<PAGE> 1
As filed with the Securities and Exchange Commission on MAY 28, 1999
Registration Nos. 33-73404
811-8236
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. ___ |_|
Post-Effective Amendment No. 22 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 24 |X|
------------------------------
Northern Funds
(Exact Name of Registrant as Specified in Charter)
207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-595-9111
------------------------------
Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on JULY 30,1999 pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of beneficial interest
<PAGE> 2
NORTHERN FUNDS
- - Money Market Fund
- - U.S. Government Money Market Fund
- - U.S. Government Select Money Market Fund
- - Municipal Money Market Fund
- - California Municipal Money Market Fund
- - U.S. Government Fund
- - Short-Intermediate U.S. Government Fund
- - Intermediate Tax-Exempt Fund
- - California Intermediate Tax-Exempt Fund
- - Florida Intermediate Tax-Exempt Fund
- - Fixed Income Fund
- - Tax-Exempt Fund
- - Arizona Tax-Exempt Fund
- - California Tax-Exempt Fund
- - International Fixed Income Fund
- - High Yield Municipal Fund
- - High Yield Fixed Income Fund
- - Income Equity Fund
- - Stock Index Fund
- - Growth Equity Fund
- - Select Equity Fund
- - Mid Cap Growth Fund
- - Small Cap Index Fund
- - Small Cap Fund
- - International Growth Equity Fund
- - International Select Equity Fund
- - Technology Fund
Prospectus dated July 30, 1999
An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Fund involves investment risks, including possible
loss of principal. Although each of the Money Market Funds seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose money by
investing in the Money Market Funds.
The California Municipal Money Market, California Intermediate Tax-Exempt,
Florida Intermediate Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt
Funds are not available in certain states. Please call 1-800-595-9111 to
determine the availability in your state.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Page 1
<PAGE> 3
CONTENTS
@@
<TABLE>
<CAPTION>
PAGE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RISK/RETURN SUMMARY MONEY MARKET FUNDS
Information about the objectives, principal - Money Market Fund 7
strategies and risk characteristics of each Fund - U.S. Government Money Market Fund 8
- U.S. Government Select Money Market Fund 9
- Municipal Money Market Fund 10
- California Municipal Money Market Fund 11
----------------------------------------------------------
FIXED INCOME FUNDS
- U.S. Government Fund 12
- Short-Intermediate U.S. Government Fund 13
- Intermediate Tax-Exempt Fund 14
- California Intermediate Tax-Exempt Fund 15
- Florida Intermediate Tax-Exempt Fund 16
- Fixed Income Fund 17
- Tax-Exempt Fund 18
- Arizona Tax-Exempt Fund 19
- California Tax-Exempt Fund 20
- International Fixed Income Fund 21
- High Yield Municipal Fund 22
- High Yield Fixed Income Fund 23
----------------------------------------------------------
EQUITY FUNDS
- Income Equity Fund 24
- Stock Index Fund 25
- Growth Equity Fund 26
- Select Equity Fund 27
- Mid Cap Growth Fund 28
- Small Cap Index Fund 29
- Small Cap Fund 30
- International Growth Equity Fund 31
- International Select Equity Fund 32
- Technology Fund 33
----------------------------------------------------------
PRINCIPAL INVESTMENT RISKS 34
----------------------------------------------------------
FUND PERFORMANCE
- Money Market Fund 38
- U.S. Government Money Market Fund 39
- U.S. Government Select Money Market Fund 40
- Municipal Money Market Fund 41
- California Municipal Money Market Fund 42
- U.S. Government Fund 43
- Intermediate Tax-Exempt Fund 44
- Florida Intermediate Tax-Exempt Fund 45
- Fixed Income Fund 46
- Tax-Exempt Fund 47
- California Tax-Exempt Fund 48
- International Fixed Income Fund 49
</TABLE>
Page 2
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- Income Equity Fund 50
- Stock Index Fund 51
- Growth Equity Fund 52
- Select Equity Fund 53
- Small Cap Fund 54
- International Growth Equity Fund 55
- International Select Equity Fund 56
- Technology Fund 57
----------------------------------------------------------
FUND FEES AND EXPENSES 58
- ------------------------------------------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS INVESTMENT ADVISERS 62
Details that apply to the Funds as a group ----------------------------------------------------------
ADVISORY FEES 62
----------------------------------------------------------
FUND MANAGEMENT 63
- FIXED INCOME FUNDS 63
- EQUITY FUNDS 64
----------------------------------------------------------
OTHER FUND MANAGEMENT INFORMATION 65
----------------------------------------------------------
OTHER FUND SERVICES 65
- ------------------------------------------------------------------------------------------------------------------
ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES 65
How to open, maintain and close an account - Purchasing Shares 65
- Opening an Account 65
- Selling Shares 67
----------------------------------------------------------
ACCOUNT POLICIES AND OTHER INFORMATION 69
- Calculating Share Price 69
- Timing of Money Market Fund
Purchase Requests 69
- Timing of Non-Money Market Fund
Purchase Requests 69
- Social Security/Tax Identification
Number 70
- In-Kind Purchases and Redemptions 70
- Miscellaneous Purchase Information 70
- Timing of Redemption and Exchange
Requests 70
- Payment of Money Market Fund
Redemption Proceeds 70
- Payment of Non-Money Market Fund
Redemption Proceeds 71
- Miscellaneous Redemption Information 71
- Exchange Privileges 71
- Telephone Transactions 71
- Making Changes to Your Account
Information 72
- Signature Guarantees 72
- Business Day 72
</TABLE>
Page 3
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- Early Closings 72
- Authorized Intermediaries 72
- Service Organizations 72
- Shareholder Reports 73
----------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS 73
----------------------------------------------------------
TAX CONSIDERATIONS 74
----------------------------------------------------------
TAX TABLE 75
----------------------------------------------------------
YEAR 2000 ISSUES 76
- ------------------------------------------------------------------------------------------------------------------
APPENDICES APPENDIX A
- Special Risks and Other Considerations 77
- Additional Description of Securities and
Common Investment Techniques 82
- Disclaimers 90
----------------------------------------------------------
Appendix B
- Fund Financial Highlights 93
- ------------------------------------------------------------------------------------------------------------------
FOR MORE INFORMATION Annual/Semiannual Report 105
----------------------------------------------------------
Statement of Additional Information 105
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
@@
Page 4
<PAGE> 6
RISK/RETURN SUMMARY
NORTHERN FUNDS IS A FAMILY OF NO-LOAD MUTUAL FUNDS THAT OFFERS A SELECTION OF
FUNDS TO INVESTORS, EACH WITH A DISTINCT INVESTMENT OBJECTIVE AND RISK/REWARD
PROFILE.
The descriptions on the following pages may help you choose the fund or funds
that best fit your investment needs. Keep in mind, however, that no fund can
guarantee it will meet its investment objective, and no fund should be relied
upon as a complete investment program.
This Prospectus describes the five money market, twelve fixed income and ten
equity funds (the "Funds") that make up the Northern Funds Family.
In addition to the instruments described on the pages below, each Fund may use
various investment techniques in seeking its investment objective. You can learn
more about these techniques and their related risks by reading Appendix A to
this Prospectus and the Statement of Additional Information.
SOME DEFINITIONS
CALIFORNIA FUNDS = California Municipal Money Market Fund,
California Intermediate Tax-Exempt Fund and
California Tax-Exempt Fund.
EQUITY FUNDS = Income Equity Fund, Stock Index
Fund, Growth Equity Fund, Select Equity
Fund, Mid Cap Growth Fund, Small Cap Index
Fund, Small Cap Fund, International Growth
Equity Fund, International Select Equity
Fund and Technology Fund.
FIXED INCOME FUNDS = U.S. Government Fund, Short-Intermediate
U.S. Government Fund, Intermediate
Tax-Exempt Fund, California Intermediate
Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund, Fixed Income Fund,
Tax-Exempt Fund, Arizona Tax-Exempt Fund,
California Tax-Exempt Fund, International
Fixed Income Fund, High Yield Municipal
Fund and High Yield Fixed Income Fund.
INTERNATIONAL FUNDS = International Fixed Income Fund,
International Growth Equity Fund and
International Select Equity Fund.
MONEY MARKET FUNDS = Money Market Fund, U.S. Government Money
Market Fund, U.S. Government Select
Money Market Fund, Municipal Money Market
Fund and California Municipal Money
Market Fund.
MUNICIPAL FUNDS = Municipal Money Market Fund, California
Municipal Money Market Fund and High
Yield Municipal Fund.
NON-MONEY MARKET FUNDS = Fixed Income Funds and Equity Funds.
TAX-EXEMPT FUNDS = Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida
Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Arizona Tax-Exempt Fund and
California Tax-Exempt Fund.
A WORD ABOUT THE MONEY MARKET FUNDS
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share. Consistent with this policy, each of the Money Market Funds:
- - Limits its dollar-weighted average portfolio maturity to 90 days or less;
Page 5
<PAGE> 7
- - Buys securities with remaining maturities of 397 days or less (except for
certain variable and floating rate instruments and securities
collateralizing repurchase agreements); and
- - Invests only in U.S. dollar-denominated securities that represent minimal
credit risks.
In addition, each Money Market Fund limits its investments to "Eligible
Securities" as defined by the Securities and Exchange Commission ("SEC").
Eligible Securities include, generally, securities that either (a) have
short-term debt ratings at the time of purchase in the two highest rating
categories or (b) are issued or guaranteed by, or otherwise allow a Money Market
Fund to demand payment from, an issuer with those ratings. Securities that are
unrated (including securities of issuers that have long-term but not short-term
ratings) may be deemed to be Eligible Securities if determined to be of
comparable quality by The Northern Trust Company ("Northern Trust") under the
direction of the Board of Trustees. Securities in which the Money Market Funds
may invest may not earn as high a level of income as long-term or lower quality
securities, which generally have greater market risk and more fluctuation in
market value.
In accordance with current SEC regulations, each Money Market Fund will not
invest more than 5% of the value of its total assets at the time of purchase in
the securities of any single issuer. However, the California Municipal Money
Market Fund may invest up to 25% of its total assets in fewer than 5 issuers,
and the other Funds may invest up to 25% of their total assets in the securities
of a single issuer for up to three Business Days. These limitations do not apply
to cash, certain repurchase agreements, U.S. government securities or securities
of other investment companies. In addition, securities subject to certain
unconditional guarantees and securities that are not "First Tier Securities" as
defined by the SEC are subject to different diversification requirements as
described in the Statement of Additional Information.
Page 6
<PAGE> 8
RISK/RETURN SUMMARY
MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks its objective by investing in a broad range of government, bank
and commercial obligations that are available in the money markets, including:
- - U.S. dollar-denominated obligations of U.S. banks with total assets in
excess of $1 billion (including obligations of foreign branches of such
banks);
- - U.S. dollar-denominated obligations of foreign commercial banks where such
banks have total assets in excess of $5 billion;
- - High-quality commercial paper and other obligations issued or guaranteed
by U.S. and foreign corporations and other issuers;
- - Corporate bonds, notes, paper and other instruments that are of
high-quality;
- - Asset-backed securities;
- - Securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies or instrumentalities and custodial receipts
with respect thereto;
- - U.S. dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or
instrumentalities;
- - Repurchase agreements relating to the above instruments; and
- - Municipal securities issued or guaranteed by state or local governmental
bodies.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 7
<PAGE> 9
U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks its objective by investing in:
- Securities issued or guaranteed as to principal and interest by the
U.S. government, its agencies or instrumentalities;
- Repurchase agreements relating to such securities; and
- Custodial receipts representing interests in U.S. government
securities.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 8
<PAGE> 10
RISK/RETURN SUMMARY
U.S. GOVERNMENT SELECT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks its objective by investing exclusively in securities issued or
guaranteed as to principal and interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the Fund will seek to acquire
only those U.S. government securities the interest upon which is generally
exempt from state income taxation. These securities include obligations issued
by the U.S. Treasury and certain U.S. government agencies and instrumentalities,
such as the Federal Home Loan Bank and the Federal Farm Credit Bank Funding
Corp.
When appropriate securities that are exempt from state taxes are unavailable,
the Fund may also invest in non-exempt U.S. government securities and cash
equivalents including money market funds and time deposits with a maturity of
three months or less, and may hold uninvested cash.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 9
<PAGE> 11
MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide, to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of income exempt from
regular Federal income tax by investing primarily in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objective by investing primarily in high-quality
short-term instruments, the interest on which is exempt from regular Federal
income tax ("municipal instruments"). These may include:
- Fixed and variable rate notes and similar debt instruments;
- Tax-exempt commercial paper;
- Municipal bonds, notes, paper or other instruments; and
- Municipal bonds and notes which are guaranteed as to principal and
interest or backed by the U.S. government or its agencies or
instrumentalities.
Under normal circumstances, at least 80% of the Fund's annual gross income will
be derived from municipal instruments. Under normal market conditions,
investments in taxable instruments will not exceed 20% of the value of the total
assets of the Fund; during temporary defensive periods, however, all or any
portion of a Fund's assets may be invested in such instruments.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds" the interest on which may be treated as an
item of tax preference to shareholders under the Federal alternative minimum
tax). To the extent the Fund invests in AMT obligations, some portion of the
Fund's dividends may be subject to the alternative minimum tax.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 10
<PAGE> 12
RISK/RETURN SUMMARY
CALIFORNIA MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide, to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of income exempt from
regular Federal income tax and California state personal income tax.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objective by investing primarily in high-quality
short-term instruments, the interest on which is exempt from regular Federal
income tax and California state personal income tax ("California municipal
instruments"). These may include:
- Fixed and variable rate notes and similar debt instruments;
- Tax-exempt commercial paper;
- Municipal bonds, notes, paper or other instruments; and
- Municipal bonds and notes which are guaranteed as to principal and
interest or backed by the U.S. government or its agencies or
instrumentalities.
Under normal circumstances, at least 80% of the Fund's annual gross income will
be derived from municipal instruments and at least 65% of the Fund's total
assets will be invested in California municipal instruments the interest on
which is exempt from California state personal income tax ("California municipal
instruments"). Under normal market conditions, investments in taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds" the interest on which may be treated as an
item of tax preference to shareholders under the Federal alternative minimum
tax). To the extent the Fund invests in AMT obligations, some portion of the
Fund's dividends may be subject to the alternative minimum tax.
The Fund is "non-diversified" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and may invest more of its assets in fewer issuers
than other types of money market funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 11
<PAGE> 13
U.S. GOVERNMENT FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES
In seeking a high level of current income, the Fund will invest, under normal
market conditions, at least 65% of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements relating to such securities. These may include:
- U.S. Treasury bills, notes and bonds
- Obligations of U.S. government agencies and instrumentalities
- Mortgage-related securities issued or guaranteed by U.S. government
agencies and instrumentalities
- Stripped securities evidencing ownership of future interest or
principal payments on obligations of the U.S. government, its
agencies or instrumentalities
- Repurchase agreements relating to the above instruments
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between one and ten years.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 12
<PAGE> 14
RISK/RETURN SUMMARY
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income, the Fund will invest, under normal market
conditions, at least 65% of its total assets in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities and repurchase
agreements relating to such securities. These may include:
- U.S. Treasury bills, notes and bonds
- Obligations of U.S. government agencies and instrumentalities
- Mortgage-related securities issued or guaranteed by U.S. government
agencies and instrumentalities
- Stripped securities evidencing ownership of future interest or
principal payments on obligations of the U.S. government, its
agencies or instrumentalities
- Repurchase agreements relating to the above instruments
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between two and five years.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 13
<PAGE> 15
INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from regular
Federal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax, the Fund
may invest in a broad range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
treated as an item of tax preference to shareholders under the Federal
alternative minimum tax) will not be deemed to have been derived from municipal
instruments for the purpose of determining whether the Fund meets this policy.
To the extent the Fund invests in AMT obligations, some portion of the Fund's
dividends may be subject to the alternative minimum tax.
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 14
<PAGE> 16
RISK/RETURN SUMMARY
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and California state personal income tax by investing in municipal
instruments.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax and
California state personal income tax, the Fund may invest in a broad range of
municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
treated as an item of tax preference to shareholders under the Federal
alternative minimum tax) will not be deemed to have been derived from municipal
instruments for the purposes of determining whether the Fund meets this policy.
To the extent the Fund invests in AMT obligations, some portion of the Fund's
dividends may be subject to the alternative minimum tax. In addition, under
normal market conditions at least 65% of the Fund's total assets will be
invested in California municipal instruments.
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years.
The Fund is "non-diversified" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and may invest more of its assets in fewer issuers
than "diversified" mutual funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 15
<PAGE> 17
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular federal income
tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax, the Fund
may invest in a broad range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
treated as an item of tax preference to shareholders under the Federal
alternative minimum tax) will not be deemed to have been derived from municipal
instruments for the purposes of determining whether the Fund meets this policy.
To the extent the Fund invests in AMT obligations, some portion of the Fund's
dividends may be subject to the alternative minimum tax. In addition, under
normal market conditions, at least 65% of the Fund's total assets will be
invested in municipal instruments issued by the state of Florida and its
municipalities, counties and other taxing districts, as well as other securities
exempt from the Florida intangibles tax ("Florida municipal instruments").
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years.
The Fund is "non-diversified" under the 1940 Act, and may invest more of its
assets in fewer issuers than "diversified" mutual funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 16
<PAGE> 18
RISK/RETURN SUMMARY
FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income, the Fund will invest, under normal market
conditions, in a broad range of bonds and other fixed income securities. These
may include:
- Obligations of the U.S. government, its agencies or
instrumentalities
- Obligations of state, local and foreign governments
- Obligations of domestic and foreign banks and corporations
- Zero coupon bonds, debentures and convertible debentures
- Mortgage and other asset-backed securities
- Stripped securities evidencing ownership of future interest or
principal payments on debt obligations
- Repurchase agreements relating to the above instruments
Although the Fund invests primarily in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization or of comparable quality
as determined by Northern Trust), it may invest a portion of its assets in
obligations of foreign issuers and in securities that are below investment grade
("junk bonds").
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between seven and twelve years.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 17
<PAGE> 19
TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from regular
Federal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax, the Fund
may invest in a broad range of municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
treated as an item of tax preference to shareholders under the Federal
alternative minimum tax) will not be deemed to have been derived from municipal
instruments for the purposes of determining whether the Fund meets this policy.
To the extent the Fund invests in AMT obligations, some portion of the Fund's
dividends may be subject to the alternative minimum tax.
Under normal market conditions, investment in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 18
<PAGE> 20
RISK/RETURN SUMMARY
ARIZONA TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and Arizona state personal income tax by investing in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax and
Arizona state personal income tax, the Fund may invest, under normal market
conditions, at least 80% of its total assets in a broad range of municipal
instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
an item of tax preference to shareholders under the Federal alternative minimum
tax) will not be deemed to have been derived from municipal instruments for the
purposes of determining whether the Fund meets this policy. To the extent the
Fund invests in AMT obligations, some portion of the Fund's dividends may be
subject to the alternative minimum tax. In addition, under normal market
conditions at least 65% of the 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").
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years.
The Fund is "non-diversified" under the 1940 Act, and may invest more of its
assets in fewer issuers than "diversified" mutual funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 19
<PAGE> 21
CALIFORNIA TAX-EXEMPT FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide high current income exempt from regular Federal income
tax and California state personal income tax.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax and
California state personal income tax, the Fund may invest in a broad range of
municipal instruments. These may include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
- Municipal instruments backed by letters of credit or other forms of
credit enhancement issued by domestic or foreign banks and other
financial institutions.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from tax-exempt municipal instruments. Interest earned by the
Fund on AMT obligations ("private activity bonds" the interest on which may be
treated as an item of the tax preference to shareholders under the Federal
alternative minimum tax) will not be deemed to have been derived from municipal
instruments for the purposes of determining whether the Fund meets this policy.
To the extent the Fund invests in AMT obligations, some portion of the Fund's
dividends may be subject to the alternative minimum tax. In addition, under
normal market conditions at least 65% of the Fund's total assets will be
invested in California municipal instruments.
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of a Fund's
assets may be invested in such instruments. Taxable investments will consist
exclusively of those instruments that may be purchased by the Fixed Income Fund.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between ten and thirty years.
The Fund is "non-diversified" under the 1940 Act, and may invest more of its
assets in fewer issuers than "diversified" mutual funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 20
<PAGE> 22
RISK/RETURN SUMMARY
INTERNATIONAL FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES
In seeking to maximize total return, the Fund will invest, under normal market
conditions, at least 65% of its total assets in bonds and other fixed income
securities of foreign issuers. These may include:
- Obligations of foreign governments, their agencies or
instrumentalities
- Obligations of supranational organizations (such as the World Bank)
- Obligations of foreign corporations and banks
- Zero coupon bonds, debentures and convertible debentures of foreign
issuers
- Mortgage and other asset-backed securities of foreign issuers
The Fund will invest in the securities of issuers located in at least three
different foreign countries. Although the Fund primarily invests in mature
markets (such as Germany and Japan), it may also invest in emerging markets
(such as Argentina and China) depending upon the Fund management team's outlook
for the relative economic growth, expected inflation and other economic and
political prospects of each country or region. It is expected that during the
current fiscal year a substantial portion of the Fund's assets will be invested
in foreign governmental obligations because such obligations represent a
substantial portion of the non-U.S. fixed income market.
The Fund may also invest a portion of its assets in domestic obligations,
including obligations of the U.S. government, its agencies and instrumentalities
and repurchase agreements collateralized by such obligations. It may also invest
in the obligations of domestic banks and corporations, zero coupon bonds,
debentures and convertible debentures, and mortgage and other asset-backed
securities.
Although the Fund invests primarily in investment grade debt obligations (i.e.,
obligations rated within the top four rating categories by a Nationally
Recognized Statistical Rating Organization or of comparable quality as
determined by Northern Trust), it may invest a portion of its assets in
obligations that are below investment grade ("junk bonds").
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund's dollar-weighted average maturity will, under normal market
conditions, range between three and eleven years.
The Fund is "non-diversified" under the 1940 Act, and may invest more of its
assets in fewer issuers than "diversified" mutual funds.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 21
<PAGE> 23
HIGH YIELD MUNICIPAL FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income exempt from regular Federal income
tax.
PRINCIPAL INVESTMENT STRATEGIES
In seeking high current income exempt from regular Federal income tax, the Fund
will invest, under normal market conditions, at least 65% of its total assets in
municipal securities that are of low, medium or upper medium quality. These may
include:
- General obligation bonds secured by the issuer's full faith, credit
and taxing power
- Revenue obligation bonds payable from the revenues derived from a
particular facility or class of facilities
- Moral obligation bonds
- Tax-exempt derivative instruments
- Stand-by commitments
Upper medium quality securities are rated A by a Nationally Recognized
Statistical Rating Organization, and medium quality securities are rated BBB or
Baa by a Nationally Recognized Statistical Rating Organization. Lower quality
securities, also commonly referred to as "junk bonds," are rated BB, Ba or lower
by a Nationally Recognized Statistical Rating Organization. Unrated securities
will be of comparable quality.
Lower quality securities tend to offer higher yields than higher rated
securities with similar maturities. However, lower rated securities are
considered speculative and generally involve greater price volatility and
greater risk of loss than higher rated securities. Medium quality securities,
although considered investment grade, are also considered to have speculative
characteristics. There is no minimum rating for a municipal instrument purchased
or held by the Fund, and the Fund may purchase securities that are in default.
Although the Fund primarily invests in low, medium or upper quality securities,
it may invest a portion (or, during temporary defensive periods, all) of its
assets in securities of higher quality.
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from municipal securities. Under normal market conditions,
investments in taxable instruments will not exceed 20% of the value of the total
assets of the Fund; during temporary defensive periods, however, all or any
portion of a Fund's assets may be invested in such instruments. Taxable
investments will consist exclusively of those instruments that may be purchased
by the High Yield Fixed Income Fund.
The Fund is not limited in the amount of its assets that may be invested in AMT
obligations ("private activity bonds" the interest on which may be treated as an
item of tax preference to shareholders under the Federal alternative minimum
tax). To the extent the Fund invests in AMT obligations, some portion of the
Fund's dividends may be subject to the alternative minimum tax.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund does not have any minimum portfolio maturity limitation, and may invest
its assets from time to time primarily in instruments with short, medium or long
maturities. The instruments held by the Fund are considered speculative, and an
investment in the Fund presents substantial risks.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 22
<PAGE> 24
RISK/RETURN SUMMARY
HIGH YIELD FIXED INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income. In doing so, the Fund may also
consider the potential for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
In seeking to achieve its investment objective, the Fund will invest, under
normal market conditions, at least 65% of its total assets in rated and unrated
lower quality securities. Lower quality securities, also commonly referred to as
"junk bonds," are rated BB, Ba or lower by a Nationally Recognized Statistical
Rating Organization. Unrated securities will be determined to be of comparable
quality by Northern Trust. These may include:
- Obligations of U.S. and foreign corporations and banks
- Obligations of foreign, state and local governments
- Obligations of the U.S. government, its agencies or
instrumentalities
- Senior and subordinated bonds and debentures
- Mortgage and other asset-related securities
- Zero coupon, pay-in-kind and capital appreciation bonds
- Convertible securities, preferred stock, structured securities and
loan participations
- Equity securities when the Fund holds debt or preferred stock of the
issuer
- Repurchase agreements relating to the above instruments
Lower rated securities tend to offer higher yields than higher rated securities
with similar maturities. However, lower rated securities are considered
speculative and generally involve greater price volatility and greater risk of
loss than higher rated securities. There is no minimum rating for a security
purchased or held by the Fund, and the Fund may purchase securities that are in
default. Although the Fund primarily invests in lower quality fixed income
securities, it may invest a portion (or, during temporary defensive periods,
all) of its assets in securities of higher quality.
Although the Fund invests primarily in the debt obligations of domestic issuers,
it may invest a portion of its assets in the obligations of foreign issuers.
In selecting securities for the Fund, the investment management team uses a
relative value approach, emphasizing sectors and securities believed to provide
more than adequate compensation for the risks assumed. In determining whether a
particular sector or security provides relative value, the investment management
team analyzes various economic and market information, including economic
growth, interest and inflation rates, deficit levels, the shape of the yield
curve, sector and quality spreads and risk premiums. It also uses proprietary
valuation models to analyze and compare expected returns and assumed risks.
