENT OF REDEMPTION PROCEEDS -- NON-MONEY MARKET FUNDS. 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 receipt by the Transfer Agent or
an authorized intermediary of a request in good order on a Business Day, except
as otherwise provided by the rules of the SEC. However, if any portion of the
shares to be redeemed represents an investment made by check, the Funds may
delay the payment of the redemption proceeds until the Transfer Agent is
reasonably satisfied that the check has been collected, which could take up to
fifteen days from the purchase date. This procedure does not apply to shares
purchased by money order or wire payment.
PAYMENT OF REDEMPTION PROCEEDS -- MONEY MARKET FUNDS. If received by the
Transfer Agent by 1:00 p.m. (Chicago Time) on a Business Day, a redemption
request normally will result in proceeds being sent on the next Business Day,
unless payment in immediately available funds on the same Business Day is
specifically requested. Proceeds for redemption orders received on a
non-Business Day will normally be sent on the second Business Day after receipt
in good order. However, if any portion of the shares to be redeemed represents
an investment made by check, Northern Funds may delay the payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to fifteen days from the purchase
date. Northern Funds reserves the right to defer crediting, sending or wiring
redemption proceeds for up to seven days after receiving the redemption order
if, in its judgment, an earlier payment could adversely affect a Fund.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern Trust or the Transfer Agent is directed otherwise. The ACH
system may be utilized for payment of redemption proceeds. Redemptions may not
be processed if a shareholder has failed to submit a completed and signed
Purchase Application. Northern Funds may require any information reasonably
necessary to ensure that a redemption has been duly authorized.
To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net asset
value of the remaining shares in the account falls below $1,000. Before such
involuntary redemption would occur, you would be given at least 60 days' written
notice and, during that period, you could make an additional investment to
restore the account to at least the minimum amount, in which case there would be
no such redemption. Involuntary redemptions will not be made because the value
of shares in an account falls below the minimum amount solely because of a
decline in a Fund's net asset value. Northern Funds also reserves the right to
redeem the shares held by any shareholder who provides incorrect or incomplete
account information or when such involuntary redemptions are necessary to avoid
adverse consequences to Northern Funds and its shareholders. Any involuntary
redemption
-71-
<PAGE> 77
would be at net asset value. Northern Funds also reserves the right to redeem
shares involuntarily if it is otherwise appropriate to do so under the 1940 Act
(see "Amortized Cost Valuation" in the Additional Statement).
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Money Market Fund's net investment income is declared as a dividend on each
Business Day. Net investment income includes interest accrued on the Fund's
assets less the Fund's estimated expenses. Dividends from net investment income
are paid monthly, except that dividends will 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 realized short-term capital gains, after
reduction for capital loss carry-forwards, if any, of a Fund may be distributed
from time to time during Northern Funds' fiscal year (but not less frequently
than annually). The 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 that day by the time designated under "Opening an Account and Purchasing
Shares - Additional Purchase Information - Effective Time and Price of Purchases
- - Money Market Funds;" otherwise, shares begin earning dividends on the day
after an order is executed.
Dividends from the net investment income of each of 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 and California Tax-Exempt Funds are
declared daily on each Business Day and paid monthly. 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.
Dividends from the net investment income of the other Funds are
declared and paid as follows:
DIVIDENDS
FUND DECLARED AND PAID
International Fixed Income........................... Quarterly
High Yield Municipal................................. Monthly
High Yield Fixed Income.............................. Monthly
Income Equity........................................ Monthly
Stock Index.......................................... Quarterly
Growth Equity........................................ Quarterly
Select Equity........................................ Annually
Mid Cap Growth....................................... Quarterly
Small Cap Index...................................... Annually
Small Cap ........................................... Annually
International Growth Equity.......................... Annually
-72-
<PAGE> 78
International Select Equity.......................... Annually
Technology........................................... Annually
The net realized capital gains of each Fund are distributed at least
annually.
Dividends and capital gain distributions, if any, will reduce the net
asset value of a Fund (other than a Money Market Fund) by the amount of the
dividend or capital gain distribution. Dividends and capital gain distributions,
if any, are automatically reinvested (without any sales charge or portfolio
transaction fee) in additional shares of the same Fund at their net asset value
determined on the payment date. You may, however, notify the Transfer Agent in
writing that you elect instead to have dividends and/or capital gain
distributions paid in cash or reinvested in shares of another Fund offered by
Northern Funds at their net asset value determined on the payment date (provided
you maintain an account in such Fund). This election will become effective for
distributions paid two days after its receipt by the Transfer Agent.