The Fund does not have any minimum portfolio maturity limitation, and may invest
its assets from time to time primarily in instruments with short, medium or long
maturities. The instruments held by the Fund are considered speculative, and an
investment in the Fund presents substantial risks.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 23
<PAGE> 25
INCOME EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income with long-term capital
appreciation as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking to achieve its investment objective, the Fund will, under normal
market conditions, invest at least 65% of its total assets in a mix of
income-producing equity securities, including common and preferred stocks and
convertible securities.
Using fundamental research and quantitative analysis, the investment management
team selects securities based on factors such as:
- Current income
- Prospects for growth
- Capital appreciation potential
The Fund may also invest up to 35% of its total assets in a broad range of fixed
income securities that are permissible investments for the Fixed Income Fund.
Although the convertible securities and fixed income securities in which the
Fund may invest will generally be investment grade domestic securities (i.e.,
rated within the top four rating categories by a Nationally Recognized
Statistical Rating Organization or of comparable quality as determined by
Northern Trust), the Fund may invest up to 35% of its total assets in comparable
and fixed income securities that are below investment grade ("junk bonds") and
may invest a portion of its assets in the securities of foreign issuers.
The Fund may also invest, under normal market conditions, up to 35% of its total
assets in a broad range of fixed income securities that are investment grade or
better at the time of purchase and are permissible investments for the Fixed
Income Fund.
Although the Fund primarily invests in the equity securities of U.S. companies,
it may invest a portion of its assets in the stocks of foreign issuers.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 24
<PAGE> 26
RISK/RETURN SUMMARY
STOCK INDEX FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide investment results approximating the aggregate price
and dividend performance of the securities included in the Standard & Poor's
("S&P") 500 Composite Stock Price Index ("S&P 500(R) Index").
The S&P 500(R) Index is an unmanaged index which includes 500 companies
operating across a broad spectrum of the U.S. economy, and its performance is
widely considered representative of the U.S. stock market as a whole.
The companies chosen for inclusion in the Index tend to be leaders in important
industries within the U.S. economy. However, companies are not selected by S&P
for inclusion because they are expected to have superior stock price performance
relative to the market in general or other stocks in particular.
S&P does not endorse any stock in the Index. It is not a sponsor of the Stock
Index Fund and is not affiliated with the Fund in any way.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund will invest at least 65% of its total
assets in the equity securities of the companies that make up the S&P 500(R)
Index, in approximately the same proportions as they are represented in the
Index.
The Fund is passively managed, which means it tries to duplicate the investment
composition and performance of the S&P 500(R) Index using sophisticated computer
programs and statistical procedures. As a result, the investment management team
does not use traditional methods of fund investment management for this Fund,
such as selecting securities on the basis of economic, financial and market
analysis. Because the Fund will have fees and transaction expenses (while the
Index has none), returns are likely to be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Fund will be within a .95 correlation with the S&P 500(R) Index, before
expenses.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 25
<PAGE> 27
GROWTH EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will invest, under normal
market conditions, at least 65% of its total assets in the equity securities of
a broad mix of companies. Such companies generally will have market
capitalizations in excess of $750 million. Although the Fund primarily invests
in the common, preferred and convertible stocks of U.S. companies, it may invest
a portion of its assets in the stocks of foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team selects stocks believed to have favorable growth characteristics. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
- Sales and earnings growth
- Return on equity
- Financial condition
- Market share and product leadership
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 26
<PAGE> 28
RISK/RETURN SUMMARY
SELECT EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRIMARY INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will, under normal market
conditions, invest at least 65% of its total assets in the equity securities of
a select mix of companies. Such companies generally will have market
capitalizations in excess of $750 million. Although the Fund primarily invests
in the common, preferred and convertible stocks of U.S. companies, it may invest
a portion of its assets in the securities of foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team selects stocks believed to have favorable growth characteristics. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
- Sales and earnings growth
- Return on equity
- Financial condition
- Market share and product leadership
The Fund may from time to time, emphasize particular companies or market
segments in attempting to achieve its investment objective. Many of the
companies in which the Fund invests retain their earnings to finance current and
future growth. These companies generally pay little or no dividends.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 27
<PAGE> 29
MID CAP GROWTH FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRIMARY INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will invest, under normal
market conditions, at least 65% of its total assets in the equity securities of
companies with market capitalizations that are within the range of the Standard
& Poor's MidCap 400 Stock Index.
These will be selected on the basis of such factors as:
- Market capitalization
- Liquidity
- Industry sectors
As of June 1, 1999, the approximate market capitalization range of the companies
included in the S&P MidCap 400 Index was between $_________ million and
$____________ billion. The stocks in which the Fund invests may or may not be
included in the S&P MidCap 400 Index.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of mid sized companies that it believes have demonstrated
above average sales and earnings growth and return on equity relative to their
peers. In doing so, the investment management team considers factors such as a
company's:
- Financial condition
- Market share and product leadership
- Earnings growth relative to relevant competitors
- Market valuation in comparison to other stocks and the stock's own
historical norms
- Price trends
- Other investment criteria
S&P does not endorse any stock in the Index. It is not a sponsor of the Mid Cap
Growth Fund and is not affiliated with the Fund in any way.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest a portion of its assets in the securities of foreign issuers.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 28
<PAGE> 30
RISK/RETURN SUMMARY
SMALL CAP INDEX FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide investment results approximating the aggregate price
and dividend performance of the securities included in the Russell 2000 Small
Stock Index ("Russell 2000 Index").
The Russell 2000 Index is a market value-weighted index which includes stocks of
the smallest 2,000 companies in the Russell 3000 Index. The Russell 3000 Index
includes stocks of the 3,000 largest companies based in the U.S. The Russell
2000 Index is widely considered representative of smaller company stock
performance as a whole. The companies in the Russell 2000 Index are selected
according to their total market capitalization. However, companies are not
selected by Frank Russell & Company ("Russell") for inclusion in the Index
because they are expected to have superior stock price performance relative to
the stock market in general or other stocks in particular.
Russell does not endorse any stock in the Index. It is not a sponsor of the
Small Cap Index Fund and is not affiliated with the Fund in any way.
PRIMARY INVESTMENT STRATEGIES
Under normal market conditions, the Fund will invest at least 65% of its total
assets in the securities included in the Russell 2000 Index. These will be
selected on the basis of such factors as:
- Market capitalization
- Liquidity
- Industry sectors
Although the Fund attempts to mirror the aggregate investment characteristics of
the Russell 2000 Index as a whole, the number of issues held by the Fund will be
determined by the Fund's liquidity and size.
The Fund is passively managed, which means it tries to duplicate the investment
composition and performance of the Russell 2000 Index by using sophisticated
computer programs and statistical procedures. As a result, the investment
management team does not use traditional methods of fund investment management
for the Fund, such as selecting securities on the basis of economic, financial
and market analysis. Because the Fund will have fees and transaction expenses
(while the Index has none), returns are likely to be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Fund will be within a .95 correlation with the Russell 2000 Index, before
expenses.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 29
<PAGE> 31
SMALL CAP FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will invest, under normal
market conditions, at least 65% of its total assets in the equity securities of
small companies. At the time of purchase, these companies will have market
capitalizations that are below the median capitalization of stocks listed on the
New York Stock Exchange.
Using fundamental research and quantitative analysis, the investment management
team selects small capitalization stocks of companies which it believes are
worth more than is indicated by current market prices. In determining whether a
stock is attractively priced, the investment management team analyzes factors
such as:
- The relationship between price and book value
- Trading volume
- Bid-ask spreads
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest a portion of its assets in the securities of foreign issuers.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 30
<PAGE> 32
RISK/RETURN SUMMARY
INTERNATIONAL GROWTH EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will invest, under normal
market conditions, at least 65% of its total assets in the equity securities of
a broad mix of foreign companies. Such companies generally will have market
capitalizations in excess of $750 million.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of foreign companies believed to have favorable growth
characteristics, low debt ratios and above-average returns and equity. In doing
so, the investment management team analyzes factors such as:
- Sales and earnings growth
- Return and equity
- Financial condition
- Market share and product leadership
The Fund will invest in equity securities of issuers located in at least three
different foreign countries. The Fund may invest in mature markets (such as
Germany and Japan) and it may also invest in emerging markets (such as Argentina
and China). In determining whether to invest in a particular country or region,
the investment management team looks at a number of factors, including a
country's (or region's):
- Prospects for growth
- Expected level of inflation
- Government policies influencing business conditions
- Outlook for currency relationships
- Range of investment opportunities available to international
investors
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 31
<PAGE> 33
INTERNATIONAL SELECT EQUITY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will, under normal market
conditions, invest at least 65% of its total assets in the equity securities of
a select mix of foreign companies. Such companies generally will have market
capitalizations in excess of $750 million.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of foreign companies believed to have favorable growth
characteristics. In doing so, the investment management team analyzes factors
such as:
- Sales and earnings growth
- Return on equity
- Financial condition
- Market share and product leadership
The Fund will invest in equity securities of issuers located in at least three
different foreign countries. The Fund may invest in mature markets (such as
Germany and Japan) and it may also invest in emerging markets (such as Argentina
and China). In determining whether to invest in a particular country or region,
the investment management team looks at a number of factors, including a
country's (or region's):
- Prospects for economic growth
- Expected level of inflation
- Government policies influencing business conditions
- Outlook for currency relationships
- Range of investment opportunities available to international
investors
The Fund may, from time to time, emphasize particular companies or market
segments in attempting to achieve its investment objective. Many of the
companies in which the Fund invests retain their earnings to finance current and
future growth. These companies pay little or no dividends.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 32
<PAGE> 34
RISK/RETURN SUMMARY
TECHNOLOGY FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation by investing
principally in equity securities and securities of companies that develop,
produce or distribute products and services related to advances in technology.
PRINCIPAL INVESTMENT STRATEGIES
In seeking to achieve its investment objective, the Fund will invest, under
normal market conditions, at least 65% of its total assets in securities of
companies principally engaged in technology business activities. Northern Trust
will consider an issuer principally engaged in technology business activities if
it is listed on the Morgan Stanley High-Technology 35 Index (the "Morgan Stanley
Index"), the Hambrecht and Quist Technology Index (the "H&Q Index"), the
SoundView Technology Index (the "SoundView Index"), the technology grouping of
the S&P 500 Index or any other comparable technology index.
Using fundamental research and quantitative analysis, the investment management
team selects stocks of technology companies believed to have the potential to
outperform the market over the next one- to two-year period. In doing so, the
investment management team selects investments based on factors such as:
- Financial condition
- Market share
- Product leadership or market niches
- Earnings growth rates compared with relevant competitors
- Market valuation compared to their stocks and the stock's own
historical norms
- Price trends
- 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 equipment and services; and satellite technology and
equipment. It is expected that more than 25% of the Fund's total assets will
normally be invested in technology companies which develop or sell computers,
software and peripheral products. The Fund may invest in both small and large
technology companies, without regard to their size.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest a portion of its assets in the securities of foreign issuers.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
Page 33
<PAGE> 35
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Fund's investments, its investment performance and the price of its shares. As a
result, loss of money is a risk of investing in each Fund.
AN INVESTMENT IN A FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH THE MONEY MARKET FUNDS SEEK TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
FUNDS.
The following summarizes the principal risks that apply to the Funds and may
result in a loss of your investment.
RISKS THAT APPLY TO ALL FUNDS:
- - MARKET RISK is the risk that the value of the securities in which a Fund
invests may go up or down in response to the prospects of individual
companies and/or general economic conditions. Price changes may be
temporary or last for extended periods.
- - MANAGEMENT RISK is the risk that a strategy used by the investment
management team may fail to produce the intended results.
- - LIQUIDITY RISK is the risk that a Fund will not be able to pay redemption
proceeds within the time periods described in this prospectus because of
unusual market conditions, an unusually high volume of redemption requests
or other reasons.
- - YEAR 2000 RISK is the risk that a Fund's operations or value will be
adversely affected by the "Year 2000 Problem." This risk may be of greater
significance with respect to a Fund's investments in the securities of
foreign issuers. (For more information, please see "Year 2000 Issues" on
page 51.)
RISKS THAT APPLY TO ALL MONEY MARKET FUNDS:
- - MONEY MARKET RISK is the risk that a Fund will not be able to maintain a
net asset value per share of $1.00 at all times.
RISKS THAT APPLY PRIMARILY TO THE MONEY MARKET AND FIXED INCOME FUNDS:
- - INTEREST RATE/MATURITY RISK is the risk that during periods of rising
interest rates, a Fund's yield (and the market value of its securities)
will be lower than prevailing market rates; in periods of falling interest
rates, a Fund's yield (and the market value of its securities) will tend
to be higher. The magnitude of these changes will often be greater for
longer-term fixed income securities than shorter-term securities.
- - CREDIT (OR DEFAULT) RISK is the risk that an issuer of fixed income
securities held by a Fund may default on its obligation to pay interest
and repay principal. Generally, the lower the credit rating of a security,
the greater the risk that the issuer of the security will default on its
obligation. High quality and investment grade securities are generally
believed to have relatively low degrees of credit risk.
- - PREPAYMENT (OR CALL) RISK is the risk that an issuer will exercise its
right to pay principal on an obligation held by a Fund (such as a
mortgage-backed security) earlier than expected. This may happen during a
period of declining interest rates. Under these circumstances, a Fund may
be unable to recoup all of its initial investment and will suffer from
having to reinvest in lower yielding securities. The loss of higher
yielding securities and the reinvestment at lower interest rates can
reduce the Fund's income, total return and share price.
- - EXTENSION RISK is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Fund (such as a mortgage-backed
security) later than expected. This may happen during a period of rising
interest rates.
Page 34
<PAGE> 36
RISK/RETURN SUMMARY
Under these circumstances, the value of the obligation will decrease and
the Fund will suffer from the inability to invest in higher yielding
securities.
- - U.S. GOVERNMENT SECURITIES RISK is the risk that the U.S. government will
not provide financial support to U.S. government agencies,
instrumentalities or sponsored enterprises if it is not obligated to do so
by law.
- - COUNTERPARTY RISK is the risk that an issuer of a security, or a bank or
other financial institution that has entered into a repurchase agreement,
may default on its payment obligations.
- - CREDIT ENHANCEMENT RISK is the risk that changes in credit quality of a
bank or other financial institution could cause a Fund's investments in
securities backed by letters of credit or other credit enhancements issued
by such bank or institution to decline in value.
RISK THAT APPLIES PRIMARILY TO ALL FIXED INCOME FUNDS:
- - DERIVATIVES RISK is the risk that loss may result from a Fund's
investments in options, futures, swaps, structured securities and other
derivative instruments, which may be leveraged.
RISKS THAT APPLY PRIMARILY TO THE TAX-EXEMPT FUNDS AND MUNICIPAL FUNDS:
- - CONCENTRATION RISK is the risk that the Fund may be more sensitive to an
adverse economic, business or political development if it invests more
than 25% of its assets in the municipal instruments of issuers in the same
state, in municipal instruments the interest upon which is paid solely
from revenues of similar projects, or in industrial development bonds.
- - TAX RISK is the risk that future legislative or administrative changes or
court decisions may materially affect the ability of the Fund to pay
tax-exempt dividends.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL FIXED INCOME FUND, THE
CALIFORNIA FUNDS, THE FLORIDA INTERMEDIATE TAX-EXEMPT FUND AND THE ARIZONA
TAX-EXEMPT FUND
- - NON-DIVERSIFICATION RISK is the risk that a non-diversified Fund may be
more susceptible to adverse developments affecting any single issuer, and
more susceptible to greater losses because of these developments.
RISK THAT APPLIES PRIMARILY TO THE HIGH YIELD MUNICIPAL AND HIGH YIELD FIXED
INCOME FUNDS:
- - NON-INVESTMENT GRADE (OR "JUNK BOND") RISK may impact the value of
non-investment grade securities held by a Fund. Generally, these
securities, commonly known as "junk bonds," are subject to greater credit
risk, price volatility and risk of loss than investment grade securities.
In addition, there may be less of a market for them, which could make it
harder to sell them at an acceptable price. These and related risks mean
that a Fund may not achieve the expected income from non-investment grade
securities and that its share price may be adversely affected by declines
in the value of these securities.
RISK THAT APPLIES PRIMARILY TO THE EQUITY FUNDS:
- - STOCK RISK is the risk that stock prices have historically risen and
fallen in periodic cycles. As of the date of this Prospectus, U.S. stock
markets and certain foreign stock markets were trading at or close to
record high levels. There is no guarantee that such levels will continue.
RISK THAT APPLIES PRIMARILY TO THE SMALL CAP INDEX, SMALL CAP AND TECHNOLOGY
FUNDS:
- - SMALL CAP STOCK RISK is the risk that stocks of smaller companies may be
subject to more abrupt or erratic market movements than stocks of larger,
more established companies. Small companies may have limited product lines
or financial resources, or may be dependent upon a small or inexperienced
management group. In
Page 35
<PAGE> 37
addition, small cap stocks typically are traded in lower volume, and their
issuers typically are subject to greater degrees of changes in their
earnings and prospects.
RISK THAT APPLIES PRIMARILY TO THE MID CAP GROWTH FUND:
- - MID CAP STOCK RISK is the risk that stocks of mid-sized companies may be
subject to more abrupt or erratic market movements than stocks of larger,
more established companies. Mid-sized companies may have limited product
lines or financial resources, [AND MAY BE DEPENDENT UPON A PARTICULAR
NICHE OF THE MARKET.]
RISK THAT APPLIES PRIMARILY TO THE TECHNOLOGY FUND
- - TECHNOLOGY STOCK RISK is the risk that stocks of technology companies may
be subject to greater price volatility than stocks of companies in other
sectors. Technology companies may produce or use products or services that
prove commercially unsuccessful, may become obsolete or become adversely
impacted by government regulation. Technology securities may experience
significant price movements caused by the disproportionate optimism or
pessimism of investors.
RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL FUNDS:
While foreign securities may offer special investment opportunities, they also
involve special risks not typically associated with investments in U.S.
companies or issuers. These risks normally will be greatest when a Fund invests
in emerging markets. These risks include:
- - CURRENCY RISK is the potential for price fluctuations in the dollar value
of foreign securities because of changing currency exchange rates.
- - COUNTRY RISK is the potential for price fluctuations in foreign securities
because of political, financial and economic events in foreign countries.
- - REGULATORY RISK is the risk that a foreign security could lose value
because of less stringent foreign securities regulations and accounting
and disclosure standards.
- - CONCENTRATION RISK is the risk that investment of more than 25% of a
Fund's total assets in securities of issuers located in one country will
subject the Fund to increased country risk with respect to the particular
country.
More information about the risks of investing in the Funds is provided in
Appendix A to this Prospectus. You should carefully consider the risks discussed
in this section and Appendix A before investing in a Fund.
Page 36
<PAGE> 38
RISK/RETURN SUMMARY
FUND PERFORMANCE
The bar charts and tables below provide an indication of the risks of investing
in a Fund by showing: (a) changes in the performance of a Fund from year to
year; and (b) how the average annual returns of a Fund compare to those of a
broad-based securities market index.
The bar charts and tables assume reinvestment of dividends and distributions. A
Fund's past performance is not necessarily an indication of how the Fund will
perform in the future. Performance reflects expense limitations that were in
effect during the periods presented. If expense limitations were not in place, a
Fund's performance would have been reduced. The Mid Cap Growth, High Yield
Municipal and High Yield Fixed Income Funds commenced operations on March 31,
1998, December 31, 1998 and December 31, 1998. The Short-Intermediate U.S.
Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and Small Cap
Index Funds had not commenced operations as of the date of this Prospectus.
Since these Funds have less than one calendar year of performance, no
performance information is provided in this section.
Page 37
<PAGE> 39
MONEY MARKET FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
--------------------------
<S> <C> <C>
1995: 5.71%
1996: 5.08%
1997: 5.25%
1998: 5.19%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 1.14%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 1.44%
Worst Quarter Return: Q2 '96 1.22%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
MONEY MARKET FUND (Inception 4/11/94) 5.19% 5.15%
</TABLE>
- -------------------------------------------------------------------------------
THE 7-DAY YIELD FOR THE FUND AS OF DECEMBER 31, 1998: 4.81%. YOU MAY CALL
1-800-595-9111 TO OBTAIN THE CURRENT 7-DAY YIELD.
Page 38
<PAGE> 40
RISK/RETURN SUMMARY
U.S. GOVERNMENT MONEY MARKET FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
--------------------------
<S> <C> <C>
1995: 5.62%
1996: 4.96%
1997: 5.14%
1998: 5.11%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 1.11%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 1.42%
Worst Quarter Return: Q4 '98 1.18%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
U.S. GOVERNMENT MONEY
MARKET FUND (Inception 4/11/94) 5.11% 5.05%
</TABLE>
- -------------------------------------------------------------------------------
THE 7-DAY YIELD FOR THE FUND AS OF DECEMBER 31, 1998: 4.56%. YOU MAY CALL
1-800-595-9111 TO OBTAIN THE CURRENT 7-DAY YIELD.
Page 39
<PAGE> 41
U.S. GOVERNMENT SELECT MONEY MARKET FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 5.75%
1996: 5.09%
1997: 5.21%
1998: 5.03%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 1.10%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 1.45%
Worst Quarter Return: Q4 '98 1.17%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
U.S. GOVERNMENT SELECT MONEY MARKET FUND
(Inception 12/12/94) 5.03% 5.27%
</TABLE>
THE 7-DAY YIELD FOR THE FUND AS OF DECEMBER 31, 1998: 4.50%. YOU MAY CALL
1-800-595-9111 TO OBTAIN THE CURRENT 7-DAY YIELD.
Page 40
<PAGE> 42
RISK/RETURN SUMMARY
MUNICIPAL MONEY MARKET FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 3.64%
1996: 3.18%
1997: 3.27%
1998: 3.09%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.62%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 0.95%
Worst Quarter Return: Q1 '98 0.73%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
MUNICIPAL MONEY MARKET FUND (Inception 4/11/94) 3.09% 3.21%
</TABLE>
THE 7-DAY YIELD FOR THE FUND AS OF DECEMBER 31, 1998: 3.21%. YOU MAY CALL
1-800-595-9111 TO OBTAIN THE CURRENT 7-DAY YIELD.
Page 41
<PAGE> 43
CALIFORNIA MUNICIPAL MONEY MARKET FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 3.77%
1996: 3.20%
1997: 3.28%
1998: 2.85%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.57%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 0.98%
Worst Quarter Return: Q3 '98 0.68%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
1-Year Since Inception
------ ---------------
<S> <C> <C>
CALIFORNIA MUNICIPAL MONEY MARKET FUND
(Inception 11/29/94) 2.85% 3.29%
</TABLE>
THE 7-DAY YIELD FOR THE FUND AS OF DECEMBER 31, 1998: 2.98%. YOU MAY CALL
1-800-595-9111 TO OBTAIN THE CURRENT 7-DAY YIELD.
Page 42
<PAGE> 44
RISK/RETURN SUMMARY
U.S. GOVERNMENT FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 12.59%
1996: 3.05%
1997: 7.24%
1998: 7.53%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: (0.07)%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q3 '98 4.46%
Worst Quarter Return: Q1 '96 (1.07)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
U.S. GOVERNMENT FUND (Inception 4/1/94) 7.53% 6.32%
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX* 8.49% 7.22%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
including all public obligations of the U.S. Treasury and all publicly issued
debt of U.S. Government agencies with maturities of up to 10 years. The Index
figures do not reflect any fees or expenses.
Page 43
<PAGE> 45
INTERMEDIATE TAX-EXEMPT FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 11.91%
1996: 3.36%
1997: 5.84%
1998: 5.15%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.55%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q1 '95 4.51%
Worst Quarter Return: Q1 '96 (0.25)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERMEDIATE TAX EXEMPT FUND (Inception 4/1/94) 5.15% 5.43%
LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX* 5.84% 6.20%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers 5-Year Municipal Bond Index is an unmanaged index of
investment grade (Baa or better) tax-exempt bonds with maturities of 4 to 6
years. The Index figures do not reflect any fees or expenses.
Page 44
<PAGE> 46
RISK/RETURN SUMMARY
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1997: 7.64%
1998: 5.68%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.40%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q3 '98 3.22%
Worst Quarter Return: Q1 '97 (0.12)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
(Inception 8/15/96) 5.68% 6.78%
LEHMAN BROTHERS MUTUAL FUND FLORIDA
INTERMEDIATE TAX-EXEMPT INDEX* 6.44% 6.67%
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE
MUNICIPAL INDEX** 6.30% 6.97%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers Mutual Fund Florida Intermediate Tax-Exempt Index is an
unmanaged index of investment grade (Baa or better) tax-exempt Florida bonds
with a remaining maturity of at least one year. The Index figures do not
reflect any fees or expenses.
** The Lehman Brothers Mutual Fund Intermediate Municipal Index is an unmanaged
index of investment grade (Baa or better) tax-exempt bonds with maturities of
five to ten years. The Index figures do not reflect any fees or expenses.
Page 45
<PAGE> 47
FIXED INCOME FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 18.80%
1996: 2.61%
1997: 9.24%
1998: 8.00%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: (1.22)%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q2 '95 6.62%
Worst Quarter Return: Q1 '96 (2.85)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
FIXED INCOME FUND (Inception 4/1/94) 8.00% 8.02%
LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX* 9.47% 8.42%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers Government/Corporate Bond Index is an unmanaged index of
prices of U.S. government and corporate bonds with not less than one year to
maturity. The Index figures do not reflect any fees or expenses.
Page 46
<PAGE> 48
RISK/RETURN SUMMARY
TAX-EXEMPT FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 17.37%
1996: 2.83%
1997: 8.71%
1998: 5.84%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.49%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q1 '95 6.59%
Worst Quarter Return: Q1 '96 (2.11)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
TAX EXEMPT FUND (Inception 4/1/94) 5.84% 6.98%
LEHMAN BROTHERS MUNICIPAL BOND INDEX* 6.48% 7.84%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers Municipal Bond Index is an unmanaged index of investment
grade (Baa or better) tax-exempt bonds with a remaining maturity of at least
one year. The Index figures do not reflect any fees or expenses.
Page 47
<PAGE> 49
CALIFORNIA TAX-EXEMPT FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1998: 6.42%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 0.70%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q3 '98 4.40%
Worst Quarter Return: Q4 '98 (0.16)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
CALIFORNIA TAX EXEMPT FUND (Inception
4/8/97) 6.42% 10.00%
LEHMAN BROTHERS CALIFORNIA EXEMPT
MUNICIPAL INDEX* 6.93% 9.83%
LEHMAN BROTHERS MUTUAL FUND
INTERMEDIATE MUNICIPAL INDEX** 6.30% 8.27%
</TABLE>
- -------------------------------------------------------------------------------
* The Lehman Brothers California Exempt Municipal Index is an unmanaged index
of investment grade (Baa or better) tax-exempt California bonds with a
remaining maturity of at least one year. The Index figures do not reflect any
fees or expenses.
** The Lehman Brothers Mutual Fund Intermediate Municipal Index is an unmanaged
index of investment grade (Baa or better) tax-exempt bonds with maturities of
five to ten years. The Index figures do not reflect any fees or expenses.
Page 48
<PAGE> 50
RISK/RETURN SUMMARY
INTERNATIONAL FIXED INCOME FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 19.70%
1996: 5.53%
1997: (2.51)%
1998: 17.09%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: (5.18)%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q1 '95 11.04%
Worst Quarter Return: Q1 '97 (5.67)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL FIXED INCOME FUND (Inception 4/1/94) 17.09% 8.35%
J.P. MORGAN INTERNATIONAL GOVERNMENT BOND INDEX* 18.31% 8.98%
</TABLE>
- -------------------------------------------------------------------------------
* The J.P. Morgan International Government Bond Index is an unmanaged index of
non-U.S. government bonds with maturities of one to thirty years. The Index
figures do not reflect any fees or expenses.
Page 49
<PAGE> 51
INCOME EQUITY FUND
[Bar Chart]
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1995: 18.92%
1996: 19.99%
1997: 20.84%
1998: 9.17%
</TABLE>
Year to date total return for the calendar quarter ended
March 31, 1999: 1.16%
BEST AND WORST QUARTERLY PERFORMANCE:
Best Quarter Return: Q4 '98 10.98%
Worst Quarter Return: Q3 '98 (9.30)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INCOME EQUITY FUND (Inception 4/1/94) 9.17% 13.62%
MERRILL LYNCH INVESTMENT GRADE CONVERTIBLE BOND INDEX* 11.36% 14.02%
</TABLE>
- -------------------------------------------------------------------------------
* The Merrill Lynch Investment Grade Convertible Bond Index is an unmanaged
index consisting of investment grade (BBB or better) convertible bonds and
preferred stocks. The Index figures do not reflect any fees or expenses.
Page 50
<PAGE> 52
RISK/RETURN SUMMARY
STOCK INDEX FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
1997: 32.71%
1998: 27.88%
Year to date total return for the calendar quarter ended March 31, 1999: 4.77%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 21.18%
Worst Quarter Return: Q3 '98 (10.05)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
---------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
STOCK INDEX FUND (Inception 10/7/96) 27.88% 29.73%
S&P 500 INDEX* 28.61% 30.61%
- --------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Index is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized, unmanaged index of common stock prices. The Index figures do
not reflect any fees or expenses.
Page 51
<PAGE> 53
GROWTH EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
<TABLE>
<S> <C>
1995: 26.15%
1996: 17.82%
1997: 30.13%
1998: 33.14%
</TABLE>
Year to date total return for the calendar quarter ended March 31, 1999: 5.47%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 24.82%
Worst Quarter Return: Q3 '98 (11.30)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
---------------------------
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
GROWTH EQUITY FUND (Inception 4/1/94) 33.14% 22.44%
S&P 500 INDEX* 28.61% 26.49%
- --------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Index is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized, unmanaged index of common stock prices. The Index figures do
not reflect any fees or expenses.
Page 52
<PAGE> 54
RISK/RETURN SUMMARY
SELECT EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
<TABLE>
<S> <C>
1995: 28.88%
1996: 21.53%
1997: 31.78%
1998: 35.13%
</TABLE>
Year to date total return for the calendar quarter ended March 31, 1999: 7.53%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 27.46%
Worst Quarter Return: Q3 '98 (10.70)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
SELECT EQUITY FUND (Inception 4/6/94) 35.13% 24.43%
S&P 500 INDEX* 28.61% 26.42%
- --------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Index is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized, unmanaged index of common stock prices. The Index figures do
not reflect any fees or expenses.
Page 53
<PAGE> 55
SMALL CAP FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
<TABLE>
<S> <C>
1995: 22.54%
1996: 18.95%
1997: 29.77%
1998: (5.94)%
</TABLE>
Year to date total return for the calendar quarter ended March 31, 1999:(10.64)%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q3 '97 16.95%
Worst Quarter Return: Q3 '98 (20.46)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
SMALL CAP FUND (4/1/94) (5.94)% 12.02%
RUSSELL 2000 INDEX* (2.44)% 13.05%
- --------------------------------------------------------------------------------
</TABLE>
* The Russell 2000 Index is an unmanaged index which tracks the performance of
the 2,000 smallest of the 3,000 largest U.S. companies, based on market
capitalization. The Index figures do not reflect any fees or expenses.
Page 54
<PAGE> 56
RISK/RETURN SUMMARY
INTERNATIONAL GROWTH EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
<TABLE>
<S> <C>
1995: 2.04%
1996: 5.02%
1997: 6.26%
1998: 23.98%
</TABLE>
Year to date total return for the calendar quarter ended March 31, 1999: 3.86%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 18.84%
Worst Quarter Return: Q3 '98 (13.72)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL GROWTH EQUITY FUND (Inception 4/1/94) 23.98% 7.86%
MSCI EAFE INDEX* 19.97% 8.89%
- --------------------------------------------------------------------------------
</TABLE>
* The MSCI EAFE Index is the Morgan Stanley Capital International Europe,
Australia and Far East Index, an unmanaged index which tracks the performance of
selected equity securities in Europe, Australia, Asia and the Far East. The
Index figures do not reflect any fees or expenses.
Page 55
<PAGE> 57
INTERNATIONAL SELECT EQUITY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
<TABLE>
<S> <C>
1995: -0.79%
1996: 2.89%
1997: 9.08%
1998: 22.36%
</TABLE>
Year to date total return for the calendar quarter ended March 31, 1999: 2.62%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 16.27%
Worst Quarter Return: Q3 '98 (11.80)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
INTERNATIONAL SELECT EQUITY FUND (Inception 4/5/94) 22.36% 7.26%
MSCI EAFE INDEX BLENDED WITH EMERGING MARKETS FREE INDEX* 15.24% 7.62%
- --------------------------------------------------------------------------------------
</TABLE>
*The MSCI EAFE Index Blended with Emerging Markets Free Index is an unmanaged
index comprised of companies representative of developed European and Pacific
Basin countries as well as emerging market countries. The Index figures do not
reflect any fees or expenses.
Page 56
<PAGE> 58
RISK/RETURN SUMMARY
TECHNOLOGY FUND
[Bar Chart]
CALENDAR YEAR TOTAL RETURN
--------------------------
1997: 16.76%
1998: 83.01%
Year to date total return for the calendar quarter ended March 31, 1999: 17.22%
BEST AND WORST QUARTERLY PERFORMANCE:
<TABLE>
<S> <C> <C>
Best Quarter Return: Q4 '98 50.19%
Worst Quarter Return: Q4 '97 (13.23)%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year Inception
------ ---------
<S> <C> <C>
TECHNOLOGY FUND (Inception 4/1/96) 83.01% 45.93%
MORGAN STANLEY HIGH-TECHNOLOGY 35 INDEX* 95.70% 44.94%
S&P 500(R) INDEX** 28.61% 28.66%
- --------------------------------------------------------------------------------
</TABLE>
* The Morgan Stanley High-Technology 35 Index is an unmanaged index which
tracks the performance of stocks within the technology sector. The Index
figures do not reflect any fees or expenses.
** The S&P 500(R) Index is the Standard & Poor's Composite Index of 500
stocks, a widely recognized, unmanaged index of common stock prices. The
Index figures do not reflect any fees or expenses.
Page 57
<PAGE> 59
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds. Please note that the following information does not reflect
any charges which may be imposed by The Northern Trust Company, its affiliates,
correspondent banks and other institutions on their customers. For more
information, please see "Account Policies and Other Information" on page 71.
@@
<TABLE>
<CAPTION>
U.S. Gov't U.S. Gov't Municipal California
Money Money Select Money Municipal
Market Market Money Market Market Money Market
------ ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases.................. None None None None None
Deferred Sales Charge (Load).............................. None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions......................................... None None None None None
Redemption Fees(1)........................................ None None None None None
Exchange Fees............................................. None None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees........................................... 0.60% 0.60% 0.60% 0.60% 0.60%
Distribution (12b-1) Fees(2).............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(3)......................................... 0.29% 0.31% 0.31% 0.29% 0.31%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses*..................... 0.89% 0.91% 0.91% 0.89% 0.91%
===== ===== ===== ===== =====
</TABLE>
*As a result of current voluntary fee reductions, waivers and reimbursements,
"Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which
are actually incurred by the Funds are set forth below. The voluntary fee
reductions, waivers and reimbursements may be terminated at any time at the
option of the Investment Adviser. If this occurs, "Management Fees," "Other
Expenses" and "Total Fund Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
U.S. Gov't U.S. Gov't Municipal California
Money Money Select Money Municipal
Market Market Money Market Market Money Market
------ ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
From Fund assets)
Management Fees........................................... 0.40% 0.40% 0.40% 0.40% 0.40%
Distribution (12b-1) Fees(2).............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(3)......................................... 0.15% 0.15% 0.15% 0.15% 0.15%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses...................... 0.55% 0.55% 0.55% 0.55% 0.55%
===== ===== ===== ===== =====
</TABLE>
- ---------------------------------
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) During the last fiscal year the Funds did not pay any 12b-1 fees. The
Funds do not expect to pay any 12b-1 fees during the current fiscal
year. The maximum distribution fee is 0.25% of each Fund's average net
assets under Northern Funds' Distribution and Service Plan.
(3) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses. The administrator is
entitled to an administration fee of 0.15%, a portion of which is
currently being waived voluntarily.
Page 58
<PAGE> 60
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
California
Short- Intermediate Florida
Intermediate Intermediate Tax- Intermediate
U.S. Gov't U.S. Gov't(1) Tax Exempt Exempt(1) Tax-Exempt
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None
Deferred Sales Charge (Load)............................. None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions........................................ None None None None None
Redemption Fees(2)....................................... None None None None None
Exchange Fees............................................ None None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 0.75% 0.75% 0.75% 0.75% 0.75%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.32% 0.42% 0.31% 0.37% 0.54%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses*.................... 1.07% 1.17% 1.06% 1.12% 1.29%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Arizona Tax- California International
Fixed Income Tax-Exempt Exempt(1) Tax-Exempt Fixed Income
------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None
Deferred Sales Charge (Load)............................. None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions........................................ None None None None None
Redemption Fees(2)....................................... None None None None None
Exchange Fees............................................ None None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 0.75% 0.75% 0.75% 0.75% 0.90%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.33% 0.33% 0.85% 0.42% 1.06%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses*.................... 1.08% 1.08% 1.60% 1.17% 1.96%
===== ===== ===== ===== =====
</TABLE>
*As a result of current voluntary fee reductions, waivers and reimbursements,
"Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which
are actually incurred by the Funds are set forth below. The voluntary fee
reductions, waivers and reimbursements may be terminated at any time at the
option of the Investment Adviser. If this occurs, "Management Fees," "Other
Expenses" and "Total Fund Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
California
Short- Intermediate Florida
Intermediate Intermediate Tax- Intermediate
U.S. Gov't U.S. Gov't(1) Tax Exempt Exempt(1) Tax-Exempt
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees........................................... 0.75% 0.75% 0.70% 0.70% 0.70%
Distribution (12b-1) Fees(3).............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)......................................... 0.15% 0.15% 0.15% 0.15% 0.15%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses...................... 0.90% 0.90% 0.85% 0.85% 0.85%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Arizona Tax- California International
Fixed Income Tax-Exempt Exempt(1) Tax-Exempt Fixed Income
------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees........................................... 0.75% 0.70% 0.70% 0.70% 0.90%
Distribution (12b-1) Fees(3).............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)......................................... 0.15% 0.15% 0.15% 0.15% 0.25%
----- ----- ----- ----- -----
Total Annual Fund Operating Expenses...................... 0.90% 0.85% 0.85% 0.85% 1.15%
===== ===== ===== ===== =====
</TABLE>
- ---------------------------------
(1) Since the Short-Intermediate U.S. Government, California Intermediate
Tax-Exempt and Arizona Tax-Exempt Funds had not commenced operations as
of the date of this prospectus, "Other Expenses" is based on estimated
amounts the Funds expect to pay during the current fiscal year.
(2) A fee of $15.00 may be applicable for each wire redemption.
(3) During the last fiscal year the Funds did not pay any 12b-1 fees. The
Funds do not expect to pay any 12b-1 fees during the current year. The
maximum distribution fee is 0.25% of each Fund's average net assets
under Northern Funds' Distribution and Service Plan.
(4) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses. The administrator is
entitled to an administration fee of 0.15%, a portion of which is
currently being waived voluntarily.
Page 59
<PAGE> 61
<TABLE>
<CAPTION>
High
High Yield
Yield Fixed Income Stock Growth Select Mid Cap Small Cap
Municipal Income Equity Index Equity Equity Growth Index(1)
--------- ------ ------ ----- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None None None
Deferred Sales Charge (Load)............................. None None None None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions........................................ None None None None None None None None
Redemption Fees(2)....................................... None None None None None None None None
Exchange Fees............................................ None None None None None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 0.75% 0.75% 1.00% 0.60% 1.00% 1.20% 1.00% 0.65%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.97% 0.45% 0.35% 0.40% 0.30% 0.34% 0.65% 0.36%
----- ----- ----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses*.................... 1.72% 1.20% 1.35% 1.00% 1.30% 1.54% 1.65% 1.01%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
International
Growth International
Small Cap Equity Select Equity Technology
--------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None
Deferred Sales Charge (Load)............................. None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions........................................ None None None None
Redemption Fees(2)....................................... None None None None
Exchange Fees............................................ None None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 1.20% 1.20% 1.20% 1.20%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.32% 0.42% 0.46% 0.33%
----- ----- ----- -----
Total Annual Fund Operating Expenses*.................... 1.52% 1.62% 1.66% 1.53%
===== ===== ===== =====
</TABLE>
*As a result of current voluntary fee reductions, waivers and reimbursements,
"Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which
are actually incurred by the Funds are set forth below. The voluntary fee
reductions, waivers and reimbursements may be terminated at any time at the
option of the Investment Adviser. If this occurs, "Management Fees," "Other
Expenses" and "Total Fund Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
High
High Yield
Yield Fixed Income Stock Growth Select Mid Cap Small Cap
Municipal Income Equity Index Equity Equity Growth Index(1)
--------- ------ ------ ----- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 0.70% 0.75% 0.85% 0.40% 0.85% 0.85% 0.85% 0.50%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
----- ----- ----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses..................... 0.85% 0.90% 1.00% 0.55% 1.00% 1.00% 1.00% 0.65%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
International
Growth International
Small Cap Equity Select Equity Technology
--------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees.......................................... 0.85% 1.00% 1.00% 1.00%
Distribution (12b-1) Fees(3)............................. 0.00% 0.00% 0.00% 0.00%
Other Expenses(4)........................................ 0.15% 0.25% 0.25% 0.23%
----- ----- ----- -----
Total Annual Fund Operating Expenses..................... 1.00% 1.25% 1.25% 1.23%
===== ===== ===== =====
</TABLE>
- ---------------------------------
(1) Since the Small Cap Index Fund had not commenced operations as of the
date of this prospectus, "Other Expenses" is based on estimated amounts
the Fund expects to pay during the current fiscal year.
(2) A fee of $15.00 may be applicable for each wire redemption.
(3) During the last fiscal year the Funds did not pay any 12b-1 fees. The
Funds do not expect to pay any 12b-1 fees during the current fiscal
year. The maximum distribution fee is 0.25% of each Fund's average net
assets under Northern Funds' Distribution and Service Plan.
(4) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses. The administrator is
entitled to an administration fee of 0.15%, a portion of which is
currently being waived voluntarily. The High Yield Municipal and High
Yield Fixed Income Funds commenced operations on December 31, 1998. As
a result, "Other Expenses" for those Funds are based on estimates for
the current fiscal year.
Page 60
<PAGE> 62
RISK/RETURN SUMMARY
EXAMPLE
The following Example is intended to help you compare the cost of investing in a
Fund (without fee waivers and expense reimbursements) with the cost of investing
in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated (with reinvestment of all dividends and distributions) and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that a Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
One Year 3 Years 5 Years 10 Years
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Money Market $ 91 $285 $495 $1,100
U.S. Government Money Market 93 291 506 1,123
U.S. Government Select Money Market 93 291 506 1,123
Municipal Money Market 91 285 495 1,100
California Municipal Money Market 93 291 506 1,123
U.S. Government 110 342 593 1,311
Short-Intermediate U.S. Government 120 374 N/A N/A
Intermediate Tax-Exempt 109 339 587 1,299
California Intermediate Tax-Exempt 115 358 N/A N/A
Florida Intermediate Tax-Exempt 132 411 712 1,564
Fixed Income 111 345 598 1,323
Tax-Exempt 111 345 598 1,323
Arizona Tax-Exempt 164 509 N/A N/A
California Tax-Exempt 120 374 647 1,427
International Fixed Income 201 621 1,066 2,302
High Yield Municipal 176 546 N/A N/A
High Yield Fixed Income 123 383 N/A N/A
Income Equity 138 430 744 1,632
Stock Index 103 320 555 1,229
Growth Equity 133 415 717 1,575
Select Equity 158 490 845 1,845
Mid Cap Growth 169 524 903 1,967
Small Cap Index 104 323 N/A N/A
Small Cap 156 484 835 1,823
International Growth Equity 166 515 888 1,934
International Select Equity 170 527 909 1,978
Technology 157 487 840 1,834
</TABLE>
@@
Page 61
<PAGE> 63
INVESTMENT ADVISERS
The Northern Trust Company ("Northern"), an Illinois state-chartered bank and
member of the Federal Reserve System, serves as investment adviser for all Funds
except the Stock Index, Small Cap Index and Small Cap Funds. Northern Trust
Quantitative Advisors, Inc. ("NTQA"), an Illinois state-chartered trust company,
serves as investment adviser for the Stock Index, Small Cap Index and Small Cap
Funds.
Northern and NTQA are referred to as the "Investment Advisers." The Investment
Advisers are located at 50 S. LaSalle Street, Chicago, IL 60675 and are
wholly-owned subsidiaries of Northern Trust Corporation, a bank holding company.
As of March 31, 1999, Northern Trust Corporation and its subsidiaries had
approximately $27.6 billion in assets, $16.6 billion in deposits and employed
over 8,150 persons.
Northern and its affiliates administered in various capacities (including as
master trustee, investment manager or custodian) approximately $1.3 trillion of
assets as of March 31, 1999, including approximately $242.7 billion of assets
for which Northern and its affiliates had investment management responsibility.
Under its Advisory Agreement with the Trust, each Investment Adviser, subject to
the general supervision of the Trust's Board of Trustees, is responsible for
making investment decisions for the Funds for which it serves as adviser and for
placing purchase and sale orders for portfolio securities.
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, each Investment Adviser is entitled to an advisory fee, computed daily
and payable monthly, at annual rates set forth in the table below (expressed as
a percentage of each Fund's respective average daily net assets). The table also
reflects the advisory fees (after voluntary fee waivers) paid by the Funds for
the fiscal year ended March 31, 1999.
@@
<TABLE>
<CAPTION>
ADVISORY FEE PAID
CONTRACTUAL FOR FISCAL YEAR
FUND RATE ENDED 3/31/99
- ---- ----------- -----------------
<S> <C> <C>
Money Market 0.60% 0.40%
U.S. Government Money Market 0.60% 0.40%
U.S. Government Select Money Market 0.60% 0.40%
Municipal Money Market 0.60% 0.40%
California Municipal Money Market 0.60% 0.40%
U.S. Government 0.75% 0.75%
Short-Intermediate U.S. Government 0.75% 0.75%
Intermediate Tax-Exempt 0.75% 0.70%
California Intermediate Tax-Exempt 0.75% 0.70%
Florida Intermediate Tax-Exempt 0.75% 0.70%
Fixed Income 0.75% 0.75%
Tax-Exempt 0.75% 0.70%
Arizona Tax-Exempt 0.75% 0.70%
California Tax-Exempt 0.75% 0.70%
International Fixed Income 0.90% 0.90%
High Yield Municipal 0.75% 0.70%
High Yield Fixed Income 0.75% 0.75%
Income Equity 1.00% 0.85%
Stock Index 0.60% 0.40%
Growth Equity 1.00% 0.85%
Select Equity 1.20% 0.85%
Mid Cap Growth 1.00% 0.85%
Small Cap Index 0.65% 0.50%
Small Cap 1.20% 0.85%
International Growth Equity 1.20% 1.00%
International Select Equity 1.20% 1.00%
Technology 1.20% 1.00%
</TABLE>
Page 62
<PAGE> 64
ABOUT YOUR ACCOUNT
@@
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Funds reflects that the Investment Advisers did not
charge the full amount of the advisory fees to which they would have been
entitled. The Investment Advisers may discontinue or modify their voluntary
limitations in the future at their discretion.
FUND MANAGEMENT
The Investment Advisers employ a team approach to the investment management of
the Funds, relying upon investment professionals under the leadership of James
M. Snyder, Chief Investment Officer and Executive Vice President of Northern and
Chairman and Chief Executive Officer of NTQA. Below is information regarding the
management of the Funds other than the Money Market Funds and the Stock Index
and Small Cap Index Funds.
FIXED INCOME FUNDS
The management team leaders for the U.S. Government Fund are Mark J. Wirth,
Senior Vice President of Northern Trust and Monty M. Memler, Vice President of
Northern Trust. Mr. Wirth has had such responsibility for the Fund since July
1998. Mr. Memler has had such responsibility for the Fund since November 1994.
Mr. Wirth joined Northern Trust in 1986 and during the past five years has
managed various fixed income portfolios. Mr. Memler joined Northern Trust in
1986 and during the past five years has managed various fixed income portfolios.
Mr. Wirth and Steven M. Schafer, Vice President of Northern Trust will be the
management team leaders for the Short-Intermediate U.S. Government Fund after it
commences operations. 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 Intermediate Tax-Exempt Fund and 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 bond portfolios. Mr. McGregor joined
Northern Trust in 1989 and during the past five years has managed various
municipal bond portfolios.
Messrs. Bergson and Eric V. Boeckmann, Vice President in the Fixed Income
Management Division, will also be the management team leaders for the California
Intermediate Tax-Exempt and Arizona Tax-Exempt Funds after they commence
operations. Mr. Boeckmann joined Northern Trust in 1985 and during the past five
years has managed various municipal bond portfolios, including common trust
funds invested in municipal securities.
The management team leaders for the Florida Intermediate Tax-Exempt Fund are Mr.
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 Fixed Income Fund are Messrs. Wirth and
Schafer. Mr. Wirth has had such responsibility since July 1998 and Mr. Schafer
has had such responsibility since the Fund commenced operations in December
1998.
The management team leaders for the California Tax-Exempt Fund are Messrs.
Bergson and Boeckman. Mr. Bergson has had such responsibility since November
1998 and Mr. Boeckmann has had such responsibility since April 1998.
The management team leader for the International Fixed Income Fund is Mr.
Schafer. Mr. Schafer has had such responsibility since July 1998.
Page 63
<PAGE> 65
The management team leader for the High Yield Municipal Fund is M. Jane McCart,
Senior Vice President of Northern Trust. Ms. McCart has had such responsibility
since the fund commenced operations in December 1998. From 1983 to December
1998, she was with Stein Roe & Farnham Incorporated where she had been the
portfolio manager of various municipal bond portfolios.
The management team leaders for the High Yield Fixed Income Fund are Ms. McCart
and Eric Misenheimer, Vice President of Northern Trust. Ms. McCart has had such
responsibility since the Fund commenced operations in December 1998. Mr.
Misenheimer has had such responsibility since July 31, 1999. From ____ to May
1999, Mr. Misenheimer was with Stein Roe & Farnham Incorporated where he had
been an associate portfolio manager of various high yield 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.
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 March 1998. Mr. Breckel has been with Northern Trust since 1968.
During the past five years he has managed various equity portfolios.
Susan J. French is the management team leader for the Small Cap Fund. Ms. French
serves as Vice President of Northern Trust and, since 1998, NTQA. Ms. French has
had such responsibility for the Fund since it commenced operations in April
1994. Ms. French joined Northern Trust in 1986 and during the past five years
has managed various short-term investment and equity index portfolios.
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 leader for the International Select Equity Fund is Robert
A. LaFleur. Mr. LaFleur has had such responsibility for the Fund since 1994.
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.
Page 64
<PAGE> 66
ABOUT YOUR ACCOUNT
OTHER FUND MANAGEMENT INFORMATION
Prior to April 1, 1998 Northern Trust served as investment adviser to the Stock
Index, Small Cap Index and Small Cap Funds pursuant to advisory agreements
substantially identical as those currently in effect for such Funds.
OTHER FUND SERVICES
Northern also serves as transfer agent ("Transfer Agent") and custodian for each
Fund. As Transfer Agent, Northern performs various administrative servicing
functions, and any shareholder inquiries should be directed to it. The fees that
Northern receives for its services in those capacities are described in the
Statement of Additional Information. Sunstone Financial Group, Inc. acts as
administrator for Northern Funds. Northern Funds Distributors, LLC (an affiliate
of Sunstone Financial Group, Inc.) serves as the Funds' distributor. The fee
that Sunstone Financial Group, Inc. receives for its administrative services is
described on page ___ under "Fund Fees and Expenses." Northern Funds
Distributors, LLC does not receive any compensation from the Trust for its
distribution services.