Net loss, if any, from certain foreign currency transactions or
instruments that is otherwise taken into account with respect to the
International Fixed Income Fund in calculating net investment income or net
realized capital gains for accounting purposes may not be taken into account in
determining the amount of dividends to be declared and paid, with the result
that a portion of the Fund's dividends may be treated as a return of capital,
nontaxable to the extent of a shareholder's tax basis in his or her shares.
TAXES
As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
your own tax situation. Northern Funds will send written notices to shareholders
annually regarding the tax status of distributions made by the Funds. The Funds
will determine annually the percentages of their respective net investment
income which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable,
and will apply these percentages uniformly to all dividends declared from net
investment income during that year. These percentages may differ significantly
from the actual percentages for any particular day.
FEDERAL TAXES. Each Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (the "Code"), meaning that to the extent a
Fund's earnings are distributed to shareholders as required by the Code, the
Fund itself is not required to pay federal income taxes.
To qualify, a Fund will pay as dividends at least 90% of its investment
company taxable income and at least 90% of its net tax-exempt income (if any)
each year. Investment company taxable income includes, but is not limited to,
taxable interest, dividends and short-term capital gains less expenses.
Dividends based on either investment company taxable income (which
-73-
<PAGE> 79
includes income resulting from investments in options and futures contracts) or
the excess of net short-term capital gain over net long-term capital loss are
treated as ordinary income in determining gross income for tax purposes, whether
or not the dividends are received in cash or additional shares. (Federal income
taxes for distributions to an IRA or other qualified retirement account are
deferred or eliminated under the Code.)
Dividends paid by the Tax-Exempt Funds and the Municipal Funds (but not
the other Funds) that are derived from interest on Municipal Instruments
("exempt-interest dividends") may be excludable from your federal taxable income
(unless because of your particular situation exclusion would be disallowed). You
should note that income that is not subject to federal income taxes may
nevertheless have to be considered along with other adjusted gross income in
determining whether any Social Security payments received by you are subject to
federal income taxes. You should also note that a portion of the exempt-interest
dividends paid by the Intermediate Tax-Exempt, California Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt and
California Tax-Exempt Funds may be, and a portion of such dividends by the
Municipal Money Market, California Municipal Money Market and High Yield
Municipal Funds generally will be, an item of tax preference for both corporate
and individual taxpayers in determining federal alternative minimum tax
liability. (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.) If you
hold shares for six months or less, and during that time receive exempt-interest
dividends, any loss realized on the sale of those shares will be disallowed to
the extent of the exempt-interest dividends.
Any distribution based on the excess of long-term capital gain over net
short-term capital loss will be taxable as a long-term capital gain, regardless
of how long you hold Fund shares. However, if you hold shares for six months or
less, and during that time receive a distribution that is taxable as a long-term
capital gain, any loss realized on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Before purchasing shares you should consider the effect of any capital
gain distributions and, for those Funds that do not declare dividends daily, any
net income dividends that are expected to be declared or that have been declared
but not yet paid. The net asset value of the shares will be reduced by the
amount of any such distribution, so that a shareholder will, in effect, have
paid full price for the shares and then received a portion of the price back as
a taxable distribution. This is because at any given time the value of your
shares includes the undistributed net gains, if any, realized by a Fund on the
sale of portfolio securities, and undistributed dividends and interest received,
less the Fund's expenses. Because such gains and dividends are included in the
price of your shares, when they are distributed, the price of your shares is
reduced by the amount of the distribution. Accordingly, if your distribution is
reinvested in additional shares, the distribution has no effect on the value of
your investment; while you own more shares, the price of each share has been
reduced by the amount of the distribution. Likewise, if you take your
distribution in cash, the value of your shares after the record date will be
reduced by the cash received.
-74-
<PAGE> 80
Any dividends declared in October, November or December and payable to
shareholders of record during those months will be deemed to have been paid by a
Fund and received by shareholders on December 31, so long as the dividends are
actually paid, as expected, in January of the following year.
Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using the Systematic Withdrawal
Plan to direct reinvestments), depending on the difference in the prices at
which the shares were originally purchased and when redeemed, transferred or
exchanged.