It is expected that on or after October 1, 1999, First Data Distributors, Inc.
will replace Northern Funds Distributors, LLC as the Funds' distributor. It is
also expected that Northern and First Data Investor Services Group, Inc. (an
affiliate of First Data Distributors, Inc.) will replace Sunstone Financial
Group, Inc. to serve as the Funds' co-administrators on or after such date, at
substantially the same cost to the Funds.
PURCHASING AND SELLING SHARES
PURCHASING SHARES
You may purchase shares directly from Northern Funds or, if you maintain certain
accounts, through Northern Trust and certain other institutions. If you have any
questions or need assistance in opening an investment account or purchasing
shares, call 1-800-595-9111.
As of the date of this Prospectus, shares of the Short-Intermediate U.S.
Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt, and Small
Cap Index Fund are not being offered. These Funds are expected to commence
operations during calendar year 1999. Please call 1-800-595-9111 before
investing to determine availability.
OPENING AN ACCOUNT
DIRECTLY FROM THE FUNDS. You may open a shareholder account and purchase shares
directly from the Funds with a minimum initial investment per Fund of $2,500
($500 for an IRA; $250 under the Automatic Investment Plan; and $500 for
employees of Northern Trust and its affiliates). The minimum subsequent
investment is $50 (except for reinvestments of distributions for which there is
no minimum). The Funds reserve the right to waive these minimums.
For your convenience, there are a number of ways to invest directly in the
Funds:
BY MAIL.
- Read this prospectus carefully
- Complete and sign the Purchase Application
- Enclose a check or money order payable to Northern Funds
- If you are investing on behalf of a corporation or other entity,
your Purchase Application must be accompanied by a certified
corporate resolution (or other acceptable evidence of authority).
Page 65
<PAGE> 67
- Mail your check, corporate resolution (if needed) and completed
Purchase Application to:
Northern Funds
P.O. Box 75986
Chicago, Illinois 60690-6319
- For overnight delivery use the following address:
801 South Canal Street
Chicago, Illinois 60607
Attn: Northern Funds
- For subsequent investments:
- Enclose your check with the return remittance portion of the
confirmation of your previous investment; or
- Indicate on your check or a separate piece of paper your
name, address and account number
All checks must be payable in U.S. dollars and drawn on a bank located in the
United States. Cash and third party checks are not acceptable.
BY WIRE
- To open a new account:
- Call 1-800-595-9111 for instructions
- Complete a Purchase Application and send it to:
- Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- To add to an existing account:
- Have your bank wire Federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
BY DIRECT DEPOSIT
- To purchase additional shares:
- Determine if your employer has direct deposit capabilities
through the Automated Clearing House ("ACH")
- Have your employer send payments to:
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
- The minimum periodic investment for direct deposit is $50
BY AUTOMATIC INVESTMENT
- To open a new account
- Complete a Purchase Application, including the Automatic
Investment section
- Send it to:
- Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- The minimum initial investment is $250; $50 for monthly minimum
additions
- To add to an account:
- Call 1-800-595-9111 to obtain an Automatic Investment Plan
Application
- The minimum for automatic investment additions is $50
Page 66
<PAGE> 68
ABOUT YOUR ACCOUNT
If you discontinue participation in the plan, the Funds reserve the right to
redeem the investor's account involuntarily, upon 30 days written notice, if the
account's net asset value is $1,000 or less. Involuntary redemptions will not be
made if the value of shares in an account falls below the minimum amount solely
because of a decline in the Fund's net asset value.
BY DIRECTED REINVESTMENT
You may elect to have your income dividends and capital gains
distributions automatically invested in another Northern Fund.
- Complete the Distribution Options section on the Purchase
Application
- Reinvestments can only be directed to an existing Northern
Funds account (which must meet the minimum investment
requirement)
BY EXCHANGE
You may open a new account or add to an existing account by exchanging
shares of one Fund for shares of any other Fund offered by Northern
Funds. See "Selling Shares - By Exchange."
THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you have an account with Northern Trust, you may purchase Northern Funds
shares through Northern Trust. You may also purchase shares through other
institutions (together with Northern Trust, "Service Organizations") that have
entered into agreements with Northern Funds. To determine whether you may
purchase shares through your institution, contact your institution directly or
call 1-800-595-9111. Northern Trust or another Service Organization may impose
charges against your account which will reduce the net return on an investment
in a Fund. These charges may include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income.
SELLING SHARES
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS
If you purchased Northern Funds directly or, if you purchased your shares
through an account at Northern Trust or another Service Organization and you
appear on Northern Funds records as the registered holder, you may redeem all or
part of your shares using one of the methods described below.
BY MAIL.
- Send a written request to:
Northern Funds
P.O. Box 75986
Chicago, Illinois 60690-6319
- The redemption request must include:
- The number of shares or the dollar amount to be redeemed
- The Fund account number
- A signature guarantee is also required if:
- The proceeds are to be sent elsewhere than the address
of record, or
- The redemption amount is greater than $50,000
BY WIRE.
If you authorize wire redemptions on your Purchase Application, you can
redeem shares and have the proceeds sent by federal wire transfer to a
previously designated account.
- You will be charged $15 for each wire redemption unless the
designated account is maintained at Northern Trust or an
affiliated bank
- Call the Transfer Agent at 1-800-595-9111 for instructions
- The minimum amount that may be redeemed by this method is $250
Page 67
<PAGE> 69
BY CHECK
If you authorize the checkwriting privilege on your Purchase Application,
you may redeem shares of the Money Market Funds by check in amounts of $250
or more. If your account is already open:
- Call 1-800-595-9111 for the appropriate form
- The application must be signed by each person whose name
appears on the account and accompanied by a signature
guarantee
- Dividends are earned until the check clears the Transfer Agent
- Checks you write will not be returned to you, although copies are
available upon request
- A fee of $20 will be charged to the account if there are
insufficient funds to cover the amount of your redemption by
check
- To place a stop payment request, call 1-800-595-9111. A $20 fee
will be charged to the account
- You may not use checks to close an account or redeem shares
purchased within the past fifteen days
BY SYSTEMATIC WITHDRAWAL
If you own shares of a Fund with a minimum value of $10,000, you may elect
to have a fixed sum redeemed at regular intervals and distributed in cash
or reinvested in one or more other Northern Funds.
- Call 1-800-595-9111 for an application form and additional
information
- The minimum amount is $250 per withdrawal
BY EXCHANGE.
Northern Funds offers you the ability to exchange shares of one Northern
Fund for another Fund in the Northern Funds family.
- When opening an account, complete the Exchange Privilege
section of the Purchase Application or, if your account is
already opened, send a written request to:
Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- Shares being exchanged must have a value of at least $1,000
($2,500 if a new account is being established by the
exchange)
- Call 1-800-595-9111 for more information
BY TELEPHONE.
If you authorize the telephone privilege on your Purchase Application, you
may redeem Northern Funds shares by phone.
- If your account is already opened, send a written request to:
Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
The request must be signed by each owner of the account and accompanied by
signature guarantees
- Call the 1-800-595-9111 to use the telephone privilege
- During periods of unusual economic or market activity, telephone
redemptions may be difficult to implement. In such event,
shareholders should follow the procedures outlined above under
"Selling Shares -- By Mail"
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchased your Northern Funds shares through an account at Northern Trust
or another Service Organization, you may redeem or exchange your shares
according to the instructions pertaining to that account.
- Although Northern Funds imposes no charges when you redeem, when
shares are purchased through Northern Trust or another Service
Organization, a fee may be charged by those institutions for
providing services in connection with your account
- Contact your account representative at Northern Trust or other
Service Organization for more information about redemptions or
exchanges
Page 68
<PAGE> 70
ABOUT YOUR ACCOUNT
ACCOUNT POLICIES AND OTHER INFORMATION
CALCULATING SHARE PRICE. Northern Funds issues shares and redeems shares at net
asset value ("NAV"). The NAV for each Fund is calculated by dividing the value
of the Fund's net assets by the number of the Fund's outstanding shares. The NAV
is calculated on each Business Day as of 3:00 p.m., Chicago time, for each
Non-Money Market Fund and as of 1:00 p.m., Chicago time, for each Money Market
Fund. The NAV used in determining the price of your shares is the one calculated
after your purchase, exchange or redemption order is received and accepted as
described below.
The Money Market Funds seek to maintain an NAV of $1.00 per share by valuing the
obligations held by the Funds at amortized cost in accordance with SEC
regulations. Amortized cost will normally approximate market value.
U.S. and foreign securities held by the Non-Money Market Funds generally are
valued at their market prices. Shares of an investment company held by the
Non-Money Market Funds are valued at their NAV. Any securities, including
restricted securities, for which market prices are not readily available are
valued at fair value as determined by the Investment Advisers. Short-term
obligations held by a Fund are valued at their amortized cost which, according
to the Investment Advisers, approximates market value.
A Fund may hold foreign securities that trade on weekends or other days when the
Fund does not price its shares. Therefore, the value of such securities may
change on days when shareholders will not be able to purchase or redeem shares.
TIMING OF MONEY MARKET FUND PURCHASE REQUESTS. Requests accepted by the Transfer
Agent or other authorized intermediary by 1:00 p.m., Chicago time, on any
Business Day will be executed the same day, at that day's closing share price
provided that either:
- The order is in proper form and payment in immediately available funds
has been received by the Transfer Agent;
- The order is placed by Northern Trust or a Service Organization and
payment in Federal or other immediately available funds is to be made
by the close of the same Business Day; or
- The order is accepted by an authorized intermediary and payment in
Federal or other immediately available funds is to be made by the
close the same Business Day in accordance with procedures acceptable
to Northern Funds.
Orders received by the Transfer Agent that are accompanied by payment in any
form other than immediately available funds will not be executed until payment
is converted to Federal funds, which normally occurs within two Business Days
after receipt.
TIMING OF NON-MONEY MARKET FUND PURCHASE REQUESTS. Requests accepted by the
Transfer Agent or other authorized intermediary by 3:00 p.m., Chicago time, on
any Business Day will be executed the same day, at that day's closing share
price provided that either:
- The order is in proper form and accompanied by payment of the purchase
price;
- The order is placed by Northern Trust or a Service Organization and
payment in Federal or other immediately available funds is to be made
on the next Business Day; or
- The order is accepted by an authorized intermediary and payment is to
be made on the next Business Day in accordance with procedures
acceptable to Northern Funds.
Orders received by the Transfer Agent or other authorized intermediary on a
non-Business Day or after 3:00 p.m. on a Business Day will be executed on the
next Business Day, at that day's closing share price, provided that payment is
made as noted above.
In certain circumstances, Northern Funds may advance the time by which purchase
orders must be received. See "Early Closings" on page ____.
Page 69
<PAGE> 71
SOCIAL SECURITY/TAX IDENTIFICATION NUMBER. Federal regulations require you to
provide a Social Security or other certified taxpayer identification number when
you open or reopen an account. Purchase Applications without such a number or an
indication that a number has been applied for will not be accepted. If you have
applied for a number, the number must be provided and certified within 60 days
of the date of the Purchase Application.
IN-KIND PURCHASES AND REDEMPTIONS. Northern Funds reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Fund. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Fund. See the
Statement of Additional Information for further information about the terms of
these purchases and redemptions.
MISCELLANEOUS PURCHASE INFORMATION.
- - You will be responsible for all losses and expenses of a Fund in the event
of any failure to make payment according to the procedures outlined in this
Prospectus. Northern may redeem shares from any account it maintains to
protect the Funds and Northern against loss. In addition, a $20 charge will
be imposed if a check does not clear.
- - You may initiate transactions between Northern Trust banking and Northern
Funds accounts by using Northern Trust Private Passport. For additional
details, please visit our web site www.northerntrust.com/privatepassport/
or contact your relationship manager.
- - Northern Funds reserves the right to reject any purchase order. The Funds
also reserves the right to change or discontinue any of its purchase
procedures.
- - Northern Funds may reproduce this Prospectus in an electronic format which
may be available on the Internet. If you have received this Prospectus in
its electronic format you, or your representative, may contact the Transfer
Agent for a free paper copy of this Prospectus by writing to the Northern
Funds Center at P.O. Box 75986, Chicago, Illinois 60690-6319, calling
1-800-595-9111, or sending an e-mail to: [email protected].
TIMING OF REDEMPTION AND EXCHANGE REQUESTS. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary on
a Business Day by 3:00 p.m., Chicago time, with respect to the Non-Money Market
Funds, or by 1:00 p.m., Chicago time, with respect to the Money Market Funds,
will be executed on the same day. The redemption or exchange will be effected at
that day's closing share price.
Good order means that the request must include the following information:
- The account number and Fund name
- The amount of the transaction, in dollar amount or number of
shares
- The signature of all account owners exactly as they are
registered on the account (except for telephone and wire
redemptions)
- Required signature guarantees, if applicable
- Othersupporting legal documents that might be required in the
case of estates, corporations, trusts and certain other accounts.
Call 1-800-595-9111 for more information about documentation that
may be required of these entities
In certain circumstances, Northern Funds may advance the time by which
redemption and exchange orders must be received. See "Early Closings" on page
___.
PAYMENT OF MONEY MARKET FUND REDEMPTION PROCEEDS. If a money market redemption
request is received by the Transfer Agent in good order by 1:00 p.m., Chicago
time, on a Business Day, the proceeds will normally be sent on the next Business
Day, unless payment in immediately available funds on the same Business Day is
requested. Proceeds for redemption orders received on a non-Business Day will
normally be sent on the second Business Day after receipt in good order.
However, if any portion of the shares to be redeemed represents an investment
made by check, the Funds may delay the payment of the redemption proceeds until
the check has cleared and collected. This may take up to fifteen days from the
purchase date. Northern Funds reserves the right to defer crediting, sending or
Page 70
<PAGE> 72
ABOUT YOUR ACCOUNT
wiring redemption proceeds for up to 7 days (or such longer period permitted by
the SEC) after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect a Fund.
PAYMENT OF NON-MONEY MARKET FUND REDEMPTION PROCEEDS. The Non-Money Market Funds
will make payment for redeemed shares typically within one or two Business Days,
but no later than the seventh day after a redemption request is received in good
order by the Transfer Agent or an authorized intermediary (or such longer period
permitted by the SEC). However, if any portion of the shares to be redeemed
represents an investment made by check, the Funds may delay the payment of the
redemption proceeds until the check has cleared and collected. This may take up
to fifteen days from the purchase date.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed Purchase Application.
- - Northern Funds reserves the right, to redeem shares held by any shareholder
who provides incorrect or incomplete account information or when such
involuntary redemptions are necessary to avoid adverse consequences to the
Fund and its shareholders.
- - Northern Funds may require any information reasonably necessary to ensure
that a redemption has been duly authorized.
- - Northern Funds reserves the right on 60 days' written notice, to redeem the
shares held in any account if at the time of redemption, the net asset
value of the remaining shares in the account falls below $1,000.
Involuntary redemptions will not be made if the value of shares in an
account falls below the minimum solely because of a decline in the Fund's
net asset value.
- - You may initiate transactions between Northern Trust banking and Northern
Funds accounts by using Northern Trust Private Passport. For additional
details, please visit our web site at www.northerntrust.com/
privatepassport/ or contact your relationship manager.
- - Northern Funds reserves the right to change or discontinue any of its
redemption procedures.
EXCHANGE PRIVILEGES. You may exchange shares of one Northern Fund for another
only if the registration of both accounts is identical. An exchange is a
redemption of shares of one Fund and the purchase of shares of another Fund. It
is considered a taxable event and may result in a gain or loss. Northern Funds
reserves the right, at any time without prior notice to suspend, limit or
terminate the exchange privilege of any shareholder who makes more than eight
exchanges of shares in a year and/or two exchanges of shares in a calendar
quarter. Northern may also modify or terminate the exchange privilege with
respect to any or all shareholders, and may reject any exchange request.
Exchanges are only available in states where an exchange can legally be made.
Before making an exchange you should read the prospectus for the shares you are
acquiring.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable safeguards against fraudulent
telephone transactions. If reasonable measures are taken to verify that
telephone instructions are genuine, Northern Funds and its service providers
will not be responsible for any loss resulting from fraudulent or unauthorized
instructions received over the telephone. In these circumstances, shareholders
will bear the risk of loss. During periods of unusual market activity, you may
have trouble placing a request by telephone. In this event, consider sending
your request in writing.
The proceeds of redemption orders received by telephone will be sent by check,
wire or transfer according to proper instructions. All checks will be made
payable to the shareholder of record and mailed only to the shareholder's
address of record.
Page 71
<PAGE> 73
Northern Funds reserves the right to refuse a telephone redemption.
MAKING CHANGES TO YOUR ACCOUNT INFORMATION. You may make changes to wiring
instructions, address of record, or other account information only in writing.
These instructions must be accompanied by a signature guarantee from an
institution participating in the Stock Transfer Agency Medallion Program
("STAMP"), or other acceptable evidence of authority. Additional requirements
may be imposed. In accordance with SEC regulations, the Funds and Transfer Agent
may charge a shareholder reasonable costs in locating a shareholder's current
address.
SIGNATURE GUARANTEES. If a signature guarantee is required, it must be from an
institution participating in the Stock Transfer Agency Medallion Program
("STAMP"), or other acceptable evidence of authority must be provided.
Additional requirements may be imposed by Northern Funds. In addition to the
situations described in this Prospectus, Northern Funds may require signature
guarantees in other circumstances based on the amount of a redemption request or
other factors.
BUSINESS DAY. A "Business Day" with respect to the Non-Money Market Funds is
each Monday through Friday when the New York Stock Exchange (the "Exchange") is
open for business. A "Business Day" with respect to the Money Market Funds is
each Monday through Friday when Northern or the New York Stock Exchange is open
for business. In 1999, a "Business Day" does not include a holiday observed by
Northern and the Exchange. In 1999 these holidays are: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving, Christmas Day and, for the Non-Money Market Funds, Good
Friday.
EARLY CLOSINGS. Northern Funds reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. They also reserve this right when The Bond Market
Association recommends that securities markets close or close early.
AUTHORIZED INTERMEDIARIES. Northern Funds may authorize certain financial
intermediaries (including banks, trust companies, brokers and investment
advisers), which provide recordkeeping, reporting and processing services, to
accept purchase, redemption and exchange orders from their customers on behalf
of the Funds. They may also designate other intermediaries to accept such
orders, if approved by the Funds. Authorized intermediaries are responsible for
transmitting orders and delivering funds on a timely basis. A Fund will be
deemed to have received an order when the order is accepted by the authorized
intermediary on a Business Day, and the order will be priced at the Fund's per
share NAV next determined.
SERVICE ORGANIZATIONS. Northern Funds may enter into agreements with Service
Organizations such as banks, corporations, broker/dealers and other financial
institutions, including Northern Trust, concerning the provision of support
and/or distribution services to their customers who own Fund shares. These
services may include:
- - support services such as assisting investors in processing purchase,
exchange and redemption requests;
- - processing dividend and distribution payments from the Funds;
- - providing information to customers showing their positions in the Funds;
and
- - providing subaccounting with respect to Fund shares beneficially owned by
customers or the information necessary for subaccounting.
In addition, Service Organizations may provide assistance, such as the
forwarding of sales literature and advertising to their customers, in connection
with the distribution of Fund shares.
For their services, Service Organizations may receive fees from a Fund at annual
rates of up to 0.25% of the average daily net asset value of the shares covered
by their agreements. Because these fees are paid out of the Funds' assets on an
on-going basis, they will increase the cost of your investment in the Funds. In
addition, Northern and NTQA may provide compensation to certain dealers and
other financial intermediaries who provide services to their customers who
invest in Northern Funds or whose customers purchase significant amounts of a
Fund's shares. The amount of such compensation may be made on a one-time and/or
periodic basis, and may represent all or a portion
Page 72
<PAGE> 74
ABOUT YOUR ACCOUNT
of the annual fees earned by Northern and NTQA as Investment Advisers (after
adjustments). This additional compensation will be paid by Northern, NTQA or
their affiliates and will not represent an additional expense to Northern Funds
or their shareholders.
Service Organizations may also charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Northern Funds in connection with the investment of fiduciary funds in Fund
shares. Institutions, including banks regulated by the Comptroller of the
Currency, Federal Reserve Board and state banking commissions, and investment
advisers and other money managers subject to the jurisdiction of the SEC, the
Department of Labor or state securities commissions, are urged to consult their
legal counsel before entering into agreements with Northern Funds.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Service Organizations investing in the Funds on behalf
of their customers may be required to register as dealers.
Agreements that contemplate the provision of distribution services by Service
Organizations are governed by a Distribution and Service Plan (the "Plan") that
has been adopted by Northern Funds pursuant to Rule 12b-1 under the 1940 Act.
Payments to Service Organizations, including Northern Trust, under the Plan are
not tied directly to their own out-of-pocket expenses and therefore may be used
as they elect (for example, to defray their overhead expenses), and may exceed
their direct and indirect costs.
SHAREHOLDER REPORTS. Shareholders of record will be provided each year with a
semi-annual report showing portfolio investments and other information as of
September 30, and, after the close of the Funds' fiscal year March 31, with an
annual report containing audited financial statements. To eliminate unnecessary
duplication, only one copy of shareholder reports will be sent to shareholders
with the same mailing address. Shareholders who desire a duplicate copy of
shareholder reports to be mailed to their residence should call 1-800-595-9111
or send an email to: [email protected].
DIVIDENDS AND DISTRIBUTIONS
Dividends and capital gain distributions of each Fund are automatically
reinvested in additional shares of the same Fund without any sales charge or
additional purchase price amount.
You may, however, elect to have dividends or capital gain distributions (or
both) paid in cash or reinvested in shares of another Northern Fund at their net
asset value per share. If you would like to receive dividends or distributions
in cash or have them reinvested in another Fund, you must notify the Transfer
Agent in writing. This election will become effective for distributions paid two
days after its receipt by the Transfer Agent. Dividends and distributions may
only be reinvested in a Fund in which you maintain an account.
MONEY MARKET FUNDS. Each Money Market Fund's net investment income is declared
as a dividend on each Business Day and paid monthly. Dividends will also be paid
promptly upon a total redemption of shares in an account not subject to a
standing order for the purchase of additional shares. Net investment income
includes interest accrued on the Fund's assets less the Fund's estimated
expenses. Net realized short-term capital gains may be distributed from time to
time during Northern Funds' fiscal year (but not less frequently than annually).
The Money Market Funds do not expect to realize net long-term capital gains.
Money market shares begin earning dividends on the day an order is executed if
payment in immediately available funds is received by Northern Funds by the time
designated under "Purchasing and Selling Shares." Otherwise, shares begin
earning dividends on the day after an order is received.
Page 73
<PAGE> 75
NON-MONEY MARKET FUNDS. The following table summarizes the general distribution
policies for each of the Non-Money Market Funds. A Fund with an annual dividend
or distribution policy may, in some years, make additional dividends or
distributions to the extent necessary for the Fund to avoid incurring
unnecessary tax liabilities.
<TABLE>
<CAPTION>
- ----------------------------------- ----------------------------- ---------------------
DIVIDENDS, IF ANY CAPITAL GAINS, IF ANY
FUND DECLARED AND PAID DECLARED AND PAID
- ----------------------------------- ----------------------------- ---------------------
<S> <C> <C>
U.S. Government Declared daily, paid monthly* Annually
Short-Intermediate U.S. Government Declared daily, paid monthly* Annually
Intermediate Tax-Exempt Declared daily, paid monthly* Annually
California Intermediate Tax-Exempt Declared daily, paid monthly* Annually
Florida Intermediate Tax-Exempt Declared daily, paid monthly* Annually
Fixed Income Declared daily, paid monthly* Annually
Tax-Exempt Declared daily, paid monthly* Annually
Arizona Tax-Exempt Declared daily, paid monthly* Annually
California Tax-Exempt Declared daily, paid monthly* Annually
International Fixed Income Quarterly Annually
High Yield Municipal Monthly Annually
High Yield Fixed Income Monthly Annually
Income Equity Monthly Annually
Stock Index Quarterly Annually
Growth Equity Quarterly Annually
Select Equity Annually Annually
Mid Cap Growth Quarterly Annually
Small Cap Index Annually Annually
Small Cap Annually Annually
International Growth Equity Annually Annually
International Select Equity Annually Annually
Technology Annually Annually
</TABLE>
* Shares of these Funds are entitled to the dividends declared by a Fund
beginning on the next Business Day after the purchase order is executed.
TAX CONSIDERATIONS
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income, except as discussed below. You will be
subject to income tax on Fund distributions regardless of whether they are paid
in cash or reinvested in additional shares. You will be notified annually of the
tax status of distributions to you.
In case of any Fund other than a Money Market Fund, you should note that if you
purchase shares just before a distribution, the purchase price will reflect the
amount of the upcoming distribution, but you will be taxed on the entire amount
of the distribution received, even though, as an economic matter, the
distribution simply constitutes a return of capital. This is known as "buying
into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Page 74
<PAGE> 76
ABOUT YOUR ACCOUNT
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
If you (a) have provided either an incorrect Social Security Number or Taxpayer
Identification Number or no number at all, (b) are subject to withholding by the
Internal Revenue Service for prior failure to properly include on your return
payments of interest or dividends, or (c) have failed to certify to Northern
Funds, when required to do so, that you are not subject to backup withholding or
are an "exempt recipient," then Northern Funds will be required in certain cases
to withhold and remit to the U.S. Treasury 31% of the dividends and
distributions payable to you.
There are certain tax requirements that the Funds must follow in order to avoid
Federal taxation. In their efforts to adhere to these requirements, the Funds
may have to limit their investment activity in some types of instruments.
The Tax-Exempt and Municipal Funds. The Tax-Exempt Funds and Municipal Funds
expect to pay "exempt interest dividends" that are generally exempt from regular
Federal income tax. However, a portion of the exempt-interest dividends paid by
the Tax-Exempt Funds may be, and a portion of the dividends paid by the
Municipal Funds will be, an item of tax preference for purposes of determining
Federal alternative minimum tax liability. Exempt-interest dividends will also
be considered along with other adjusted gross income in determining whether any
Social Security or railroad retirement payments received by you are subject to
Federal income taxes.
Except as stated below, you may be subject to state and local taxes on Fund
distributions and redemptions. State income taxes may not apply, however, to the
portions of each Fund's distributions, if any, that are attributable to interest
on certain types of Federal securities or interest on securities issued by the
particular state or municipalities within the state.
In addition, the California Funds and the Arizona Tax-Exempt Fund expect to pay
dividends that are generally exempt from personal income tax in those respective
states. These exemptions will apply, however, only to dividends that are derived
from interest paid on California or Arizona municipal instruments, respectively,
or on certain Federal obligations. In addition, dividends paid by these Funds
will be subject to state franchise and corporate income taxes, if applicable.
The Florida Intermediate Tax-Exempt Fund intends, but cannot guarantee, that its
shares will qualify for the exemption from the Florida intangibles tax.
In all cases, distributions, if any, derived from net long-term capital gains
will generally be taxable to you as long-term capital gains, and any dividends
derived from short-term capital gains and taxable interest income will be
taxable to you as ordinary income.
If you receive an exempt-interest dividend with respect to any share and the
share is held for six months or less, any loss on the sale or exchange of the
share will be disallowed to the extent of the dividend amount. Interest on
indebtedness incurred by a shareholder to purchase or carry shares of the
Tax-Exempt Funds and Municipal Funds generally will not be deductible for
federal income tax purposes.
The International Funds. It is expected that the International Funds will be
subject to foreign withholding taxes with respect to dividends or interest
received from sources in foreign countries. The International Funds may make an
election to treat a proportionate amount of such taxes as constituting a
distribution to each shareholder, which would allow each shareholder either (1)
to credit such proportionate amount of taxes against U.S. federal income tax
liability or (2) to take such amount as an itemized deduction.
Consult Your Tax Professional. Your investment in the Funds could have
additional tax consequences. You should consult your tax professional for
information regarding all tax consequences applicable to your investments in the
Funds. More tax information is provided in the Statement of Additional
Information. This short summary is not intended as a substitute for careful tax
planning.
TAX TABLE
You may find it particularly useful to compare the tax-free yields of the
Tax-Exempt Funds and the Municipal Funds to the equivalent yields from taxable
investments. For an investor in a low tax bracket, it may not be helpful to
invest in a tax-exempt investment if a higher after-tax yield can be achieved
from a taxable instrument.
The table below illustrates the difference between hypothetical tax-free
yields and tax-equivalent yields for different tax brackets. You should be
aware, however, that tax brackets can change over time and that your tax
adviser should be consulted for specific yield calculations.
<TABLE>
<CAPTION>
FEDERAL
MARGINAL TAX-EXEMPT YIELDS
TAXABLE INCOME TAX RATE 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- --------------------------------------------------------------------------------------------------------------------
SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 25,350 $ 0 - $ 42,350 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 25,351 - $ 61,400 $ 42,351 - $102,300 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 61,401 - $128,100 $102,301 - $155,950 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$128,101 - $278,450 $155,951 - $278,450 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $278,450 Over $278,450 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.
Page 75
<PAGE> 77
YEAR 2000 ISSUES
Like every other business dependent upon computerized information processing,
Northern Trust Corporation ("Northern Trust") must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 approaches, many systems may be unable
to accurately process certain date-based information, which could cause a
variety of operational problems for businesses. This could have a negative
effect on the companies in which the Funds invest, thus hurting the Funds'
investment returns.
Northern Trust has implemented steps to prepare its critical computer systems
and processes for Year 2000 processing. It has established a dedicated Year 2000
Project Team whose members have significant systems development and maintenance
experience. Northern Trust's Year 2000 project includes a comprehensive testing
plan of its critical systems. Northern Trust has advised the Trust that it has
substantially completed work on its critical systems and that testing with
outside parties will be conducted during 1999.
Northern Trust also will have a program to monitor and assess the efforts of
other parties, such as other service providers to the Fund. However, it cannot
control the success of those other parties' efforts. Contingency plans are being
established to provide Northern Trust with alternatives in case these entities
experience significant Year 2000 difficulties that impact Northern Trust.
Furthermore, even if the actions taken by Northern Trust are successful, the
normal operations of the Funds may, in any event, be disrupted significantly by
the failure of communications and public utility companies, governmental
entities, financial processors or others to perform their services as a result
of Year 2000 problems.
Page 76
<PAGE> 78
APPENDICES
APPENDIX A
ADDITIONAL INFORMATION ON FUND RISKS,
SECURITIES AND TECHNIQUES
This Appendix takes a closer look at some of the risks that are presented by the
types of securities in which the Funds may invest. It also explores the various
investment techniques that the investment management team may, but is not
required to, use. The Funds may invest in other securities and are subject to
further restrictions and risks which are described in the Statement of
Additional Information. You should note that a Fund's investment objective may
be changed by Northern Funds' Board of Trustees without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in a Fund having an investment objective different from the objective
which the shareholder considered appropriate at the time of investment in the
Fund.
SPECIAL RISKS AND OTHER CONSIDERATIONS.
DERIVATIVE RISK. The Funds may purchase certain "derivative" instruments. A
derivative is a financial instrument whose value is derived from---or based
upon---the performance of underlying assets, interest or currency exchange
rates, or indices. Many types of instruments representing a wide range of
potential risks and rewards are derivatives, including futures contracts,
options, interest rate and currency swaps, equity swaps, structured securities,
forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset-backed securities,
"stripped" securities and various floating rate instruments, including leveraged
"inverse floaters").
INVESTMENT STRATEGY. A Fund will invest in derivatives only if the
potential risks and rewards are consistent with the Fund's objective,
strategies and overall risk profile. The Funds may use derivatives for
hedging purposes to offset a potential loss in one position by
establishing an interest in an opposite position. Certain Funds may
also use derivatives for speculative purposes to invest for potential
income or capital gain.
SPECIAL RISKS. Engaging in derivative transactions involves special
risks, including (a) market risk that the Fund's derivatives position
will lose value; (b) credit risk that the counterparty to the
transaction will default; (c) leveraging risk that the value of the
derivative instrument will decline more than the value of the assets on
which it is based; (d) illiquidity risk that a Fund will be unable to
sell its position because of lack of market depth or disruption; (e)
pricing risk that the value of a derivative instrument will be
difficult to determine; and (f) operations risk that loss will occur as
a result of inadequate systems or human error. Many types of
derivatives have been recently developed and have not been tested over
complete market cycles. For these reasons, a Fund may suffer a loss
whether or not the analysis of the investment management team is
accurate.
FOREIGN INVESTMENT RISK. Foreign securities include direct investments in
non-U.S. dollar-denominated securities traded outside of the United States and
dollar-denominated securities of foreign issuers. Foreign securities also
include indirect investments such as American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs").
ADRs are U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are issued by U.S. banks or trust companies, and entitle the
holder to all dividends and capital gains that are paid out on the underlying
foreign shares. EDRs and GDRs are receipts issued by non-U.S. financial
institutions that often trade on foreign exchanges. They represent ownership in
an underlying foreign or U.S. security and are generally denominated in a
foreign currency.
INVESTMENT STRATEGY. The International Funds intend to invest a
substantial portion of their total assets in foreign securities. The
Fixed Income, High Yield Fixed Income, Income Equity, Growth Equity,
Select Equity, Mid Cap Growth, Small Cap and Technology Funds may
invest up to 25% of their total assets in foreign securities. These
Funds may also invest in foreign time deposits and other short-term
instruments. The Income Equity, Growth Equity, Select Equity, Mid Cap
Growth, Small Cap and Technology Funds will not invest more than 25% of
their respective assets in ADRs, and will not invest more than 10% of
their respective assets in EDRs and GDRs.
Page 77
<PAGE> 79
The Money Market Fund may invest in the U.S. dollar-denominated
obligations issued or guaranteed by one or more foreign governments or
any of their political subdivisions, agencies or instrumentalities,
foreign commercial banks and foreign branches of U.S. banks. It may
also invest in U.S. dollar-denominated commercial paper and other
obligations of foreign issuers. Investments by the Money Market Fund in
foreign issuer obligations will not exceed 50% of the Fund's total
assets.
The International Growth Equity, International Select Equity and
International Fixed Income Funds may invest more than 25% of their
total assets in the securities of issuers located in Japan, the United
Kingdom, France, Germany or Switzerland because the securities markets
in those countries are highly developed, liquid and subject to
extensive regulation.
SPECIAL RISKS. Foreign securities involve special risks and costs.
Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in the
securities of foreign governments involves the risk that foreign
governments may default on their obligations or may otherwise not
respect the integrity of their debt. The performance of investments in
securities denominated in a foreign currency will also depend, in part,
on the strength of the foreign currency against the U.S. dollar and the
interest rate environment in the country issuing the currency. Absent
other events which could otherwise affect the value of a foreign
security (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency
generally results in an increase in value of a foreign
currency-denominated security in terms of U.S. dollars. A decline in
the value of the foreign currency relative to the U.S. dollar generally
results in a decrease in value of a foreign currency-denominated
security.
Investment in foreign securities may involve higher costs than
investment in U.S. securities, including higher transaction and custody
costs as well as the imposition of additional taxes by foreign
governments. Foreign investments may also involve risks associated with
the level of currency exchange rates, less complete financial
information about the issuers, less market liquidity, more market
volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend
income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls or freezes on the
convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of
domestic banks may be subject to less stringent reserve requirements,
and to different accounting, auditing and recordkeeping requirements.
Additional risks are involved when investing in countries with emerging
economies or securities markets. These countries are located in the
Asia/Pacific region, Eastern Europe, Latin and South America and
Africa. In general, the securities markets of these countries are less
liquid, are subject to greater price volatility, have smaller market
capitalizations and have problems with securities registration and
custody. In addition, because the securities settlement procedures are
less developed in these countries, a Fund may be required to deliver
securities receiving payment and may also be unable to complete
transactions during market disruptions. As a result of these and other
risks, investments in these countries generally present a greater risk
of loss to the Funds.
While the Funds' investments may, if permitted, be denominated in
foreign currencies, the portfolio securities and other assets held by
the Funds are valued in U.S. dollars. Currency exchange rates may
fluctuate significantly over short periods of time causing a Fund's net
asset value to fluctuate as well. Currency exchange rates can be
affected unpredictably by the intervention or the failure to intervene
by U.S. or foreign governments or central banks, or by currency
controls or political developments in the U.S. or abroad. To the extent
that a Fund is invested in foreign securities while also maintaining
currency positions, it may be exposed to greater combined risk. The
Funds' respective net currency positions may expose them to risks
independent of their securities positions.
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union
presents unique uncertainties, including the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to
existing currencies rather than the euro;
Page 78
<PAGE> 80
APPENDICES
the establishment and maintenance of exchange rates for currencies
being converted into 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 European countries participating in the euro will
converge over time; and whether the conversion of the currencies of
other countries in the European Union ("EU"), such as the United
Kingdom and Denmark, into the euro and the admission of other non-EU
countries such as Poland, Latvia and Lithuania as members of the EU
may have an impact on the euro. These or other factors, including
political and economic risks, could cause market disruptions, and
could adversely affect the value of securities held by the Funds.
INVESTMENT GRADE CREDIT RISK. A security is considered investment grade if, at
the time of purchase, it is rated:
BBB or higher by Standard and Poor's Ratings Services ("S&P");
Baa or higher by Moody's Investors Service, Inc. ("Moody's");
BBB or higher by Duff & Phelps Credit Rating Co. ("Duff"); or
BBB or higher by Fitch IBCA Inc. ("Fitch").
A security will be considered investment grade if it receives one of the above
ratings, even if it receives a lower rating from other rating organizations.
INVESTMENT STRATEGY. Except as stated in the next section, fixed
income and convertible securities purchased by the Funds will
generally be rated investment grade. The Funds may also invest in
unrated securities if the Investment Adviser believes they are
comparable in quality.
SPECIAL RISKS. Although securities rated BBB by S&P, Duff or Fitch, or
Baa by Moody's are considered investment grade, they have certain
speculative characteristics. Therefore, they may be subject to a
higher risk of default than obligations with higher ratings.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Investment Adviser will consider such an
event in determining whether the Fund should continue to hold the
security.
MATURITY RISK. Each Fixed Income Fund will normally maintain the dollar-weighted
average maturity of its Fund within a specified range. However, the maturities
of certain instruments, such as variable and floating rate instruments, are
subject to estimation. In addition, in calculating average weighted maturities,
the maturity of mortgage and other asset-backed securities will be based on
estimates of average life. As a result, the Funds cannot guarantee that these
estimates will, in fact, be accurate or that their average maturities will
remain within their specified limits.
NON-INVESTMENT GRADE CREDIT RISK. Non-investment grade fixed income and
convertible securities are generally rated BB or below by S&P, Duff or Fitch, or
Ba by Moody's.
INVESTMENT STRATEGY. The High Yield Municipal Fund and the High Yield
Fixed Income Fund may invest without limitation in non-investment grade
securities, convertible securities. The other Fixed Income Funds (with
the exception of the U.S. Government Fund and the Short-Intermediate
U.S. Government Fund) and the Equity Funds (with the exception of the
Stock Index Fund and Small Cap Index Fund ) may invest up to 15% (35%
in the case of the Income Equity Fund) of total assets in
non-investment grade securities, including convertible securities, when
the investment management team determines that such securities are
desirable in light of the Funds' investment objectives and portfolio
mix. Such securities may be purchased as long as they are rated B or
higher at the time of purchase by at least one major rating agency (or,
if unrated, they are of comparable quality as determined by Northern
Trust).
SPECIAL RISKS. Non-investment grade securities (sometimes referred to
as "junk bonds") are considered predominantly speculative by
traditional investment standards. The market value of these low-rated
securities tends to be more sensitive to individual corporate
developments and changes in interest rates and economic conditions than
higher-rated securities. In addition, they generally present a higher
degree of credit risk. Issuers of low-rated securities are often highly
leveraged, so their ability to repay their debt during an economic
downturn or periods of rising interest rates may be impaired. The risk
of loss due to
Page 79
<PAGE> 81
default by these issuers is also greater because low-rated securities
generally are unsecured and are often subordinated to the rights of
other creditors of the issuers of such securities. Investment by a
Fund in defaulted securities poses additional risk of loss should
nonpayment of principal and interest continue in respect of such
securities. Even if such securities are held to maturity, recovery by
a Fund of its initial investment and any anticipated income or
appreciation will be uncertain. A Fund may also incur additional
expenses in seeking recovery on defaulted securities.
The secondary market for lower quality securities is concentrated in
relatively few market markers and is dominated by institutional
investors. Accordingly, the secondary market for such securities is
not as liquid as, and is more volatile than, the secondary market for
higher quality securities. In addition, market trading volume for
these securities is generally lower and the secondary market for such
securities could contract under adverse market or economic conditions,
independent of any specific adverse changes in the condition of a
particular issuer. These factors may have an adverse effect on the
market price and a Fund's ability to dispose of particular portfolio
investments. A less developed secondary market may also make it more
difficult for a Fund to obtain precise valuations of the high yield
securities in its portfolio.
Investments in lower quality securities, whether rated or unrated,
will be more dependent on Northern Trust's credit analysis than would
be the case with investments in higher quality securities.
PORTFOLIO TURNOVER RISK. The investment management team will not consider the
Fund turnover rate a limiting factor in making investment decisions for a Fund.
A high portfolio turnover rate (100% or more) involves correspondingly greater
expenses which must be borne by a Fund and its shareholders. It may also result
in higher short-term capital gains that are taxable to shareholders. See
"Financial Highlights" for the Funds' historical portfolio turnover rates.
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 the High Yield Municipal Fund and the High Yield Fixed Income Fund will
generally not exceed 300%.
TEMPORARY INVESTMENT RISK. Short-term obligations refer to U.S. government
securities, high-quality money market instruments (including commercial paper
and obligations of foreign and domestic banks such as certificates of deposit,
bank and deposit notes, bankers' acceptances and fixed time deposits) and
repurchase agreements with maturities of 13 months or less. Generally, these
obligations are purchased to provide stability and liquidity to a Fund.
INVESTMENT STRATEGY. Each Non-Money Market Fund may invest all or any
portion of its assets in short-term obligations pending investment, to
meet anticipated redemption requests or as a temporary defensive
measure in response to adverse market or economic conditions (except
for the Stock Index and Small Cap Index Funds which generally will not
invest in these securities as part of a temporary defensive strategy
to protect against potential stock market declines).
SPECIAL RISKS. A Non-Money Market Fund may not achieve its investment
objective when its assets are invested in short-term obligations.
TRACKING RISK. The Stock Index and Small Cap Index Funds (the "Index Funds")
seek to track the performance of their respective benchmarks indices.
INVESTMENT STRATEGY. Under normal market conditions, the Investment
Adviser expects the quarterly performance of the Index Funds to be
within a .95 correlation with their respective benchmarks, before
expenses.
SPECIAL RISKS. The Index Funds are subject to the risk of tracking
variance. Tracking variance may result from share purchases and
redemptions, transaction costs, expenses and other factors. These may
prevent a Fund from achieving its investment objective.
SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE CALIFORNIA FUNDS, FLORIDA
INTERMEDIATE TAX-EXEMPT FUND AND THE ARIZONA TAX-EXEMPT FUND. The investments of
the California Funds in California municipal instruments,
Page 80
<PAGE> 82
APPENDICES
the Florida Intermediate Tax-Exempt Fund in Florida municipal instruments and
the Arizona Tax-Exempt Fund in Arizona municipal instruments raise additional
considerations. Payment of the interest on and the principal of these
instruments is dependent upon the continuing ability of issuers in these states
to meet their obligations.
INVESTMENT STRATEGY. Under normal market conditions, at least 65% of
the value of the California Funds total assets will be invested in
California municipal instruments, at least 65% of the value of the
Florida Intermediate Tax-Exempt Fund's total assets will be invested
in Florida municipal instruments; and at least 65% of the value of the
Arizona Tax-Exempt Fund's total assets will be invested in Arizona
municipal instruments. Consequently, these Funds are more susceptible
to factors adversely affecting issuers of California, Florida and
Arizona municipal instruments, and may be riskier than comparable
funds that do not emphasize these issuers to this degree.
SPECIAL RISKS. The California Funds' investments will be affected by
political and economic developments within the State of California
(the "State"), and by the financial condition of the State, its public
authorities and political subdivisions. After suffering a severe
recession in the early 1990's which caused the State to experience
financial difficulties, California's economy entered a sustained
recovery since late 1993 and the State's budget has been returned to a
positive balance. California's long-term credit rating has been raised
after being reduced during the recession. To respond to its own
revenue shortfalls during the recession, the State reduced assistance
to its public authorities and political subdivisions. Cutbacks in
state aid could further adversely affect the financial condition of
cities, counties and education districts which are subject to their
own fiscal constraints. California voters in the past have passed
amendments to the California Constitution and other measures that
limit the taxing and spending authority of California governmental
entities, and future voter initiatives could result in adverse
consequences affecting California municipal instruments. Also, the
ultimate fiscal effect of federally-mandated reform of welfare
programs on the State and its local governments is still to be
resolved. These factors, among others (including the outcome of
related pending litigation), could reduce the credit standing of
certain issuers of California municipal instruments.
Similarly, if Florida or Arizona or any of their respective political
subdivisions should suffer serious financial difficulties to the
extent their ability to pay their obligations might be jeopardized,
the ability of such entities to market their securities, and the value
of the Florida Intermediate Tax-Exempt Fund or the Arizona Tax-Exempt
Fund, could be adversely affected.
In addition to the risk of nonpayment of California, Florida or
Arizona municipal instruments, if these obligations decline in quality
and are downgraded by the Nationally Recognized Statistical Rating
Organizations, 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.
A more detailed description of special factors affecting investments
in California, Florida and Arizona municipal instruments is provided
in the Statement of Additional Information.
SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE TECHNOLOGY FUND. The
Technology Fund's concentration in technology securities presents special risk
considerations.
INVESTMENT STRATEGY: The Technology Fund invests principally in
companies that develop, produce or distribute products and services
related to advances in technology.
SPECIAL RISKS. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or
become adversely impacted by government regulation. Competitive
pressures in the technology industry may affect negatively the
financial condition of technology companies, and the Fund's
concentration in technology securities may subject it to more volatile
price movements than a more diversified securities portfolio. In
certain instances, technology securities may experience dramatic price
movements caused 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. You should,
therefore, expect that
Page 81
<PAGE> 83
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, the Fund's investments may be concentrated in companies
that develop or sell computers, software and peripheral products,
which present the following additional risks. These companies are
often dependent on the existence and health of other products or
industries and face highly competitive pressures, product licensing,
trademark and patent uncertainties and rapid technological changes
which may have a significant effect of their financial condition. For
example, an increasing number of companies and new product offerings
can lead to price cuts and slower selling cycles, and many of these
companies may be dependent on the success of a principal product, may
rely on sole source providers and third-party manufacturers, and may
experience difficulties in managing growth.
A more detailed description of special factors affecting investments in
California, Florida and Arizona municipal instruments is provided in the
Statement of Additional Information.
ADDITIONAL DESCRIPTION OF SECURITIES AND COMMON INVESTMENT TECHNIQUES.
ASSET-BACKED SECURITIES. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. They represent interests in pools of mortgages or other cash-flow
producing assets such as automobile loans, credit card receivables and other
financial assets. In effect, these securities "pass through" the monthly
payments that individual borrowers make on their mortgages or other assets net
of any fees paid to the issuers. Examples of these include guaranteed mortgage
pass-through certificates, collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs").
INVESTMENT STRATEGY. The U.S. Government Money Market Fund, the U.S.
Government Fund and the Short-Intermediate U.S. Government Fund may
purchase securities that are secured or backed by mortgages and that
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The other Funds may purchase these and other types
of asset-backed securities. The Funds will invest in asset-backed
securities rated investment grade (rated BBB or better by S&P, Duff or
Fitch, or Baa or better by Moody's) at the time of purchase. They may
also invest in unrated mortgage-backed securities which the Investment
Adviser believes are of comparable quality. These rating and
comparable quality limitations do not apply to the High Yield
Municipal and High Yield Fixed Income Funds.
SPECIAL RISKS. In addition to credit and market risk, asset-backed
securities involve prepayment risk because the underlying assets
(loans) may be prepaid at any time. The value of these securities may
also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support, or the counterparty. Like
other fixed income securities, when interest rates rise, the value of
an asset-backed security generally will decline. However, when
interest rates decline, the value of an asset-backed security with
prepayment features may not increase as much as that of other fixed
income securities. In addition, non-mortgage asset-backed securities
involve certain risks not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the underlying collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to
the protection of a number of state and Federal consumer credit laws.
Automobile receivables are subject to the risk that the trustee for
the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing the receivables.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Funds can borrow money from
banks and enter into reverse repurchase agreements with banks and other
financial institutions. Reverse repurchase agreements involve the sale of
securities held by a Fund subject to the Fund's agreement to repurchase them at
a mutually agreed upon date and price (including interest).
INVESTMENT STRATEGY. Each Fund may borrow in amounts not exceeding
one-third of its total assets (including the amount borrowed). These
transactions may be entered into as a temporary measure for emergency
purposes or to meet redemption requests. The Funds (other than the
Municipal Money Market, U.S. Government Select Money Market,
California Municipal Money Market, Income Equity, Growth
Page 82
<PAGE> 84
APPENDICES
Equity, Select Equity, and Small Cap Funds) may utilize reverse
repurchase agreements when the investment management team expects that
the interest income to be earned from the investment of the
transaction proceeds will be greater than the related interest
expense. A Fund's reverse repurchase agreements, together with any
other borrowings, will not exceed, in the aggregate, 33 1/3% of the
value of its total assets. In addition, whenever borrowings exceed 5%
of the Fund's total assets, the Fund will not make any investments.
SPECIAL RISKS. Borrowings and reverse repurchase agreements involve
leveraging. If the securities held by the Funds decline in value while
these transactions are outstanding, the net asset value of the Funds'
outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse
repurchase agreements involve the risks that the interest income
earned by a Fund (from the investment of the proceeds) will be less
than the interest expense of the transaction, that the market value of
the securities sold by a Fund will decline below the price the Fund is
obligated to pay to repurchase the securities, and that the securities
may not be returned to the Fund.
CONVERTIBLE SECURITIES. A convertible security is a bond or preferred stock that
may be converted (exchanged) into the common stock of the issuing company within
a specified time period for a specified number of shares. They offer the Funds a
way to participate in the capital appreciation of the common stock into which
the securities are convertible, while earning higher current income than is
available from the common stock.
INVESTMENT STRATEGY. The Equity Funds (other than the Stock Index and
Small Cap Index Funds), the Fixed Income Fund, High Yield Fixed Income
Fund and the International Fixed Income Fund may each acquire
convertible securities. These securities are subject to the same
rating requirements as fixed income securities held by a Fund.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the Funds, other than the U.S. Government
Select Money Market Fund, may invest a portion of their total assets
in custodial receipts. Investments by the U.S. Government Money Market
Fund, U.S. Government Fund and Short-Intermediate U.S. Government Fund
in custodial receipts will not exceed 35% of the value of such Funds'
total assets.
SPECIAL RISKS. Like other stripped obligations, custodial receipts may
be subject to greater price volatility than ordinary debt obligations
because of the way in which their principal and interest are returned
to investors.
EQUITY SWAPS. Equity swaps allow the parties to the swap agreement to exchange
components of return on one equity investment (e.g., a basket of equity
securities or an index) for a component of return on another non-equity or
equity investment, including an exchange of differential rates of return.
INVESTMENT STRATEGY. The Equity Funds may invest in equity swaps.
Equity swaps may be used to invest in a market without owning or
taking physical custody of securities in circumstances where direct
investment may be restricted for legal reasons or is otherwise
impractical. Equity swaps may also be used for other purposes, such as
hedging or seeking to increase total return.
SPECIAL RISKS. Equity swaps are derivative instruments and their
values can be very volatile. To the extent that the investment
management team does not accurately analyze and predict the potential
relative fluctuation on the components swapped with the other party, a
Fund may suffer a loss. The value of some components of an equity swap
(such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is
outstanding, a Fund may suffer a loss if the counterparty defaults.