Dividends and certain interest income earned by a Fund from foreign
securities may be subject to foreign withholding taxes or other taxes. So long
as more than 50% of the value of a Fund's total assets at the close of a taxable
year consists of stock or securities of foreign corporations, the Fund may
elect, for U.S. federal income tax purposes, to treat certain foreign taxes paid
by it, including generally any withholding taxes and other foreign income taxes,
as paid by its shareholders. It is possible that one or more of the
International Funds will make this election in certain years. Should a Fund make
the election, the amount of such foreign taxes paid by the Fund will be included
in its shareholders' income pro rata (in addition to taxable distributions
actually received by them), and each shareholder will be entitled either (a) to
credit his proportionate amounts of such taxes against applicable U.S. federal
income tax liabilities, or (b) if the shareholder itemizes deductions, to deduct
such proportionate amounts from applicable U.S. federal taxable income.
If a Fund invests in certain "passive foreign investment companies"
("PFICs"), it would be subject to federal income tax (and possibly additional
interest charges) on a portion of any "excess distribution" or gain from the
disposition of such investments even if it distributes the income to its
shareholders. If a Fund elects to treat the PFIC as a "qualified electing fund"
("QEF") and the PFIC furnishes certain financial information in the required
form, the Fund instead would be required to include in income each year its
allocable share of the ordinary earnings and net capital gains of the QEF,
whether or not received, and such amounts would be subject to the various
distribution requirements described above. In addition, a Fund could, as an
alternative, elect to mark-to-market and recognize ordinary income each year
with respect to any appreciation in a PFIC investment.
Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the dividends and distributions payable to any
investor (i) who has provided either an incorrect Social Security Number or
Taxpayer Identification Number or no number at all, (ii) who is subject to
withholding by the Internal Revenue Service for prior failure to properly
include on his return payments of interest or dividends, or (iii) who has failed
to certify to Northern Funds, when required to do so, that he is not subject to
backup withholding or is an "exempt recipient."
STATE AND LOCAL TAXES GENERALLY. Because the state and local tax rules
applicable to an investment in Northern Funds may be different from the federal
tax rules described above, you should discuss your investment with your tax
adviser. In particular, dividends may be taxable
-75-
<PAGE> 81
under state or local law as dividend income even though all or part of those
dividends come from interest on obligations that, if held by you directly, would
be free of such income taxes. Additionally, although the U.S. Government Select
Money Market Fund intends to invest principally in U.S. government securities
the interest on which is generally exempt from state income taxation, you should
see your tax adviser to determine whether distributions from the Fund are exempt
in light of your particular circumstances.
STATE AND LOCAL TAXES -- CALIFORNIA FUNDS. If, at the close of each quarter of
each of the California Funds' taxable year, at least 50% of the value of its
total assets consists of California Municipal Instruments and certain specified
federal obligations, and if the Fund qualifies as a regulated investment company
for federal tax purposes, then the Fund will be qualified to pay dividends
exempt from California state personal income tax to its shareholders. If the
Fund so qualifies, dividends derived from interest attributable to California
Municipal Instruments and such federal obligations will be exempt from
California state personal income tax (unless, because of your particular
situation, exclusion would be disallowed). Any dividends paid to shareholders
subject to California state franchise tax or California state corporate income
tax may be taxed as ordinary dividends to such shareholders notwithstanding that
all or a portion of such dividends are exempt from California state personal
income tax.
Except as noted with respect to the California state personal income
tax, dividends paid by the California Funds may be taxable under state or local
law as dividend income even though all or part of those dividends come from
interest on obligations that, if held by you directly, would be free of such
income taxes. Moreover, to the extent, if any, that dividends paid by a Fund to
its shareholders are derived from taxable interest or from capital gains, such
dividends will be subject to federal income tax and California state personal
income tax, if applicable, whether or not such dividends are reinvested. Future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in the California Funds.
STATE AND LOCAL TAXES -- FLORIDA INTERMEDIATE TAX-EXEMPT FUND. Florida does not
currently have an income tax for individuals, and therefore individual
shareholders of this Fund will not be subject to any Florida income tax on
amounts received from the Fund. However, Florida does impose an income tax on
certain corporations, so that such amounts may be taxable to corporate
shareholders.
Florida also imposes an "intangibles tax" at the annual rate of 2 mills
or 0.2% on certain securities and other intangible assets owned by Florida
residents. With respect to the first mill, or first 0.1%, of the intangibles
tax, every natural person is entitled each year to an exemption of the first
$20,000 of the value of the property subject to the tax. A husband and wife
filing jointly will have an exemption of $40,000. With respect to the last one
mill, or last 0.1% of the intangibles tax, every natural person is entitled each
year to an exemption of the first $100,000 of the value of the property subject
to the tax. A husband and wife filing jointly will have an exemption of
$200,000.
Obligations issued by the State of Florida or its municipalities,
counties, and other taxing districts, or by the U.S. Government, certain U.S.
Government agencies and certain U.S.
-76-
<PAGE> 82
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 the portfolio of the Florida Intermediate Tax-Exempt Fund consists solely
of such exempt assets, then the Fund's shares will be entirely exempt from the
Florida intangibles tax payable in the following year.
The Fund intends, but cannot guarantee, that its shares will qualify
for exemption from the Florida intangibles tax.
STATE AND LOCAL TAXES -- 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 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.
TAX TABLE
<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>
$0-$ 22,100 $0-$ 36,900 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 22,101-$ 53,500 $ 36,901-$ 89,150 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 53,501-$115,000 $ 89,151-$140,000 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$115,001-$250,000 $140,001-$250,000 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $250,000 Over $250,000 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 1998 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.
-77-
<PAGE> 83
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 above 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.
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the direction of
its Board of Trustees. The Additional Statement contains the name of each
Trustee and other background information.
INVESTMENT ADVISERS, TRANSFER AGENT AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago, Illinois 60675,
serves as Northern Funds' investment adviser (except with respect to the Stock
Index, Small Cap Index and Small Cap Funds). NTQA, an affiliate of Northern
Trust which also has offices at 50 S. LaSalle Street, Chicago, Illinois 60675,
serves as investment adviser to the Stock Index, Small Cap Index and Small Cap
Funds. Northern Trust also serves as transfer agent and custodian for each Fund.
As transfer agent, Northern Trust provides various administrative servicing
functions, and any shareholder inquiries may be directed to it. Northern Trust's
transfer agency offices are located at 801 S. Canal Street, Chicago, Illinois
60607.
Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. NTQA is an Illinois state-chartered trust company
formed in 1988. On December 31, 1997, NTQA became a wholly-owned subsidiary of
Northern Trust Corporation. NTQA 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 September 30, 1998, Northern Trust
Corporation and its subsidiaries had approximately $28.1 billion in assets,
$17.0 billion in deposits and employed approximately 7,944 persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $1.13 trillion in
assets as of September 30, 1998, including over $220.7 billion for which
Northern Trust and its affiliates had investment management responsibility.
-78-
<PAGE> 84
Subject to the general supervision of Northern Funds' Board of
Trustees, the Investment Advisers are responsible for making investment
decisions for the Funds and placing purchase and sale orders for portfolio
securities. 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
must not inquire or take into consideration whether issuers of securities
proposed for purchase or sale for the Funds' accounts are customers of Northern
Trust's commercial banking department. These requirements are designed to
prevent investment advisory personnel for the Funds from knowing which companies
have commercial business with Northern Trust and from purchasing securities
where they know the proceeds will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of related
expenses, Northern Trust is entitled to a fee, computed daily and payable
monthly, at an annual rate of 0.60% of the average daily net assets of each of
the Money Market Funds; 0.75% of the average daily net assets of each of 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 and California Tax-Exempt Funds; 0.75% of
the average daily net assets of the High Yield Municipal and High Yield Fixed
Income Funds; 0.90% of the average daily net assets of the International Fixed
Income Fund; 1.00% of the average daily net assets of each of the Income Equity,
Growth Equity and Mid Cap Growth Funds; and 1.20% of the average daily net
assets of each of the Select Equity, International Growth Equity, International
Select Equity and Technology Funds. As compensation for its advisory services
and its assumption of related expenses, NTQA is entitled to a fee, computed
daily and payable monthly, at an annual rate of 0.60% of the average daily net
assets of the Stock Index Fund; 0.65% of the average daily net assets of the
Small Cap Index Fund; and 1.20% of the average daily net assets of the Small Cap
Fund.
During Northern Funds' fiscal year ended March 31, 1998, Northern Trust
received investment management fees (after waivers) at the annualized rates of
0.31% and 0.34% of the average daily net assets of the U.S. Government Select
Money Market and California Municipal Money Market Funds, respectively, and at
the annualized rates set forth above under "Expense Summary" with respect to the
other Funds that had commenced operations.
Prior to April 1, 1998, Northern Trust served as investment adviser to
the Stock Index, Small Cap Index and Small Cap Funds on the same terms as those
currently in effect for such Funds.
Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Funds for these services are
described in the Additional Statement.