EXCHANGE RATE-RELATED SECURITIES. Exchange rate-related securities represent
certain foreign debt obligations whose principal values are linked to a foreign
currency but which are repaid in U.S. dollars.
Page 83
<PAGE> 85
INVESTMENT STRATEGY. The Fixed Income, International Fixed Income,
High Yield Fixed Income and Income Equity Funds may invest in exchange
rate-related securities.
SPECIAL RISKS. The principal payable on an exchange rate-related
security is subject to currency risk. In addition, the potential
illiquidity and high volatility of the foreign exchange market may
make exchange rate-related securities difficult to sell prior to
maturity at an appropriate price.
FORWARD CURRENCY EXCHANGE CONTRACTS. A forward currency exchange contract is an
obligation to exchange one currency for another on a future date at a specified
exchange rate.
INVESTMENT STRATEGY. The Equity Funds (other than the Stock Index and
Small Cap Index Funds), the International Funds, the Fixed Income Fund
and the High Yield Fixed Income Fund may enter into forward currency
exchange contracts for hedging purposes and to help reduce the risks
and volatility caused by changes in foreign currency exchange rates.
The International Funds and the High Yield Fixed Income Fund may also
enter into these contracts for speculative purposes (i.e., to increase
total return) or for cross-hedging purposes. Foreign currency exchange
contracts will be used at the discretion of the investment management
team, and no Fund is required to hedge its foreign currency positions.
SPECIAL RISKS. Forward foreign currency contracts are privately
negotiated transactions, and can have substantial price volatility. As
a result, they offer less protection against default by the other
party than is available for instruments traded on an exchange. When
used for hedging purposes, they tend to limit any potential gain that
may be realized if the value of a Fund's foreign holdings increases
because of currency fluctuations. When used for speculative purposes,
forward currency exchange contracts may result in additional losses
that would not otherwise be incurred.
FUTURES CONTRACTS AND RELATED OPTIONS. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. For example, a futures contract may obligate a
Fund, at maturity, to take or make delivery of certain domestic or foreign
securities, the cash value of a securities index or a stated quantity of a
foreign currency. When a Fund purchases an option on a futures contract, it has
the right to assume a position as a purchaser or seller of a futures contract at
a specified exercise price during the option period. When a Fund sells an option
on a futures contract, it becomes obligated to purchase or sell a futures
contract if the option is exercised.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, each Fund (other than the Money Market Funds) may invest in
futures contracts and options on futures contacts on domestic or
foreign exchanges or boards of trade. They may be used for hedging
purposes, to increase total return or to maintain liquidity to meet
potential shareholder redemptions, invest cash balances or dividends
or minimize trading costs.
The value of a Fund's futures contacts may equal up to 100% of its
total assets. However, a Fund will not purchase or sell a futures
contract unless, after the transaction, the sum of the aggregate
amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options used for non-hedging
purposes is 5% or less of its total assets.
SPECIAL RISKS. Futures contracts and options present the following
risks: imperfect correlation between the change in market value of a
Fund's securities and the price of futures contracts and options; the
possible inability to close a futures contract when desired; losses
due to unanticipated market movements which are potentially unlimited;
and the possible inability of the investment management team to
correctly predict the direction of securities prices, interest rates,
currency exchange rates and other economic factors. Foreign exchanges
or boards of trade generally do not offer the same protections as U.S.
exchanges.
ILLIQUID OR RESTRICTED SECURITIES. Illiquid securities include repurchase
agreements and time deposits with notice/termination dates of more than seven
days, certain variable amount master demand notes that cannot be called within
seven days, certain insurance funding agreements (see below), certain unlisted
over-the-counter options and
Page 84
<PAGE> 86
APPENDICES
other securities that are traded in the U.S. but are subject to trading
restrictions because they are not registered under the Securities Act of 1933,
as amended (the "1933 Act").
INVESTMENT STRATEGY. Each Fund may invest up to 15% (10% in the cash of
the Money Market Funds) of its net assets in securities that are
illiquid. If otherwise consistent with their investment objectives and
policies, the Funds may purchase commercial paper issued pursuant to
Section 4(2) of the 1933 Act and domestically traded securities that
are not registered under the 1933 Act but can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act
("Rule 144A Securities"). These securities will not be considered
illiquid so long as the Investment Advisers determine, under guidelines
approved by the Trust's Board of Trustees, that an adequate trading
market exists.
SPECIAL RISKS. Because illiquid and restricted securities may be
difficult to sell at an acceptable price, they may be subject to
greater volatility and may result in a loss to a Fund. The practice of
investing in Rule 144A Securities could increase the level of a Fund's
illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities.
INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is an
agreement that requires a Fund to make cash contributions to a deposit fund of
an insurance company's general account. The insurance company then credits
interest to the Fund for a set time period.
INVESTMENT STRATEGY. The Money Market Fund and Fixed Income Fund may
invest in IFAs issued by insurance companies that meet quality and
credit standards established by the Investment Advisers. The High Yield
Fixed Income Fund may invest in IFAs without regard to a minimum rating
criteria.
SPECIAL RISKS. IFAs are not insured by a government agency--they are
backed only by the insurance company that issues them. As a result,
they are subject to default risk. In addition, an active secondary
market in IFAs does not currently exist. This means that it may be
difficult to sell an IFA at an appropriate price.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. Interest rate and
currency swaps are contracts that obligate a Fund and another party to exchange
their rights to pay or receive interest or specified amounts of currency,
respectively. Interest rate floors entitle the purchasers to receive interest
payments if a specified index falls below a predetermined interest rate.
Interest rate caps entitle the purchasers to receive interest payments if a
specified index exceeds a predetermined interest rate.
INVESTMENT STRATEGY. The Fixed Income Funds and the Income Equity Fund
may enter into interest rate swaps and the U.S. Government,
Short-Intermediate U.S. Government, Fixed Income, International Fixed
Income, High Yield Municipal and High Yield Fixed Income Funds may
purchase interest rate floors or caps to protect against interest rate
fluctuations and fluctuations in the floating rate market. The
International Funds and the High Yield Fixed Income Fund may also enter
into currency swaps to protect again currency fluctuations.
SPECIAL RISKS. If the other party to an interest rate swap defaults, a
Fund's risk of loss consists of the amount of interest payments that
the Fund is entitled to receive. In contrast, currency swaps usually
involve the delivery of the entire principal value of one currency in
exchange for the other currency. Therefore, the entire principal value
of a currency swap is subject to the risk that the other party will
default on its delivery obligations. Like other derivative securities,
swaps, floors and caps can be highly volatile. As a result, they may
not always be successful hedges and they could lower a Fund's total
return.
INVESTMENT COMPANIES. To the extent consistent with their respective investment
objectives and policies, the Funds may invest in securities issued by other
investment companies, including money market funds, index funds, "country funds"
(i.e., funds that invest primarily in issuers located in a specific foreign
country or region), S&P's Depository Receipts ("SPDRs") and similar securities
of other issuers.
INVESTMENT STRATEGY. Investments by a Fund in other investment
companies will be subject to the limitations of the 1940 Act.
Page 85
<PAGE> 87
SPECIAL RISKS. As a shareholder of another investment company, a Fund
would be subject to the same risks as any other investor in that
company. In addition, it would bear a proportionate share of any fees
and expenses paid by that company. These would be in addition to the
advisory and other fees paid directly by the Fund.
LOAN PARTICIPATIONS. A loan participation is an interest in a loan to a U.S. or
foreign company or other borrower which is administered and sold by a financial
intermediary.
INVESTMENT STRATEGY. The High Yield Fixed Income Fund may invest in
loan participations in the form of a direct or co-lending relationship
with the corporate borrower, an assignment of an interest in the loan
by a co-lender or another participant, or a participation in a seller's
share of the loan.
SPECIAL RISKS. Like other debt obligations, loan participations may be
subject to credit risk if the borrower defaults on making interest
payments and repaying the principal. In the case where the Fund
purchases a loan assignment or participation from another lender, the
Fund is also subject to delays, expenses and risks greater than would
have been involved if the Fund had purchased a direct obligation of the
borrower.
MUNICIPAL AND RELATED INSTRUMENTS. Municipal instruments include debt
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies, authorities and
instrumentalities.
Municipal instruments include both "general" and "revenue" bonds and may be
issued to obtain funds for various public purposes. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power.
Revenue obligations are payable only from the revenues derived from a particular
facility or class of facilities. In some cases, revenue bonds are also payable
from the proceeds of a special excise or other specific revenue source such as
lease payments from the user of a facility being financed.
Municipal instruments also include "moral obligation" bonds, which are supported
by a moral commitment but not a legal obligation of a state or municipality, as
well as custodial receipts and certificates of participation that represent
interests in municipal instruments held by a trustee.
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 marked by investment banking firms
under various names such as FLOATs(SM), RITEs(SM), SAVRs(SM) and RIBs(SM).
Because 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 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.
Page 86
<PAGE> 88
APPENDICES
Each Tax-Exempt Fund and Municipal Fund may acquire "stand-by commitments"
relating to the municipal instruments it holds. Under a stand-by commitment, a
dealer agrees to purchase, at the Fund's option, specified municipal instruments
at a specified price. A stand-by commitment may increase the cost, and thereby
reduce the yield, of the municipal instruments to which the commitment relates.
The Funds will acquire stand-by commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights for trading purposes.
INVESTMENT STRATEGY. In connection with its investments in municipal
instruments, the Tax-Exempt Funds and Municipal Funds may invest more
than 25% of their total assets in (a) municipal instruments the
interest upon which is paid solely from revenues of similar projects,
and (b) industrial development obligations. However, the Tax-Exempt
Funds and Municipal Funds do not intend to invest more than 25% of the
value of their total assets in industrial development bonds or similar
obligations where the non-governmental entities supplying the revenues
to be paid are in the same industry.
The Florida Intermediate Tax-Exempt Fund expects to invest principally
in Florida Municipal Instruments, the California Funds expect to invest
principally in California Municipal Instruments and the Arizona
Tax-Exempt Fund expects to invest principally in Arizona Municipal
Instruments. The other Tax-Exempt Funds and Municipal Funds may also
invest from time to time more than 25% of the value of their total
assets in municipal instruments whose issuers are in the same state.
Funds in addition to the Tax-Exempt Funds and Municipal Funds may
invest from time to time in municipal instruments or other securities
issued by state and local governmental bodies. Generally, this will
occur when the yield of municipal instruments, on a pre-tax basis, is
comparable to that of other permitted short-term taxable investments.
Dividends paid by the Funds other than the Tax-Exempt Funds and
Municipal Funds on such investments will be taxable to shareholders.
SPECIAL RISKS. Municipal instruments purchased by the Tax-Exempt Funds
and Municipal Funds may be backed by letters of credit or other forms
of credit enhancement issued by foreign (as well as domestic) banks and
other financial institutions. If the credit quality of these banks and
financial institutions declines, a Fund could suffer a loss to the
extent that the Fund is relying upon this credit support. Risks
relating to foreign banks and financial institutions are described on
page ___ under "Foreign Investment Risk."
In addition, when a substantial portion of a Fund's assets is invested
in instruments which are used to finance facilities involving a
particular industry, whose issuers are in the same state or which are
otherwise related, there is a possibility that an economic, business or
political development affecting one instrument would likewise affect
the related instrument.
OPTIONS. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, each Fund (other than the Money Market Funds) may write
(sell) covered call options, buy put options, buy call options and
write secured put options for hedging (or, with respect to the
International Funds, cross-hedging) purposes or to earn additional
income. Options may relate to particular securities, foreign or
domestic securities indices, financial instruments, foreign currencies
or (in the case of the International Fixed Income Fund and High Yield
Fixed Income Fund) the yield differential between two securities. A
Fund will not purchase put and call options in an amount that exceeds
5% of its net assets at the time of purchase. The total value of a
Fund's assets subject to options written by the Fund will not be
greater than 25% of its net assets at the time the option is written. A
Fund may "cover" a call option by owning the security underlying the
option or through other means. Put options written by a Fund are
"secured" if the Fund maintains liquid assets in a segregated account
in an amount at least equal to the exercise price of the option up
until the expiration date.
SPECIAL RISKS. Options trading is a highly specialized activity that
involves investment techniques and risks different from those
associated with ordinary Fund securities transactions. The value of
options can be highly volatile, and their use can result in loss if the
investment management team is incorrect in its
Page 87
<PAGE> 89
expectation of price fluctuations. The successful use of options for
hedging purposes also depends in part on the ability of the investment
management team to predict future price fluctuations and the degree of
correlation between the options and securities markets.
Each Fund will invest and trade in unlisted over-the-counter options
only with firms deemed creditworthy by the Investment Advisers.
However, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation,
which performs the obligations of its members which fail to perform
them in connection with the purchase or sale of options.
REAL ESTATE INVESTMENT TRUSTS (REITS). REITs are pooled investment vehicles that
invest primarily in either real estate or real estate related loans.
INVESTMENT STRATEGY. The High Yield Fixed Income, Income Equity, Small
Cap Index and Small Cap Funds may invest in REITs.
SPECIAL RISKS. The value of a REIT is affected by changes in the value
of the properties owned by the REIT or securing mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to
repay financing costs and the ability of a REIT's manager. REITs are
also subject to risks generally associated with investments in real
estate. A Fund will indirectly bear its proportionate share of any
expenses, including management fees, paid by a REIT in which it
invests.
REPURCHASE AGREEMENTS. Repurchase agreements involve the purchase of securities
by a Fund subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price.
INVESTMENT STRATEGY. Each Fund may enter into repurchase agreements
with financial institutions such as banks and broker-dealers that are
deemed to be creditworthy by the Investment Advisers. Although the
securities subject to a repurchase agreement may have maturities
exceeding one year, settlement of the agreement will never occur more
than one year after a Fund acquires the securities.
SPECIAL RISKS. In the event of a default, a Fund will suffer a loss to
the extent that the proceeds from the sale of the underlying
securities and other collateral are less than the repurchase price and
the Fund's costs associated with delay and enforcement of the
repurchase agreement. In addition, in the event of bankruptcy, a Fund
could suffer additional losses if a court determines that the Fund's
interest in the collateral is not enforceable.
SECURITIES LENDING. In order to generate additional income, the Funds may lend
securities on a short-term basis to banks, brokers-dealers, or other qualified
institutions. In exchange, the Funds will receive collateral equal to at least
100% of the value of the securities loaned.
INVESTMENT STRATEGY. Securities lending may represent no more than
one-third the value of a Fund's total assets (including the loan
collateral). Any cash collateral received by a Fund in connection with
these loans may be invested in U.S. government securities and other
liquid high-grade debt obligations.
SPECIAL RISKS. The main risk when lending portfolio securities is that
the borrower might become insolvent or refuse to honor its obligation
to return the securities. In this event, a Fund could experience
delays in recovering its securities and may incur a capital loss. In
addition, a Fund may incur a loss in reinvesting the cash collateral
it receives.
STRIPPED OBLIGATIONS. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments, banks and other issuers. They
entitle the holder to receive either interest payments or principal payments
that have been "stripped" from a debt obligation. These obligations include
stripped mortgage-backed securities, which are derivative multi-class mortgage
securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the Funds may purchase stripped securities.
Page 88
<PAGE> 90
APPENDICES
SPECIAL RISKS. Stripped securities are very sensitive to changes in
interest rates and to the rate of principal prepayments. A rapid or
unexpected change in prepayments could severely depress the price of
certain stripped securities and adversely affect a Fund's total
returns.
STRUCTURED SECURITIES. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference.
INVESTMENT STRATEGY. Each Fund may invest in structured securities to
the extent consistent with its investment objective.
SPECIAL RISKS. The terms of some structured securities may provide
that in certain circumstances no principal is due at maturity and,
therefore, a Fund could suffer a total loss of its investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition,
changes in the interest rates or the value of the security at maturity
may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of
market risk than other types of securities. Structured securities may
also be more volatile, less liquid and more difficult to accurately
price than less complex securities due to their derivative nature.
UNITED STATES GOVERNMENT OBLIGATIONS. These include U.S. Treasury obligations,
such as bills, notes and bonds, which generally differ only in terms of their
interest rates, maturities and time of issuance. These also include obligations
issued or guaranteed by the U.S. government or its agencies and
instrumentalities. Securities guaranteed as to principal and interest by the
U.S. government, its agencies or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or an agency or
instrumentality thereof, and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, each Fund may invest in a variety of U.S. Treasury
obligations and also may invest in obligations issued or guaranteed by
the U.S. government or its agencies and instrumentalities.
SPECIAL RISKS. Not all U.S. government obligations carry the same
guarantees. Some, such as those of the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of
the United States Treasury. Other obligations, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to
borrow from the United States Treasury; and others, such as those
issued by the Federal National Mortgage Association ("FNMA"), are
supported by the discretionary authority of the U.S. government to
purchase the agency's obligations. Still others are supported only by
the credit of the instrumentality. No assurance can be given that the
U.S. government would provide financial support to its agencies or
instrumentalities if it is not obligated to do so by law. There is no
assurance that these commitments will be undertaken or complied with
in the future. In addition, the secondary market for certain
participations in loans made to foreign governments or their agencies
may be limited.
VARIABLE AND FLOATING RATE INSTRUMENTS. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that float at a margin above a generally recognized index rate. These
instruments include variable amount master demand notes, long-term variable and
floating rate bonds (sometimes referred to as "Put Bonds") where the Fund
obtains at the time of purchase the right to put the bond back to the issuer or
a third party at par at a specified date and (other than the Money Market Funds)
leveraged inverse floating rate instruments ("inverse floaters"). An inverse
floater is leveraged to the extent that its interest rate varies by an amount
that exceeds the amount of the variation in the index rate of interest.
INVESTMENT STRATEGY. Each Fund may invest in rated and unrated
variable and floating rate instruments to the extent consistent with
its investment objective. Unrated instruments may be purchased by a
Fund if they are determined by the Investment Advisers to be of
comparable quality to rated instruments eligible for purchase by the
Fund.
Page 89
<PAGE> 91
SPECIAL RISKS. Variable and floating rate instruments are subject to
the same risks as fixed income investments, particularly interest rate
and credit risk. The market values of inverse floaters are subject to
greater volatility than other variable and floating rate instruments
due to their higher degree of leverage. Because there is no active
secondary market for certain variable and floating rate instruments,
they may be more difficult to sell if the issuer defaults on its
payment obligations or during periods when the Funds are not entitled
to exercise their demand rights. As a result, the Funds could suffer a
loss with respect to these instruments.
WARRANTS. A warrant represents the right to purchase a security at a
predetermined price for a specified period of time.
INVESTMENT STRATEGY. Each Equity Fund (other than the Stock Index and
Small Cap Index Funds) and the High Yield Fixed Income Fund may invest
up to 5% of its net assets at the time of purchase in warrants and
similar rights. A Fund may also purchase bonds that are issued in
tandem with warrants.
SPECIAL RISKS. Warrants are derivative instruments that present risks
similar to options.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD COMMITMENTS. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
INVESTMENT STRATEGY. Each Fund may purchase or sell securities on a
when-issued, delayed-delivery or forward commitment basis. Although
the Funds would generally purchase securities in these transactions
with the intention of acquiring the securities, the Funds may dispose
of such securities prior to settlement if the investment management
team deems it appropriate to do so.
SPECIAL RISKS. Purchasing securities on a when-issued, delayed
delivery or forward commitment basis involves the risk that the value
of the securities may decrease by the time they are actually issued or
delivered. Conversely, selling securities in these transactions
involves the risk that the value of the securities may increase by the
time they are actually issued or delivered. These transactions also
involve the risk that the seller may fail to deliver the security or
cash on the settlement date.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. These are securities
issued at a discount from their face value because interest payments are
typically postponed until maturity. Interest payments on pay-in-kind securities
are payable by the delivery of additional securities. The amount of the discount
rate varies depending on factors such as the time remaining until maturity,
prevailing interest rates, a security's liquidity and the issuer's credit
quality. These securities also may take the form of debt securities that have
been stripped of their interest payments.
INVESTMENT STRATEGY. Each Fund may invest in zero coupon, pay-in-kind
and capital appreciation bonds to the extent consistent with its
investment objective.
SPECIAL RISKS. The market prices of zero coupon, pay-in-kind and
capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a
greater degree to changes in interest rates than interest-bearing
securities having similar maturities and credit quality. A Fund's
investments in zero coupon, pay-in-kind and capital appreciation bonds
may require the Fund to sell some of its Fund securities to generate
sufficient cash to satisfy certain income distribution requirements.
DISCLAIMERS
The Stock Index Fund is not sponsored, endorsed, sold or promoted by S&P, nor
does S&P guarantee the accuracy and/or completeness of the S&P 500(R) Index or
any data included therein. S&P makes no warranty, express or
Page 90
<PAGE> 92
APPENDICES
implied, as to the results to be obtained by the Fund, owners of the Fund, any
person or any entity from the use of the S&P 500(R) Index or any data included
therein. S&P makes no express or implied warranties and expressly disclaims all
such warranties of merchantability or fitness for a particular purpose for use
with respect to the S&P 500(R) Index or any data included therein.
The Small Cap Index Fund is not sponsored, endorsed, sold or promoted by
Russell, nor does Russell guarantee the accuracy and/or completeness of the
Russell 2000 Index or any data included therein. Russell makes no warranty,
express or implied, as to the results to be obtained by the Fund, owners of the
Fund, any person or any entity from the use of the Russell 2000 Index or any
data included therein. Russell makes no express or implied warranties and
expressly disclaims all such warranties of merchantability or fitness for a
particular purpose for use with respect to the Russell 2000 Index or any data
included therein.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
Page 91
<PAGE> 93
APPENDIX B
The financial highlights tables are intended to help you understand a Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned or lost on an investment in a Fund (assuming reinvestment of
all dividends and distributions). This information has been audited by Arthur
Andersen LLP, whose report is included in the Funds' annual report along with
the Funds' financial statements. The annual report is available upon request and
without charge.
Page 92
<PAGE> 94
FINANCIAL HIGHLIGHTS
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
FUND FUND
------------------------------------------------------------ ---------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(1) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
income ................. 0.05 0.05 0.05 0.05 0.04 0.05 0.05 0.05
- --------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.05) (0.05) (0.05) (0.05) (0.04) (0.05) (0.05) (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) ............. 5.04% 5.31% 5.05% 5.57% 4.55% 4.94% 5.22% 4.93%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $4,886,098 $3,296,030 $1,607,187 $1,061,813 $894,279 $469,866 $417,042 $314,259
Ratio to average net assets
of:(4)
Expenses, net of
waivers and
reimbursements ........... 0.55% 0.55% 0.55% 0.49% 0.45% 0.55% 0.55% 0.55%
Expenses, before
waivers and
reimbursements ........... 0.89% 0.90% 0.90% 0.91% 0.96% 0.91% 0.93% 0.96%
Net investment income,
net of waivers and
reimbursements ........... 4.91% 5.19% 4.94% 5.42% 4.94% 4.82% 5.10% 4.82%
Net investment income,
before waivers and
reimbursements ........... 4.57% 4.84% 4.59% 5.00% 4.43% 4.46% 4.72% 4.41%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT U.S. GOVERNMENT
MONEY MARKET SELECT MONEY MARKET
FUND FUND
-------------------- -----------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1995(1) 1999 1998 1997 1996 1995(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
income ................. 0.05 0.04 0.05 0.05 0.05 0.05 0.02
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.05) (0.04) (0.05) (0.05) (0.05) (0.05) (0.02)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) ............. 5.46% 4.47% 4.87% 5.24% 5.07% 5.55% 1.75%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $207,105 $227,543 $416,527 $306,425 $168,128 $85,400 $82,162
Ratio to average net assets
of:(4)
Expenses, net of
waivers and
reimbursements ........... 0.49% 0.45% 0.55% 0.46% 0.40% 0.33% 0.30%
Expenses, before
waivers and
reimbursements ........... 0.94% 1.01% 0.91% 0.93% 0.97% 1.00% 1.32%
Net investment income,
net of waivers and
reimbursements ........... 5.33% 4.93% 4.73% 5.13% 4.95% 5.43% 5.84%
Net investment income,
before waivers and
reimbursements ........... 4.88% 4.37% 4.37% 4.66% 4.38% 4.76% 4.82%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period April 11, 1994 (commencement of operations) through March
31, 1995.
(2) For the period December 12, 1994 (commencement of operations) through March
31, 1995.
(3) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
Page 93
<PAGE> 95
FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET FUNDS
<TABLE>
<CAPTION>
MUNICIPAL
MONEY MARKET
FUND
---------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
income ...................... 0.03 0.03 0.03 0.03 0.03
- ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ...................... (0.03) (0.03) (0.03) (0.03) (0.03)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 2.98% 3.27% 3.14% 3.54% 2.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $2,384,030 $1,814,343 $1,420,041 $1,102,789 $927,747
Ratio to average net assets of:(4)
Expenses, net of waivers
and reimbursements ............ 0.55% 0.55% 0.55% 0.49% 0.45%
Expenses, before waivers
and reimbursements ............ 0.89% 0.89% 0.90% 0.91% 0.95%
Net investment income,
net of waivers and
reimbursements ................ 2.90% 3.20% 3.08% 3.46% 3.10%
Net investment income,
before waivers and
reimbursements ................ 2.56% 2.86% 2.73% 3.04% 2.60%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
MUNICIPAL
MONEY MARKET
FUND
-----------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
income ...................... 0.03 0.03 0.03 0.04 0.01
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ...................... (0.03) (0.03) (0.03) (0.04) (0.01)
- -----------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------
TOTAL RETURN(3) .................. 2.75% 3.20% 3.19% 3.63% 1.27%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $363,050 $224,843 $200,989 $165,087 $161,316
Ratio to average net assets of:(4)
Expenses, net of waivers
and reimbursements ............ 0.55% 0.49% 0.45% 0.39% 0.35%
Expenses, before waivers
and reimbursements ............ 0.91% 0.94% 0.94% 0.94% 1.07%
Net investment income,
net of waivers and
reimbursements ................ 2.68% 3.14% 3.13% 3.55% 3.78%
Net investment income,
before waivers and
reimbursements ................ 2.32% 2.69% 2.64% 3.00% 3.06%
- -----------------------------------------------------------------------------------------
</TABLE>
(1) For the period April 11, 1994 (commencement of operations) through March
31, 1995.