Northern Trust may, at its own expense, provide compensation to certain
dealers and other institutions whose customers purchase shares of a Fund. The
amount of such compensation may be made on a one-time and/or periodic basis, and
may equal or exceed the annual fees that
-79-
<PAGE> 85
are earned by Northern Trust from a Fund and are attributable to shares held by
such customers. Such compensation will not represent an additional expense to
the Funds or their shareholders, since it will be paid from the assets of
Northern Trust or its affiliates.
The Investment Advisers employ a team approach to the investment
management of the Funds, relying upon investment professionals in the Investment
Services Group. James M. Snyder, Chief Investment Officer and Executive Vice
President of Northern Trust and Chairman and Chief Executive Officer of NTQA,
oversees the management of all fixed income, equity and money market assets
managed by the Investment Advisers and is the head of the Investment Services
Group. Below is information regarding the management of each 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 Fixed Income Fund are Mark J.
Wirth, Senior Vice President of Northern Trust, and Stephen M. Schafer, Vice
President of Northern Trust. Mr. Wirth has had such responsibility since July
1998 and Mr. Schafer has had such responsibility since December 1998. Mr. Wirth
joined Northern Trust in 1986 and during the past five years has managed various
fixed income portfolios. 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.
The management team leaders for the U.S. Government Fund are Mark J.
Wirth 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. Mr. Memler joined Northern
Trust in 1986 and during the past five years has managed various fixed income
portfolios.
The management team leaders for the International Fixed Income Fund are
Michael J. Lannan and Steven M. Schafer, Vice President of Northern Trust. Mr.
Lannan has had such responsibility since the Fund commenced operations in April
1994 and Mr. Schafer has had such responsibility since July 1998. Mr. Lannan
joined Northern Trust in 1986 and during the past five years has managed various
fixed income portfolios.
Messrs. Wirth and Schafer will be the management team leaders for the
Short-Intermediate U.S. Government Fund after it commences operations.
The management team leaders for the Tax-Exempt Fund and Intermediate
Tax-Exempt Fund are Eric M. Bergson, Vice President of Northern Trust, and
Timothy T. A. McGregor, Second Vice President of Northern Trust. Mr. Bergson and
Mr. McGregor have had such responsibility for the Tax-Exempt Fund since November
1998. Mr. Bergson has had such responsibility for the Intermediate Tax-Exempt
Fund since 1994. Mr. McGregor has had such responsibility for the Intermediate
Tax-Exempt Fund since 1998. Mr. Bergson joined Northern Trust in 1986 and during
the past five years has managed various municipal securities. Mr.
-80-
<PAGE> 86
McGregor joined Northern Trust in 1989 and during the past five years has
managed various municipal bond portfolios.
The management team leaders for the Florida Intermediate Tax-Exempt
Fund are Eric M. Bergson and Gregory A. Bell, Second Vice President of Northern
Trust. Mr. Bergson has had such responsibility for the Florida Intermediate
Tax-Exempt Fund since 1996. 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 California Tax-Exempt Fund are Eric
M. Bergson and Eric V. Boeckman, Vice President in the Fixed Income Management
Division. Mr. Bergson has had such responsibility since November 1998 and Mr.
Boeckmann has had such responsibility since April 1998. 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. Messrs. Bergson and Boeckmann will also be the management team
leaders for the California Intermediate Tax-Exempt and Arizona Tax-Exempt Funds
after they commence operations.
Upon commencement of the portfolios, the management team leader for the
High Yield Fixed Income Fund and the High Yield Municipal Fund will be M. Jane
McCart, Senior Vice President of Northern Trust. Ms. McCart joined Northern
Trust in 1998. From 1983 to 1998, she was with Stein Roe & Farnham Incorporated
where she had been the portfolio manager of various municipal bond portfolios.
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.
-81-
<PAGE> 87
Theodore Breckel, 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 April 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.
The management team leader for the International Growth Equity Fund is
Robert A. LaFleur, Senior Vice President of Northern Trust. Mr. LaFleur has had
such responsibility for the Fund since it commenced operations in April 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 International Select Equity Fund
are Robert A. LaFleur and Svein Backer. Mr. LaFleur has had such responsibility
for the Fund since 1994 and Mr. Backer, Second Vice President of Northern Trust,
has had such responsibility for the Fund since July 1997. Mr. Backer joined
Northern Trust in 1992 and for the past five years has been responsible for the
stock selection and coverage of existing holdings for the United Kingdom,
Scandinavian, Australian, Canadian, South African and Emerging Market Europe
weightings in Northern Trust's international equity portfolios.