(2) For the period November 29, 1994 (commencement of operations) through March
31, 1995.
(3) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(4) Annualized for periods less than a full year.
Page 94
<PAGE> 96
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
INTERMEDIATE
U.S. GOVERNMENT TAX-EXEMPT
FUND FUND
--------------------------------------------------------- ------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 10.20 $ 9.88 $ 10.06 $ 9.84 $ 10.00 $ 10.36 $ 10.07 $ 10.22
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.50 0.54 0.51 0.51 0.50 0.39 0.40 0.40
Net realized and
unrealized
gains (losses) on
investments, forward
foreign
currency contracts and
foreign
currency transactions .. 0.10 0.32 (0.11) 0.29 (0.16) 0.11 0.29 (0.06)
- -------------------------------------------------------------------------------------------------------------------------------
Total Income from
Investment
Operations .................. 0.60 0.86 0.40 0.80 0.34 0.50 0.69 0.34
- -------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.49) (0.53) (0.51) (0.51) (0.50) (0.39) (0.40) (0.40)
From net realized gains .. (0.26) (0.01) (0.05) (0.07) -- (0.11) -- (0.07)
In excess of net
investment income ....... -- -- -- -- -- -- -- --
In excess of net
realized gains .......... -- -- (0.02) -- -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (0.75) (0.54) (0.58) (0.58) (0.50) (0.50) (0.40) (0.49)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 10.05 $ 10.20 $ 9.88 $ 10.06 $ 9.84 $ 10.36 $ 10.36 $ 10.07
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) ............. 6.01% 8.90% 3.98% 7.65% 3.49% 4.88% 6.95% 3.39%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $268,242 $229,352 $181,921 $149,062 $116,443 $344,789 $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% 0.90% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ....... 1.07% 1.07% 1.09% 1.10% 1.12% 1.06% 1.07% 1.07%
Net investment income,
net of waivers and
reimbursements ........... 4.73% 5.24% 5.19% 5.07% 5.20% 3.76% 3.84% 3.90%
Net investment income,
before waivers and
reimbursements ........... 4.56% 5.07% 5.00% 4.87% 4.98% 3.55% 3.62% 3.68%
PORTFOLIO TURNOVER
RATE ..................... 123.75% 47.41% 83.41% 112.00% 42.29% 54.03% 61.83% 61.39%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FLORIDA
INTERMEDIATE INTERMEDIATE
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,
1996 1995 1999 1998 1997(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 10.03 $ 10.00 $ 10.47 $ 10.03 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.41 0.40 0.39 0.40 0.24
Net realized and
unrealized
gains (losses) on
investments, forward
foreign
currency contracts and
foreign
currency transactions .. 0.26 0.03 0.16 0.44 0.03
- ------------------------------------------------------------------------------------
Total Income from
Investment
Operations .................. 0.67 0.43 0.55 0.84 0.27
- ------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.41) (0.40) (0.39) (0.40) (0.24)
From net realized gains .. (0.07) -- (0.16) -- --
In excess of net
investment income ....... -- -- -- -- --
In excess of net
realized gains .......... -- -- -- -- --
- ------------------------------------------------------------------------------------
Total Distributions Paid .... (0.48) (0.40) (0.55) (0.40) (0.24)
- ------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 10.22 $ 10.03 $ 10.47 $ 10.47 $ 10.03
- ------------------------------------------------------------------------------------
TOTAL RETURN(2) ............. 6.81% 4.38% 5.38% 8.51% 2.63%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $244,139 $221,251 $37,121 $25,329 $14,807
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ....... 0.85% 0.85% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ....... 1.08% 1.09% 1.29% 1.41% 2.31%
Net investment income,
net of waivers and
reimbursements ........... 4.01% 4.09% 3.67% 3.86% 3.84%
Net investment income,
before waivers and
reimbursements ........... 3.78% 3.85% 3.23% 3.30% 2.38%
PORTFOLIO TURNOVER
RATE ..................... 137.85% 78.87% 57.98% 46.12% 50.77%
- ------------------------------------------------------------------------------------
</TABLE>
Page 95
<PAGE> 97
(1) For the period August 15, 1996 (commencement of operations) through March
31, 1997.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 96
<PAGE> 98
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
FIXED INCOME TAX-EXEMPT
FUND FUND
------------------------------------------------------- --------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999 1998 1997 1996
- -------------------------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 10.42 $ 9.86 $ 10.10 $ 9.78 $ 10.00 $ 10.73 $ 10.24 $ 10.35 $ 10.08
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.54 0.59 0.57 0.58 0.62 0.45 0.47 0.50 0.48
Net realized and
unrealized
gains (losses) on
investments, forward
foreign
currency contracts and
foreign
currency transactions .. -- 0.56 (0.12) 0.50 (0.22) 0.13 0.57 (0.06) 0.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income from
Investment
Operations .................. 0.54 1.15 0.45 1.08 0.40 0.58 1.04 0.44 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.54) (0.58) (0.56) (0.59) (0.62) (0.45) (0.47) (0.47) (0.48)
From net realized gains .. (0.27) (0.01) (0.10) (0.17) -- (0.23) (0.08) (0.05) (0.02)
In excess of net
investment income ....... -- -- (0.01) -- -- -- -- (0.03) --
In excess of net
realized gains .......... -- -- (0.02) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .... (0.81) (0.59) (0.69) (0.76) (0.62) (0.68) (0.55) (0.55) (0.50)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 10.15 $ 10.42 $ 9.86 $ 10.10 $ 9.78 $ 10.63 $ 10.73 $ 10.24 $ 10.35
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) ............. 5.18% 11.90% 4.59% 11.18% 4.16% 5.47% 10.39% 4.32% 7.80%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $275,108 $181,917 $122,444 $101,339 $65,929 $227,823 $167,220 $136,372 $125,113
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ....... 0.90% 0.90% 0.90% 0.90% 0.90% 0.85% 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ....... 1.08% 1.09% 1.12% 1.14% 1.18% 1.08% 1.09% 1.10% 1.10%
Net investment income,
net of waivers and
reimbursements ........... 5.15% 5.71% 5.69% 5.79% 6.48% 4.13% 4.42% 4.61% 4.62%
Net investment income,
before waivers and
reimbursements ........... 4.97% 5.52% 5.47% 5.55% 6.20% 3.90% 4.18% 4.36% 4.37%
PORTFOLIO TURNOVER
RATE ..................... 84.85% 33.55% 87.64% 116.22% 55.27% 140.39% 74.32% 8.10% 60.50%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA
TAX-EXEMPT TAX-EXEMPT
FUND FUND
------------ ---------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1995 1999 1998(1)
- -------------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 10.00 $ 10.76 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .... 0.48 0.43 0.41
Net realized and
unrealized
gains (losses) on
investments, forward
foreign
currency contracts and
foreign
currency transactions .. 0.08 0.23 0.76
- ------------------------------------------------------------------
Total Income from
Investment
Operations .................. 0.56 0.66 1.17
- ------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ................. (0.48) (0.43) (0.41)
From net realized gains .. -- (0.10) --
In excess of net
investment income ....... -- -- --
In excess of net
realized gains .......... -- -- --
- ------------------------------------------------------------------
Total Distributions Paid .... (0.48) (0.53) (0.41)
- ------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ............... $ 10.08 $ 10.89 $ 10.76
- ------------------------------------------------------------------
TOTAL RETURN(2) ............. 5.78% 6.20% 11.86%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .............. $118,690 $77,249 $39,943
Ratio to average net assets
of:(3)
Expenses, net of waivers
and reimbursements ....... 0.85% 0.85% 0.85%
Expenses, before waivers
and reimbursements ....... 1.11% 1.17% 1.60%
Net investment income,
net of waivers and
reimbursements ........... 4.95% 3.87% 4.01%
Net investment income,
before waivers and
reimbursements ........... 4.69% 3.55% 3.26%
PORTFOLIO TURNOVER
RATE ..................... 54.94% 62.55% 22.22%
- ------------------------------------------------------------------
</TABLE>
Page 97
<PAGE> 99
(1) For the period August 8, 1997 (commencement of operations) through March
31, 1998.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 98
<PAGE> 100
FINANCIAL HIGHLIGHTS (CONTINUED)
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
INTERNATIONAL HIGH YIELD HIGH YIELD
FIXED INCOME MUNICIPAL FIXED INCOME
FUND FUND FUND
--------------------------------------------------------------- ---------- ------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999(1) 1999(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 9.85 $ 10.08 $ 10.62 $ 10.64 $ 10.00 $ 10.00 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... 0.38 0.43 0.56 0.78 0.58 0.05 0.11
Net realized and
unrealized
gains (losses) on
investments, forward
foreign currency
contracts
and foreign currency
transactions ................. 0.58 0.02 (0.40) (0.16) 0.64 -- 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income from
Investment
Operations ....................... 0.96 0.45 0.16 0.62 1.22 0.05 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ...................... (0.32) (0.59) (0.58) (0.62) (0.56) (0.04) (0.09)
From net realized gains ....... (0.07) (0.09) (0.11) (0.02) -- -- --
In excess of net
investment income ............ -- -- -- -- (0.02) -- --
In excess of net
realized gains ............... (0.04) -- (0.01) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid ......... (0.43) (0.68) (0.70) (0.64) (0.58) (0.04) (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 10.38 $ 9.85 $ 10.08 $ 10.62 $ 10.64 $ 10.01 $ 10.10
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(2) .................. 9.68% 4.61% 1.39% 5.84% 12.77% 0.57% 2.06%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $ 14,285 $ 13,675 $ 16,426 $ 15,665 $ 13,028 $ 10,033 $ 40,864
Ratio to average net assets of:(3)
Expenses, net of waivers
and reimbursements ............ 1.15% 1.15% 1.15% 1.15% 1.15% 0.85% 0.90%
Expenses, before waivers
and reimbursements ............ 1.96% 1.87% 1.96% 2.00% 2.42% 5.60% 2.18%
Net investment income,
net of waivers and
reimbursements ................ 4.69% 4.98% 5.49% 5.75% 5.96% 2.92% 6.78%
Net investment income,
before waivers and
reimbursements ................. 3.88% 4.26% 4.68% 4.90% 4.69% (1.83)% 5.50%
PORTFOLIO TURNOVER
RATE .......................... 16.49% 30.26% 37.76% 52.05% 43.24% 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 99
<PAGE> 101
(1) Commenced investment operations after the close of business on December 31,
1998.
(2) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(3) Annualized for periods less than a full year.
Page 100
<PAGE> 102
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INCOME EQUITY STOCK INDEX
FUND FUND
------------------------------------------------------ -------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995 1999 1998 1997(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 13.81 $ 11.81 $ 11.59 $ 9.95 $ 10.00 $ 15.03 $ 10.74 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... 0.46 0.45 0.44 0.34 0.29 0.16 0.15 0.08
Net realized and unrealized
Gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions ................. (0.41) 3.02 1.19 1.66 (0.08) 2.49 4.80 0.74
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations ......... 0.05 3.47 1.63 2.00 0.21 2.65 4.95 0.82
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ........................ (0.48) (0.44) (0.44) (0.36) (0.26) (0.17) (0.15) (0.07)
From net realized gains ....... (0.65) (1.03) (0.97) -- -- (0.17) (0.51) (0.01)
In excess of net
investment income ............ -- -- -- -- -- -- -- --
In excess of accumulated
net realized gains on
investment transaction ....... -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid ......... (1.13) (1.47) (1.41) (0.36) (0.26) (0.34) (0.66) (0.08)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 12.73 $ 13.81 $ 11.81 $ 11.59 $ 9.95 $ 17.34 $ 15.03 $ 10.74
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) .................. 0.67% 31.00% 14.42% 20.41% 2.21% 17.78% 47.11% 8.21%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $118,414 $117,562 $77,102 $55,919 $38,954 $169,062 $93,907 $35,840
Ratio to average net assets of:(7)
Expenses, net of waivers
and reimbursements ............ 1.00% 1.00% 1.00% 1.00% 1.00% 0.55% 0.55% 0.55%
Expenses, before waivers
and reimbursements ............ 1.35% 1.37% 1.42% 1.48% 1.55% 1.00% 1.18% 2.23%
Net investment income (loss),
net of waivers and
reimbursements ................ 3.54% 3.53% 3.71% 3.17% 3.08% 1.10% 1.23% 1.92%
Net investment income
(loss), before waivers and
reimbursements ................. 3.19% 3.16% 3.29% 2.69% 2.53% 0.65% 0.60% 0.24%
PORTFOLIO TURNOVER
RATE ........................... 79.95% 81.24% 72.04% 67.32% 45.68% 2.46% 32.06% 64.94%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROWTH EQUITY
FUND
-------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 18.62 $ 13.93 $ 13.15 $ 10.61 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... 0.02 0.03 0.08 0.08 0.08
Net realized and unrealized
Gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions ................. 4.51 6.36 1.49 2.59 0.60
- ----------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations ......... 4.53 6.39 1.57 2.67 0.68
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ........................ (0.02) (0.03) (0.08) (0.08) (0.07)
From net realized gains ....... (1.19) (1.67) (0.71) (0.05) --
In excess of net
investment income ............ -- -- -- -- --
In excess of accumulated
net realized gains on
investment transaction ....... -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Total Distributions Paid ......... (1.21) (1.70) (0.79) (0.13) (0.07)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 21.94 $ 18.62 $ 13.93 $ 13.15 $ 10.61
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(6) .................. 24.72% 48.06% 11.72% 25.13% 6.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $640,948 $479,782 $302,605 $224,571 $113,185
Ratio to average net assets of:(7)
Expenses, net of waivers
and reimbursements ............ 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ............ 1.30% 1.30% 1.33% 1.36% 1.40%
Net investment income (loss),
net of waivers and
reimbursements ................ 0.08% 0.18% 0.56% 0.70% 0.86%
Net investment income
(loss), before waivers and
reimbursements ................. (0.22)% (0.12)% 0.23% 0.34% 0.46%
PORTFOLIO TURNOVER
RATE ........................... 49.67% 73.85% 67.34% 73.20% 82.90%
- ----------------------------------------------------------------------------------------------
</TABLE>
Page 101
<PAGE> 103
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
SELECT EQUITY MID CAP
FUND GROWTH FUND
--------------------------------------------------------- ----------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(2) 1999(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 19.16 $ 14.55 $ 13.12 $ 10.77 $ 10.00 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... -- 0.02 0.02 0.02 0.06 --
Net realized and unrealized
gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions ................. 5.40 6.81 2.05 2.73 0.75 1.72
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations ........ 5.40 6.83 2.07 2.75 0.81 1.72
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ...................... (0.01) (0.02) (0.02) (0.03) (0.04) --
From net realized gains ....... (1.22) (2.20) (0.62) (0.37) -- --
In excess of net
investment income ........... -- -- -- -- -- --
In excess of accumulated
net realized gains on
investment transactions ..... -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions Paid ......... (1.23) (2.22) (0.64) (0.40) (0.04) --
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 23.33 $ 19.16 $ 14.55 $ 13.12 $ 10.77 $ 11.72
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) .................. 28.79% 49.71% 15.64% 25.70% 8.18% 17.19%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $198,530 $126,536 $ 63,677 $ 33,842 $ 15,123 $ 77,378
Ratio to average net assets of:(7)
Expenses, net of waivers
and reimbursements ............ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ............ 1.54% 1.58% 1.67% 1.91% 2.61% 1.65%
Net investment income (loss),
net of waivers and
reimbursements ................ (0.15)% 0.15% 0.21% 0.22% 0.82% (0.51)%
Net investment income
(loss) before waivers and
reimbursements ................. (0.69)% (0.43)% (0.46)% (0.69)% (0.79)% (1.16)%
PORTFOLIO TURNOVER
RATE ........................... 87.73% 148.55% 72.68% 137.99% 48.88% 173.39%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP
FUND
------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR ............. $ 16.76 $ 12.31 $ 11.58 $ 9.98 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .......... 0.04 0.03 0.07 0.05 0.11
Net realized and unrealized
gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions ................. (3.93) 5.14 1.37 2.29 (0.05)
- --------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations ........ (3.89) 5.17 1.44 2.34 0.06
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment
income ...................... (0.01) (0.04) (0.06) (0.07) (0.08)
From net realized gains ....... (0.54) (0.68) (0.65) (0.67) --
In excess of net
investment income ............ -- -- -- -- --
In excess of accumulated
net realized gains on
investment transactions ...... -- -- -- -- --
- --------------------------------------------------------------------------------------------
Total Distributions Paid ......... (0.55) (0.72) (0.71) (0.74) (0.08)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR .................... $ 12.32 $ 16.76 $ 12.31 $ 11.58 $ 9.98
- --------------------------------------------------------------------------------------------
TOTAL RETURN(6) .................. (23.46)% 42.71% 12.48% 24.09% 0.57%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year ................... $264,434 $368,579 $197,113 $155,238 $ 76,627
Ratio to average net assets of:(7)
Expenses, net of waivers
and reimbursements ............ 1.00% 1.00% 1.00% 1.00% 1.00%
Expenses, before waivers
and reimbursements ............ 1.52% 1.53% 1.54% 1.61% 1.76%
Net investment income (loss),
net of waivers and
reimbursements ................ 0.25% 0.28% 0.54% 0.65% 1.36%
Net investment income
(loss) before waivers and
reimbursements ................. (0.27)% (0.25)% 0.00% 0.04% 0.60%
PORTFOLIO TURNOVER
RATE ........................... 18.74% 18.59% 18.92% 46.59% 82.46%
- --------------------------------------------------------------------------------------------
</TABLE>
Page 102
<PAGE> 104
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY FUNDS
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH EQUITY
FUND
---------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ 11.66 $ 10.05 $ 10.23 $ 9.61 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ........... 0.13 0.09 0.09 0.17 0.04
Net realized and unrealized
gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions .................. 1.36 1.98 0.18 0.65 (0.31)
- ------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .......... 1.49 2.07 0.27 0.82 (0.27)
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income ..... -- (0.07) (0.09) (0.11) (0.03)
From net realized gains ........ (0.46) (0.29) (0.23) -- --
In excess of net
investment income ............. (0.12) (0.10) -- (0.09) --
In excess of accumulated
net realized gains on
investment transactions ....... -- -- (0.13) -- (0.09)
- ------------------------------------------------------------------------------------------------
Total Distributions Paid .......... (0.58) (0.46) (0.45) (0.20) (0.12)
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ..................... $ 12.57 $ 11.66 $ 10.05 $ 10.23 $ 9.61
- ------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ................... 13.04% 21.34% 2.61% 8.61% (2.65)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .................... $215,656 $178,210 $165,892 $181,237 $114,673
Ratio to average net assets of: (7)
Expenses, net of waivers
and reimbursements ............. 1.25% 1.25% 1.25% 1.25% 1.25%
Expenses, before waivers
and reimbursements ............. 1.62% 1.62% 1.63% 1.65% 1.71%
Net investment income (loss),
net of waivers and
reimbursements ................. 0.52% 0.79% 0.78% 0.92% 0.47%
Net investment income (loss),
before waivers and
reimbursements ................. 0.15% 0.42% 0.40% 0.52% 0.01%
PORTFOLIO TURNOVER
RATE ........................... 177.89% 145.02% 190.94% 216.86% 158.31%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
SELECT EQUITY TECHNOLOGY
FUND FUND
---------------------------------------------------------- ---------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995(4) 1999 1998 1997(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF YEAR .............. $ 12.52 $ 10.37 $ 10.73 $ 9.78 $ 10.00 $ 17.11 $ 11.95 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income ........... 0.04 0.22 0.04 0.01 0.04 -- -- --
Net realized and unrealized
gains (losses) on
investments, options,
futures contracts and
foreign currency
transactions .................. 1.08 2.19 (0.25) 0.99 (0.23) 13.55 6.06 2.10
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .......... 1.12 2.41 (0.21) 1.00 (0.19) 13.55 6.06 2.10
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS PAID:
From net investment income ..... -- (0.16) (0.03) (0.02) (0.03) -- -- --
From net realized gains ........ (0.65) -- -- -- -- (0.67) (0.90) (0.15)
In excess of net
investment income ............. (0.01) (0.10) (0.04) (0.03) -- -- -- --
In excess of accumulated
net realized gains on
investment transactions ....... -- -- (0.08) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Paid .......... (0.66) (0.26) (0.15) (0.05) (0.03) (0.67) (0.90) (0.15)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR ..................... $ 12.98 $ 12.52 $ 10.37 $ 10.73 $ 9.78 $ 29.99 $ 17.11 $ 11.95
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(6) ................... 9.16% 23.74% (1.95)% 10.20% (1.95)% 79.97% 52.62% 20.82%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of year .................... $124,513 $117,618 $108,944 $102,719 $ 71,958 $343,709 $104,389 $ 43,754
Ratio to average net assets of: (7)
Expenses, net of waivers
and reimbursements ............. 1.25% 1.25% 1.25% 1.25% 1.25% 1.23% 1.25% 1.25%
Expenses, before waivers
and reimbursements ............. 1.66% 1.64% 1.66% 1.71% 1.75% 1.53% 1.59% 2.02%
Net investment income (loss),
net of waivers and
reimbursements ................. 0.38% 0.29% 0.47% 0.12% 0.47% (0.87)% (0.96)% (0.75)%
Net investment income (loss),
before waivers and
reimbursements ................. (0.03)% (0.10) 0.06% (0.34)% (0.03)% (1.17)% (1.30)% (1.52)%
PORTFOLIO TURNOVER
RATE ........................... 168.19% 98.22% 97.60% 176.71% 97.69% 61.01% 74.75% 67.89%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 103
<PAGE> 105
- ---------------------------------
(1) For the period October 7, 1996 (commencement of operations) through March
31, 1997.
(2) For the period April 6, 1994 (commencement of operations) through March 31,
1995.
(3) Commenced investment operations after the close of business on March 31,
1998.
(4) For the period April 5, 1994 (commencement of operations) through March 31,
1995.
(5) Commenced investment operations on April 1, 1996.
(6) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return
is not annualized for periods less than one year.
(7) Annualized for periods less than a full year.
Page 104
<PAGE> 106
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In the Funds' annual reports, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("SAI"). The SAI is incorporated
by reference into this Prospectus (is legally considered part of this
Prospectus).
The Funds' annual and semiannual reports, and the SAI, are available free upon
request by calling The Northern Funds Center at 1-800-595-9111.
TO OBTAIN OTHER INFORMATION AND FOR SHAREHOLDER INQUIRIES:
BY TELEPHONE - Call 1-800-595-9111
BY MAIL - Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
ON THE INTERNET - Text-only versions of the Funds' documents are available:
- On the SEC's website at http://www.sec.gov.
- On Northern Funds' website at http://www.northernfunds.com.
You may review and obtain copies of Northern Funds' documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies of
Northern Funds' documents by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, D.C. 20549-6009. Information on the
operation of the public reference room may be obtained by calling the SEC at
1-800-SEC-0330.
[LOGO]
811-8236
Page 105
<PAGE> 107
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
INTERMEDIATE TAX-EXEMPT FUND
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
FIXED INCOME FUND
TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
INTERNATIONAL FIXED INCOME FUND
HIGH YIELD MUNICIPAL FUND
HIGH YIELD FIXED INCOME FUND
INCOME EQUITY FUND
STOCK INDEX FUND
GROWTH EQUITY FUND
SELECT EQUITY FUND
MID CAP GROWTH FUND
SMALL CAP INDEX FUND
SMALL CAP FUND
INTERNATIONAL GROWTH EQUITY FUND
INTERNATIONAL SELECT EQUITY FUND
TECHNOLOGY FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated July 30, 1999 (the
"Additional Statement") is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated July 30, 1999, as amended or
supplemented from time to time, for the Money Market Fund, U.S. Government Money
Market Fund, U.S. Government Select Money Market Fund, Municipal Money Market
Fund, California Municipal Money Market Fund (collectively, the "Money Market
Funds"), U.S. Government Fund, Short-Intermediate U.S.
-1-
<PAGE> 108
Government Fund, Intermediate Tax-Exempt Fund, California Intermediate
Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Fixed Income Fund,
Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, High Yield
Municipal Fund, High Yield Fixed Income Fund, International Fixed Income Fund,
Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund,
Mid Cap Growth Fund, Small Cap Index Fund, Small Cap Fund, International Growth
Equity Fund, International Select Equity Fund and Technology Fund (collectively,
the "Non-Money Market Funds," and together with the Money Market Funds, the
"Funds") of Northern Funds (the "Prospectus"). Copies of the Prospectus may be
obtained without charge from the Transfer Agent by writing to the Northern Funds
Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by calling
1-800-595-9111. Capitalized terms not otherwise defined have the same meaning as
in the Prospectus.
The audited financial statements and related report of Arthur Andersen
LLP, independent accountants, contained in the annual report to shareholders for
the fiscal year ended March 31, 1999 are incorporated herein by reference in the
section entitled "Financial Statements." No other part of the annual report is
incorporated by reference herein. Copies of the annual report may be obtained,
upon request and without charge by calling The Northern Trust Company at
1-800-595-9111.
----------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-2-
<PAGE> 109
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
ADDITIONAL INVESTMENT INFORMATION........................................ 4
Investment Objectives and Policies....................................... 4
Special Risk Factors and Considerations Relating to California
Municipal Instruments, Florida Municipal Instruments and Arizona
Municipal Instruments.............................................. 33
California Municipal Instruments......................................... 33
Florida Municipal Instruments............................................ 47
Arizona Municipal Instruments............................................ 49
Investment Restrictions.................................................. 50
ADDITIONAL TRUST INFORMATION............................................. 55
Classification and History............................................... 55
Trustees and Officers.................................................... 55
Investment Adviser, Transfer Agent and Custodian......................... 58
Administrator and Distributor............................................ 71
Service Organizations.................................................... 74
Counsel and Auditors..................................................... 76
In-Kind Purchases and Redemptions........................................ 76
Automatic Investing Plan................................................. 76
Directed Reinvestments................................................... 77
Redemptions and Exchanges................................................ 77
Retirement Plans......................................................... 78
Expenses................................................................. 78
PERFORMANCE INFORMATION.................................................. 78
Money Market Funds....................................................... 78
Non-Money Market Funds................................................... 80
General Information...................................................... 85
NET ASSET VALUE.......................................................... 88
TAXES ................................................................... 90
Federal - General Information............................................ 90
Federal - Tax-Exempt Information......................................... 92
Taxation of Certain Financial Instruments................................ 93
Special State Tax Considerations Pertaining to the California Funds...... 93
Special State Tax Considerations Pertaining to the Florida Intermediate
Tax-Exempt Fund.................................................... 95
Special State Tax Considerations Pertaining to the Arizona Tax-Exempt
Fund............................................................... 95
DESCRIPTION OF SHARES.................................................... 96
FINANCIAL STATEMENTS..................................................... 99
OTHER INFORMATION........................................................ 99
APPENDIX A............................................................... A-1
APPENDIX B............................................................... B-1
</TABLE>
-3-
<PAGE> 110
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives, strategies and risks
of the Funds as set forth in the Prospectus. In addition to the instruments
discussed below and in the Prospectus, each Fund may purchase other types of
financial instruments, however designated, whose investment and credit quality
characteristics are determined by the Investment Advisers to be substantially
similar to those of any other investment otherwise permitted by the Funds'
investment policies.