The management team leaders for the Technology Fund are John B. Leo and
George J. Gilbert, Vice Presidents 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. Leo joined Northern 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 a common trust technology fund, analyzed corporations and made
recommendations to portfolio managers on whether to buy, sell or hold securities
of issuers in a number of different industries.
YEAR 2000
Like every other business dependent upon computerized information
processing, Northern Trust Corporation and Sunstone Financial Group, Inc.
("Sunstone") must deal with "Year 2000" issues, which stem from using two digits
to reflect the year in computer programs and data. Computer programmers and
other designers of equipment that use microprocessors have long abbreviated
dates by eliminating the first two digits of the year under the assumption that
those two digits will always be 19. As the Year 2000 approaches, many systems
may be unable to process accurately certain date-based information, which could
cause a variety of operational problems for businesses.
-82-
<PAGE> 88
Northern Trust Corporation's data processing software and hardware
provide essential support to virtually all of its business units, including the
units that provide services to Northern Funds, so successfully addressing Year
2000 issues is of the highest importance. Failure to complete renovation of the
critical systems used by Northern Trust Corporation on a timely basis could have
a materially adverse effect on its ability to provide such services -- as could
Year 2000 problems experienced by others. Although the nature of the problem is
such that there can be no complete assurance it will be successfully resolved,
Northern Trust Corporation has indicated that a renovation and risk mitigation
program is well under way and that it has 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. Northern Trust Corporation has advised Northern Funds that it expects to
complete work on its critical systems by December 31, 1998, so that testing with
outside parties may be conducted during 1999.
Northern Trust Corporation also will have a program to monitor and
assess the efforts of other parties. However, it cannot control the success of
those efforts. Contingency plans will be established where appropriate to
provide Northern Trust Corporation with alternatives in case these entities
experience significant Year 2000 difficulties which impact Northern Trust
Corporation.
Sunstone and its affiliates depend on the consistent operations of
their computer software systems in providing services to Northern Funds.
Addressing Year 2000 issues is of the highest importance to Sunstone and its
affiliates. Sunstone does not utilize any proprietary software systems in
providing services to the Funds. Sunstone utilizes only software provided by
software vendors in providing services to the Funds. Sunstone and its affiliates
are monitoring and assessing the efforts of their software vendors for the
Funds. They cannot, however, control the success of those efforts. Sunstone and
its affiliates are in the process of developing contingency plans for the
systems they utilize to provide services to the Funds in the event these
entities experience significant Year 2000 difficulties. The inability of
Northern Funds and its service providers to successfully address the Year 2000
issue could result in interruptions in the Funds' business and have a materially
adverse effect on the Funds' operations.
ADMINISTRATOR AND DISTRIBUTOR
Sunstone Financial Group, Inc., 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202, acts as administrator for Northern Funds. As compensation for
its administrative services (which include clerical, compliance, regulatory and
other services) and the assumption of related expenses, Sunstone is entitled to
a fee, computed daily and payable monthly, at an annual rate of 0.15% of
Northern Funds' average net assets. No compensation was payable by Northern
Funds to Sunstone for its distribution services.
-83-
<PAGE> 89
Sunstone Distribution Services, LLC, 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, an affiliate of Sunstone, is currently the
distributor of the shares of Northern Funds. Effective on or after January 1,
1999, Northern Funds Distributors, LLC, an affiliate of Sunstone and Sunstone
Distribution Services, LLC, will replace Sunstone Distribution Services, LLC as
distributor of Northern Funds. Miriam M. Allison, an officer of Northern Funds,
is also an officer of Sunstone Distribution Services, LLC and Northern Funds
Distributors LLC. Shares of Northern Funds are sold by Sunstone Distribution
Services, LLC (and will be sold by Northern Funds Distributors, LLC effective on
or after January 1, 1999), as distributor, on a continuous basis. No
compensation is payable by Northern Funds to Sunstone Distribution Services, LLC
for its distribution services, nor will it be payable to Northern Funds
Distributors, LLC for its distribution services.
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, which are described more
fully in the Additional Statement, may include support services such as
assisting investors in processing administrative purchase, exchange and
redemption requests; processing dividend and distribution payments from the
Funds; providing information to customers showing their positions in the Funds;
and providing subaccounting with respect to Fund shares beneficially owned by
customers or the information necessary for subaccounting. In addition, Service
Organizations may provide assistance, such as the forwarding of sales literature
and advertising to their customers, in connection with the distribution of Fund
shares. For their services, Service Organizations may receive fees from a Fund
at annual rates of up to 0.25% of the average daily net asset value of the
shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged
-84-
<PAGE> 90
under agreements with Northern Funds only to perform services that are
permissible under these laws.
Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under the
1940 Act. Payments to Service Organizations, including Northern Trust, under the
Plan are not tied directly to their own out-of-pocket expenses and therefore may
be used as they elect (for example, to defray their overhead expenses), and may
exceed their direct and indirect costs.
EXPENSES
Except as set forth above and in the Additional Statement, each Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the organization
of Northern Funds, taxes, interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Funds' shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Funds' expenses and/or reduce their advisory and administrative fees from
the Funds during the current fiscal year. The result of these reimbursements and
fee reductions will be to increase the performance of the Funds during the
periods for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Except as provided below under "Further Information -- Miscellaneous," net asset
value per share for purposes of purchases and redemptions is calculated by
Northern Trust on each Business Day as of 3:00 p.m. (Chicago Time) for each
non-Money Market Fund, and as of 1:00 p.m. (Chicago Time) for each Money Market
Fund. Net asset value is calculated by dividing the value of all securities and
other assets belonging to a Fund, less the liabilities charged to a Fund, by the
number of the Fund's outstanding shares.
-85-
<PAGE> 91
In seeking to maintain a net asset value of $1.00 per share with
respect to each Money Market Fund for purposes of purchases and redemptions,
Northern Funds values the portfolio securities held by each of the Money Market
Funds pursuant to the amortized cost method of valuation described in the
Additional Statement under "Amortized Cost Valuation."
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.
ADVERTISING 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
-86-
<PAGE> 92
may be compared to Lehman Brothers High Yield Municipal 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 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 Morgan Stanley Capital International
Europe, Australasia 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.
A Fund calculates its total return on an "average annual total return"
basis for various periods from the date the Fund commences investment operations
and for other periods as permitted under SEC rules. Average annual total return
reflects the average annual percentage change in value of an investment over the
measuring period. Total return may also be calculated on an aggregate total
return basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return reflect changes in the price of a Fund's shares and
assume that any dividends and capital gain distributions are reinvested. When
considering average total return figures for periods longer than one year, you
should note that the annual total return for any one year may be more or less
than the average for the entire period. A Fund may also advertise its total
return on an aggregate, year-by-year or other basis for various specified
periods through charts, graphs, schedules or quotations.
The yield of a Fund (other than the Money Market Funds) 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 its per share net
income during the relevant period by the per share net asset value on the last
day of the period and analyzing the result on a semi-annual basis. The yield of
a Money Market Fund is computed based on the Fund's net income during a
specified seven-day period. The net investment income is then "annualized." That
is, the amount of net investment income generated by the investment during the
period is assumed to be generated each week over a 52-week period and is shown
as a percentage of the investment. The "effective" yield of a Money Market Fund
is calculated similarly but, when annualized, the net investment income
generated by the investment is assumed to be reinvested. The "effective" yield
will be slightly higher than the "yield" because of the compounding effect of
this assumed reinvestment.
The tax-equivalent yield for the Tax-Exempt Funds and the Municipal
Funds shows the amount of taxable yield needed to produce an after-tax
equivalent of a tax-free yield, and is calculated by increasing the yield (as
calculated above) by the amount necessary to reflect the
-87-
<PAGE> 93
payment of federal and/or state income taxes at a stated rate. The
tax-equivalent yield for the Tax-Exempt Funds and the Municipal Funds will
always be higher than the Fund's yield.
Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in a Fund will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value should be
considered in ascertaining the total return to shareholders for a given period.
Total return data should also be considered in light of the risks associated
with a Fund's composition, quality, operating expenses and market conditions.
Any fees charged by Northern Trust or a Service Organization directly to its
customers in connection with investments in the Funds will not be included in
Northern Funds' calculations of performance data.
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October 12, 1993
under an Agreement and Declaration of Trust (the "Trust Agreement"). The Trust
Agreement permits the Board of Trustees to issue an unlimited number of shares
of beneficial interest of one or more separate series representing interests in
different investment portfolios. Northern Funds has established twenty-seven
separate Funds, which are described in this Prospectus.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each series entitled
to vote on a matter will vote in the aggregate and not by series, except as
required by law or when the matter to be voted on affects only the interests of
shareholders of a particular series. The Additional Statement gives examples of
situations where the law requires voting by series. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate
shares of Northern Funds may elect all of the Trustees.
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder communications
in connection with the meeting.
As of September 30, 1998, Northern Trust possessed sole or shared
voting or investment power for its customer accounts with respect to more than
50% of the outstanding shares of Northern Funds.
SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual report
showing portfolio investments and other information as of September 30 and,
after the close of the Funds' fiscal
-88-
<PAGE> 94
year March 31, with an annual report containing audited financial statements. To
eliminate unnecessary duplication, only one copy of shareholder reports will be
sent to shareholders with the same mailing address. Shareholders who desire a
duplicate copy of shareholder reports to be mailed to their residence should
call 1-800-595-9111 or send an e-mail to: [email protected].
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain tax-sheltered
retirement plans, including profit-sharing plans, 401(k) plans, money purchase
pension plans, target benefit plans and individual retirement accounts. Further
information about how to participate in these plans, the fees charged and the
limits on contributions can be obtained from Northern Trust. To invest through
any of the tax-sheltered retirement plans, please call Northern Trust for
information and the required separate application. To determine whether the
benefits of a tax-sheltered retirement plan are available and/or appropriate, a
shareholder should consult with a tax adviser.
MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern Funds is
registered as an open-end management investment company under the 1940 Act, and
each of the Funds (other than the California Funds, the Florida Intermediate
Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the International Fixed Income
Fund) is classified under that Act as a diversified portfolio.
When a shareholder moves, the shareholder is responsible for sending
written notice to Northern Funds of any new mailing address. Northern Funds and
the Transfer Agent may charge a shareholder their reasonable costs in locating a
shareholder's current address in accordance with SEC regulations.
As used in this Prospectus, "Business Day" means, with respect to the
non-Money Market Funds, each day Northern Trust and the New York Stock Exchange
(the "Exchange) are open, which is Monday through Friday, except for holidays
observed by Northern Trust and/or the Exchange. In 1998, these holidays are New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day (July 3rd), Labor Day, Columbus Day, Veterans
Day, Thanksgiving and Christmas. "Business Day" means, with respect to the Money
Market Funds, each day that Northern Trust is open, which is a Monday through
Friday, except for holidays observed by it. In 1998, these holidays are New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Memorial Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving and Christmas. On days when
Northern Trust or the Exchange closes early as a result of unusual weather or
other conditions, the Funds reserve the right to advance the time on that day by
which purchase, redemption and exchange requests must be received. In addition,
on any Business Day when The Bond Market Association recommends that the
securities markets close or close early, the Funds reserve the right to cease or
to advance the deadline for accepting purchase, redemption and exchange orders
for same Business Day credit. Purchase, redemption and exchange requests
received after the advanced closing time
-89-
<PAGE> 95
will be effected on the next Business Day. Northern Trust is not required to
calculate the net asset value of a Fund on days during which no shares are
tendered to a Fund for redemption and no orders to purchase or sell shares are
received by a Fund, or on days on which there is an insufficient degree of
trading in the Fund's portfolio securities for changes in the value of such
securities to affect materially the net asset value per share. Each Fund
reserves the right, however, to reject any purchase order and also to defer
crediting, sending or wiring redemption proceeds for up to seven days after
receiving a redemption order if, in its judgment, an earlier payment would
adversely affect such Fund. See "Opening an Account and Purchasing Shares" and
"Redeeming and Exchanging Shares" above for more information.
From time to time, and subject to the applicable law, Northern Funds'
distributor may provide promotional incentives to brokers or banks, including
Northern Trust, whose representatives have sold or are expected to sell shares
of the Funds. At various times, the distributor may implement programs under
which an entity's sales force may be eligible to win cash or non-cash awards for
sales efforts, and may finance sales contests or recognition programs conforming
to criteria established by the distributor. The distributor may also provide
marketing services to entities consisting of written informational material
relating to sales incentive campaigns conducted by such entities for their
representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other literature.
The Stock Index Fund and the Small Cap Index Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's or Russell, respectively, nor
does Standard & Poor's or Russell guarantee the accuracy and/or completeness of
the S&P 500 Index or the Russell Index or any data included therein. Standard &
Poor's and Russell make no warranty, express or implied, as to the results to be
obtained by the Stock Index Fund or Small Cap Index Fund, respectively, the
shareholders of those Funds, any person or any entity from the use of the S&P
500 Index or the Russell Index, or any data included therein. Standard & Poor's
and Russell make no express or implied warranties and expressly disclaim all
such warranties of merchantability of fitness for a particular purpose for use
with respect to the S&P 500 Index or the Russell Index, respectively, or any
data included therein.
--------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN NORTHERN FUNDS'
ADDITIONAL STATEMENT IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-90-