MONEY MARKET FUNDS
Money Market Fund seeks to maximize current income to the
extent consistent with the preservation of capital and
maintenance of liquidity by investing only in high-quality
money market instruments.
U.S. Government Money Market Fund has the same objective as
the Money Market Fund but invests primarily in securities
issued or guaranteed by the U.S. government, its agencies
or instrumentalities and related repurchase agreements.
U.S. Government Select Money Market Fund seeks to maximize
current income to the extent consistent with the preservation
of capital and maintenance of liquidity by investing
exclusively in high quality money market instruments.
Municipal Money Market Fund seeks high current income exempt
from regular federal tax to the extent consistent with
preserving capital by investing mainly in short-term municipal
instruments.
California Municipal Money Market Fund seeks to provide its
shareholders to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of
income exempt from regular federal income tax and California
state personal income tax.
FIXED INCOME FUNDS
U.S. Government Fund seeks high current income from U.S.
Government securities. The Fund's dollar-weighted average
maturity is anticipated to range between one and ten years. It
is designed for investors who seek greater principal stability
than is generally available from higher yielding corporate
bonds.
-4-
<PAGE> 111
Short-Intermediate U.S. Government Fund seeks high current
income from a broad range of U.S. Government securities. The
Fund's dollar-weighted average maturity is anticipated to
range between two and five years. It is designed for investors
who seek greater principal stability than is generally
available from higher yielding corporate bonds.
Fixed Income Fund seeks high current income from a broad range
of bonds and other fixed income securities. The Fund's average
maturity is anticipated to range between seven and twelve
years. This Fund generally presents greater risk and reward
potential than the U.S. Government Fund and the
Short-Intermediate U.S. Government Fund.
International Fixed Income Fund seeks to maximize total return
consistent with reasonable risk while investing in foreign
securities markets. Total return is comprised of current
income and value fluctuations from investing in bonds and
other fixed income securities of foreign issuers.
High Yield Municipal Fund seeks a high level of current income
exempt from regular federal income tax.
High Yield Fixed Income Fund seeks a high level of current
income. In seeking current income, the Fund may also consider
the potential for capital appreciation. In pursuing its
investment objective, the Fund invests in high yield fixed
income instruments.
TAX-EXEMPT FUNDS
Intermediate Tax-Exempt Fund seeks high current income exempt
from regular federal income tax by investing in a broad range
of municipal instruments with an expected average maturity of
three to ten years.
California Intermediate Tax-Exempt Fund seeks high current
income exempt from regular federal income tax and California
state personal income tax by investing in municipal
instruments with an expected average maturity of three to ten
years.
Florida Intermediate Tax-Exempt Fund seeks high current income
exempt from regular federal income tax by investing in
municipal instruments with an expected average maturity of
three to ten years. The Fund intends, but cannot guarantee,
that its shares will qualify for exemption from the Florida
intangibles tax.
Tax-Exempt Fund seeks high current income exempt from regular
federal income tax by investing in municipal instruments with
an expected average maturity of ten to thirty years.
-5-
<PAGE> 112
Arizona Tax-Exempt Fund seeks high current income exempt from
regular federal income tax and Arizona state personal income
tax by investing in municipal instruments with an expected
average maturity of ten to thirty years.
California Tax-Exempt Fund seeks high current income exempt
from regular federal income tax and California state personal
income tax by investing in municipal instruments with an
expected average maturity of ten and thirty years.
EQUITY FUNDS
Income Equity Fund seeks to achieve high current income and,
as a secondary objective, longer-term capital appreciation.
The Fund invests in convertible and other equity securities.
Because it emphasizes high current income, this Fund is likely
to have the least price fluctuation of Northern Funds' equity
funds.
Stock Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance of
the securities included in the S&P 500 Index.
Growth Equity Fund seeks long-term capital appreciation by
investing mainly in the equity securities of growth companies.
It is designed for investors willing to accept above-average
price volatility in search of long-term reward.
Select Equity Fund is also for the more aggressive investor,
seeking long-term capital appreciation by investing
principally in common stocks of companies the adviser believes
to have superior growth characteristics. Any income is
incidental to this objective.
Mid Cap Growth Fund seeks long-term capital appreciation by
investing primarily in equity securities of companies with
market capitalizations that are within the capitalization
range of the Standard & Poor's MidCap 400 Stock Index at the
time of investment.
Small Cap Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance of
the securities included in the Russell 2000 Small Stock Index
(the "Russell Index").
Small Cap Fund seeks long-term capital appreciation; any
income is incidental to this objective. Because it invests
principally in the equity securities of smaller companies,
this Fund is likely to have more price volatility than the
Growth Equity and Select Equity Funds.
-6-
<PAGE> 113
International Growth Equity Fund offers the potential benefits
of international diversification to investors willing to
accept above-average price volatility while seeking long-term
capital appreciation. While subject to additional risks such
as currency fluctuations and the higher volatility of foreign
securities, this Fund uses diversification, in an effort to
control risk.
International Select Equity Fund seeks long-term growth by
investing principally in common stock of foreign issuers that
the adviser believes are growing faster than their markets.
Because fewer countries and securities are generally
represented in this Fund than in the International Growth
Equity Fund, it is likely to experience more price volatility.
Technology Fund seeks long-term capital appreciation by
investing principally in equity securities and securities
convertible into common stock of companies that develop,
produce or distribute products and services related to
advances in technology. The Fund will, under normal market
conditions, invest at least 65% of the value of its total
assets in securities of companies principally engaged in
technology business activities. An issuer is considered
principally engaged in technology business activities if such
issuer is listed on the Morgan Stanley High-Technology 35
Index (the "Morgan Stanley Index"), the Hambrecht and Quist
Technology Index (the "H&Q Index"), the SoundView Technology
Index, the technology grouping of the S&P 500 Index or any
other comparable index.
The Morgan Stanley Index is a broad-market technology
indicator dedicated exclusively to the electronics-based
technology sector. The 35 stocks in the Index include highly
capitalized 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 SoundView Technology Index
includes approximately 100 companies from the design,
automation, communications, mainframe computer, microcomputer,
minicomputer, peripherals, semiconductor, software and related
services industries. The H&Q Index is comprised of publicly
traded stocks of approximately 200 technology companies. The
H&Q Index includes companies in the electronics, medical and
related technologies industries and is a market capitalization
weighted index. Changes in the indices may occur when Morgan
Stanley, SoundView or H&Q choose to modify their indices or as
mergers, acquisitions and failures dictate. Such changes may
happen with fair regularity owing to the fast-changing nature
of the technology industries.
-7-
<PAGE> 114
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME
DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party. Bank notes and bankers' acceptances rank junior to deposit liabilities of
the bank and pari passu with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance sheet, while
deposit notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation
only to the extent of $100,000 per depositor per bank.
A Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee Cds"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee Bas"), which are
U.S. dollar-denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the United States.
INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is
normally a general obligation of the issuing insurance company and not a
separate account. The purchase price paid for an IFA becomes part of the general
assets of the insurance company, and the contract is paid from the company's
general assets. The Money Market Fund and Fixed Income Fund will only purchase
highly rated IFAs. The High Yield Fixed Income Fund is not subject to any
minimum rating criteria. Generally, IFAs are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in IFAs may not exist. Therefore, IFAs will be subject to a
Fund's limitation on illiquid investments when the Fund may not demand payment
of the principal amount within seven days and a reliable trading market is
absent. See "Illiquid Securities."
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, each Fund may invest in
zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation
-8-
<PAGE> 115
bonds are debt securities issued or sold at a discount from their face value and
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified date. The original issue discount varies depending on
the time remaining until maturity or cash payment date, prevailing interest
rates, the liquidity of the security and the perceived credit quality of the
issuer. These securities also may take the form of debt securities that have
been stripped of their unmatured interest coupons, the coupons themselves or
receipts or certificates representing interests in such stripped debt
obligations or coupons. The market prices of zero coupon bonds, capital
appreciation bonds and PIK securities generally are more volatile than the
market prices of interest bearing securities and are likely to respond to a
greater degree to changes in interest rates than interest bearing securities
having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide
the issuer with the option of paying interest or dividends on such obligations
in cash or in the form of additional securities rather than cash. Similar to
zero coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, a Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the Fund.
LOAN PARTICIPATIONS. The High Yield Fixed Income Fund may invest in loan
participations. Such loans must be to issuers in whose obligations the High
Yield Fixed Income Fund may invest. A loan participation is an interest in a
loan to a U.S. or foreign company or other borrower which is administered and
sold by a financial intermediary. In a typical corporate loan syndication, a
number of lenders, usually banks (co-lenders), lend a corporate borrower a
specified sum pursuant to the terms and conditions of a loan agreement. One of
the co-lenders usually agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fixed Income Fund may
take the form of a direct or co-lending relationship with the corporate
borrower, an assignment of an interest in the loan by a co-lender or another
participant, or a participation in the seller's share of the loan. When the High
Yield Fixed Income Fund acts as co-lender in connection with a participation
interest or when the High Yield Fixed Income Fund acquires certain participation
interests, the High Yield Fixed Income Fund will have direct recourse against
the borrower if the borrower fails to pay scheduled principal and interest. In
cases where the High Yield Fixed Income Fund lacks direct recourse, it will look
to the agent bank to enforce appropriate credit remedies against
-9-
<PAGE> 116
the borrower. In these cases, the High Yield Fixed Income Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation (such as commercial
paper) of such borrower. For example, in the event of the bankruptcy or
insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fixed
Income Fund may be regarded as a creditor of the agent bank (rather than of the
underlying corporate borrower), so that the High Yield Fixed Income Fund may
also be subject to the risk that the agent bank may become insolvent. The
secondary market, if any, for these loan participations is limited and any loan
participations purchased by the High Yield Fixed Income Fund will be regarded as
illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fixed Income Fund's portfolio investments, the
issuer of a loan participation will be the underlying borrower. However, in
cases where the High Yield Fixed Income Fund does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the High Yield Fixed Income Fund and the borrower will be
deemed issuers of a loan participation.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Although the securities subject
to a repurchase agreement may bear maturities exceeding one year, settlement for
the repurchase agreement will never be more than one year after a Fund's
acquisition of the securities and normally will be within a shorter period of
time. Securities subject to repurchase agreements are held either by Northern
Funds' custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose a Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Funds may use the proceeds of reverse repurchase
agreements to purchase other securities either maturing, or under an agreement
to resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
repurchase price. A Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Fund will segregate liquid assets in an amount at least equal to
the market value of the securities, plus accrued interest, subject to the
agreement.
-10-
<PAGE> 117
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable and
floating rate instruments that may be acquired by the Funds as described in the
Prospectus, the Investment Advisers will consider the earning power, cash flows
and other liquidity ratios of the issuers and guarantors of such instruments
and, if the instruments are subject to demand features, will monitor their
financial status and ability to meet payment on demand. In determining weighted
average portfolio maturity, an instrument may, subject to applicable Securities
and Exchange Commission ("SEC") regulations, be deemed to have a maturity
shorter than its nominal maturity based on the period remaining until the next
interest rate adjustment or the time a Fund can recover payment of principal as
specified in the instrument. Where necessary to ensure that a variable or
floating rate instrument is of the minimum required credit quality for a Fund,
the issuer's obligation to pay the principal of the instrument will be backed by
an unconditional bank letter or line of credit, guarantee or commitment to lend.
Variable and floating rate instruments eligible for purchase by the Funds
include variable amount master demand notes, which permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate, and (except for the Money Market Funds) leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage interest in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. The Funds
may deem the maturity of variable and floating rate instruments to be less than
their stated maturities based on their variable and floating rate features
and/or their put features. Unrated variable and floating rate instruments will
be determined by the Investment Advisers to be of comparable quality at the time
of purchase to rated instruments which may be purchased by the Funds.
Variable and floating rate instruments including inverse floaters held by
a Fund will be subject to the Fund's limitation on illiquid investments when the
Fund may not demand payment of the principal amount within seven days absent a
reliable trading market.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. Each Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
negotiate a commitment after entering into it. A Fund also
-11-
<PAGE> 118
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments until three days prior to the settlement date, or otherwise cover
its position. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining a Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.
UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be acquired by the Funds include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks and Maritime
Administration.
SUPRANATIONAL BANK OBLIGATIONS. A Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development). Obligations of supranational banks may be
supported by appropriated but unpaid commitments of their member countries and
there is no assurance that these commitments will be undertaken or met in the
future.
STRIPPED OBLIGATIONS. The Treasury Department has facilitated transfers of
ownership of zero coupon securities by accounting separately for the beneficial
ownership of particular interest coupon and principal payments on Treasury
securities through the Federal Reserve book-entry record-keeping system. The
Federal Reserve program as established by the Treasury Department is known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." The Funds may purchase securities registered in the STRIPS program.
Under the STRIPS program, the Funds are able to have their beneficial ownership
of zero coupon securities recorded directly in the book-entry record-keeping
system in lieu of having to hold certificates or other evidences of ownership of
the underlying U.S. Treasury securities.
In addition, the Funds, other than the U.S. Government Select Money Market
Fund, may acquire U.S. Government obligations and their unmatured interest
coupons that have been separated ("stripped") by their holder, typically a
custodian bank or investment brokerage firm. Having separated the interest
coupons from the underlying principal of the U.S. Government obligations, the
holder will resell the stripped securities in custodial receipt programs with a
number of different names, including "Treasury Income Growth Receipts" ("TIGRs")
and "Certificate of Accrual on Treasury Securities" ("CATS"). The stripped
coupons are sold separately from the underlying principal, which is usually sold
at a deep discount because the
-12-
<PAGE> 119
buyer receives only the right to receive a future fixed payment on the security
and does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are ostensibly owned by the bearer or holder), in
trust on behalf of the owners. Counsel to the underwriters of these certificates
or other evidences of ownership of U.S. Treasury securities have stated that, in
their opinion, purchasers of the stripped securities most likely will be deemed
the beneficial holders of the underlying U.S. Government obligations for federal
tax purposes. Northern Funds is unaware of any binding legislative, judicial or
administrative authority on this issue.
The Prospectus discusses other types of stripped securities that may be
purchased by the Funds, including stripped mortgage-backed securities ("SMBS").
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal.
However, in some instances, one class will receive some of the interest and most
of the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a risk that the initial investment will not be fully recouped. SMBS
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
may be considered liquid under guidelines established by the Trust's Board of
Trustees if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the net asset
value per share.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Funds may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other assets.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made periodically,
thus in effect "passing through" such payments made by the individual borrowers
on the assets that underlie the securities, net of any fees paid to the issuer
or guarantor of the securities. The average life of asset-backed securities
varies with the maturities of the underlying instruments, and the average life
of a mortgage-backed instrument, in particular, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely.
If an asset-backed security is purchased at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Conversely, if an asset-backed security is purchased at a
discount, faster than expected prepayments will
-13-
<PAGE> 120
increase, while slower than expected prepayments will decrease, yield to
maturity. In calculating a Fund's average weighted maturity, the maturity of
asset-backed securities will be based on estimates of average life.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments.
Asset-backed securities acquired by the Funds may include collateralized
mortgage obligations ("CMOs") issued by private companies. CMOs provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect
to be taxed as pass-through entities known as real estate mortgage investment
conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date. The relative
payment rights of the various CMO classes may be structured in a variety of
ways. The Funds will not purchase "residual" CMO interests, which normally
exhibit greater price volatility.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes"), which are guaranteed as to the timely payment of principal and interest
by GNMA and backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of GNMA
to borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes"), which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
-14-
<PAGE> 121
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
MUNICIPAL INSTRUMENTS. Opinions relating to the validity of municipal
instruments (including California, Florida and Arizona municipal instruments)
and to federal and state tax issues relating to these securities are rendered by
counsel to the respective issuing authorities at the time of issuance. Such
opinions may contain various assumptions, qualifications or exceptions that are
reasonably acceptable to Northern Trust. Neither Northern Funds nor Northern
Trust will review the proceedings relating to the issuance of municipal
instruments or the bases for such opinions.
Municipal instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
The 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
-15-
<PAGE> 122
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 futures 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.
An issuer's obligations under its municipal instruments are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal instruments may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their federal alternative minimum taxable income.
Northern Funds cannot predict what legislation, if any, may be proposed in the
future in Congress as regards the federal income tax status of interest on
municipal instruments or which proposals, if any, might be enacted. Such
proposals, if enacted, might materially and adversely affect the availability of
municipal instruments for investment by the Municipal Money Market, California
Municipal Money Market, Intermediate Tax-Exempt, California Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt,
California Tax-Exempt and High Yield Municipal Funds and the Funds' liquidity
and value. In such an event the Board of Trustees would reevaluate the Funds'
investment objectives and policies and consider changes in their structure or
possible dissolution.
Certain of the municipal instruments held by a Fund may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Instrument at the time of its
original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by
-16-
<PAGE> 123
changes in interest rates and other factors. A Fund may invest more than 25% of
its total assets in municipal instruments covered by insurance policies.
Interest earned by the Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Arizona Tax-Exempt Fund or California Tax-Exempt Fund on private activity
bonds (if any) that is treated as a specific tax preference item under the
federal alternative minimum tax will not be deemed to have been derived from
municipal instruments for purposes of determining whether that Fund meets its
fundamental policy that at least 80% of its annual gross income be derived from
municipal instruments.
As described in the Prospectus, the Tax-Exempt Funds and the Municipal
Money Market, California Municipal Money Market and High Yield Municipal Funds
may invest in municipal leases, which may be considered liquid under guidelines
established by Northern Funds' Board of Trustees. The guidelines will provide
for determination of the liquidity of a municipal lease obligation based on
factors including the following: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer. Northern Trust, under
the supervision of Northern Funds' Board of Trustees, will also consider the
continued marketability of a municipal lease obligation based upon an analysis
of the general credit quality of the municipality issuing the obligation and the
essentiality to the municipality of the property covered by the lease.
STANDBY COMMITMENTS. The Tax-Exempt Funds and Municipal Money Market,
California Municipal Money Market and High Yield Municipal Funds may enter into
standby commitments with respect to municipal instruments held by them. Under a
standby commitment, a dealer agrees to purchase at a Fund's option a specified
Municipal Instrument. Standby commitments may be exercisable by a Fund at any
time before the maturity of the underlying municipal instruments and may be
sold, transferred or assigned only with the instruments involved.
The Funds expect that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds may pay for a standby commitment either
separately in cash or by paying a higher price for municipal instruments which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding standby commitments held by a Fund will not exceed 1/2 of
1% of the value of the Fund's total assets calculated immediately after each
standby commitment is acquired.
The Funds intend to enter into standby commitments only with dealers,
banks and broker-dealers which, in Northern Trust's opinion, present minimal
credit risks. The Funds will acquire standby commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a standby commitment will not affect the
valuation of the underlying Municipal Instrument. The actual standby commitment
will be
-17-
<PAGE> 124
valued at zero in determining net asset value. Accordingly, where a Fund pays
directly or indirectly for a standby commitment, its cost will be reflected as
an unrealized loss for the period during which the commitment is held by the
Fund and will be reflected in realized gain or loss when the commitment is
exercised or expires.
WARRANTS. The Income Equity, Growth Equity, Select Equity, Mid Cap Growth,
Small Cap, International Growth Equity, International Select Equity, Technology
and High Yield Fixed Income Funds may purchase warrants and similar rights,
which are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a specified
price during a specified period of time. The prices of warrants do not
necessarily correlate with the prices of the underlying shares. The purchase of
warrants involves the risk that a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
FOREIGN SECURITIES. The International Funds intend to invest primarily in
the securities of foreign issuers. In addition, each Equity Fund, the Fixed
Income Fund and the High Yield Fixed Income Fund may invest a portion of their
assets in such securities, including (except with respect to the Fixed Income
Fund) eurodollar convertible securities, which are fixed income securities that
are issued in U.S. dollars outside the United States and are convertible into or
exchangeable for equity securities of the same or a different issuer. The Money
Market Fund may also invest in dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, as well as other foreign issuers.
These obligations may be issued by supranational entities, including
international organizations (such as the European Coal and Steel Community)
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies.
Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded outside
the United States and in investments denominated in foreign currencies. Market
risk involves the possibility that stock prices will decline over short or even
extended periods. The stock markets tend to be cyclical, with periods of
generally rising prices and periods of generally declining prices. These cycles
will affect the value of a Fund that invests in foreign stocks. The holdings of
a Fund that 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
-18-
<PAGE> 125
foreign currency-denominated security in terms of U.S. dollars. A rise in
foreign interests rates or decline in the value of the foreign currency relative
to the U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
are subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
The Money Market Fund, the Fixed Income Fund, the High Yield Fixed Income
Fund, each Equity Fund and each International Fund may invest in foreign debt,
including the securities of foreign governments. Several risks exist concerning
such investments, including the risk that foreign governments may default on
their obligations, may not respect the integrity of such debt, may attempt to
renegotiate the debt at a lower rate, and may not honor investments by United
States entities or citizens.
To the extent consistent with their investment objectives, the Funds may
also invest in obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) which are supported by subscribed,
but unpaid, commitments of its member countries. There is no assurance that
these commitments will be undertaken or complied with in the future.
The 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.
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
-19-
<PAGE> 126
securities markets of these countries are less liquid, subject to greater price
volatility, have smaller market capitalizations and have problems with
securities registration and custody. As a result, the risks presented by
investments in these countries are heightened. Additionally, settlement
procedures in emerging countries are frequently less developed and reliable than
those in the United States and may involve a Fund's delivery of securities
before receipt of payment for their sale. Settlement or registration problems
may make it more difficult for a Fund to value its portfolio securities and
could cause the Fund to miss attractive investment opportunities, to have a
portion of its assets uninvested or to incur losses due to the failure of a
counterparty to pay for securities the Fund has delivered or the Fund's
inability to complete its contractual obligations.
Although a Fund (other than the Money Market Fund) may invest in
securities denominated in foreign currencies, its portfolio securities and other
assets are valued in U.S. dollars. Currency exchange rates may fluctuate
significantly over short periods of time causing, together with other factors, a
Fund's net asset value to fluctuate as well. Currency exchange rates can be
affected unpredictably by the intervention or the failure to intervene by U.S.
or foreign governments or central banks, or by currency controls or political
developments in the U.S. or abroad. To the extent that a Fund's total assets,
adjusted to reflect the Fund's net position after giving effect to currency
transactions, are denominated in the currencies of foreign countries, the Fund
will be more susceptible to the risk of adverse economic and political
developments within those countries. In addition, through the use of forward
currency exchange contracts and with other instruments, the respective net
currency positions of the International Funds may expose them to risks
independent of their securities positions. Although the net long and short
foreign currency exposure of the International Funds will not exceed their
respective total asset values, to the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater risk than it would have if it did not maintain the currency
positions. The Funds are also subject to the possible imposition of exchange
control regulations or freezes on the convertibility of currency.
Investors should understand that the expense ratios of the International
Funds can be expected to be higher than those of Funds investing primarily in
domestic securities. The costs attributable to investing abroad are usually
higher for several reasons, such as the higher cost of investment research,
higher costs of custody of foreign securities, higher commissions paid on
comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Dividends and interest payable on a Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are
not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may reduce the net return to the shareholders. See
"Taxes."
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.
-20-
<PAGE> 127
A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangement with the issuer.
EUROPEAN DEPOSITORY RECEIPTS. Each Equity Fund and each International
Fund can also invest in EDRs and GDRs. EDRs and GDRs are receipts issued by
a non-U.S. financial institution evidencing ownership of underlying foreign
or U.S. securities and are usually denominated in foreign currencies. EDRs
and GDRs may not be denominated in the same currency as the securities they
represent. Generally, EDRs and GDRs are designed for use in the foreign
securities markets.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible loss
on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fixed Income, International Fixed Income, High Yield
Fixed Income, Income Equity, Growth Equity, Select Equity, Mid Cap Growth, Small
Cap, International Growth Equity, International Select Equity and Technology
Funds are authorized to enter into forward currency exchange contracts. These
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather may allow a Fund to establish a rate of exchange for a future point
in time.
When entering into a contract for the purchase or sale of a security, a
Fund may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S.
dollar or other foreign currency.
In addition, when an Investment Adviser anticipates that a particular
foreign currency may decline substantially relative to the U.S. dollar or other
leading currencies, in order to reduce risk, a Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the securities held by a Fund create a
short position in a foreign currency, a Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. A Fund's net long and short foreign currency exposure will not
exceed its total asset value. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency. A
Fund will also incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
-21-
<PAGE> 128
In addition, Northern Trust may purchase or sell forward currency exchange
contracts for the International Fixed Income Fund, International Growth Equity
Fund and International Select Equity Fund (collectively, the "International
Funds") and the High Yield Fixed Income Fund to seek to increase total return
when Northern Trust anticipates that the foreign currency will appreciate or
depreciate in value. The International Funds and the High Yield Fixed Income
Fund may engage in cross-hedging by using forward contracts in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if Northern Trust believes that there is a pattern of correlation
between the two currencies.
Liquid assets equal to the amount of a Fund's assets that could be
required to consummate forward contracts will be segregated except to the extent
the contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price that is (i) no higher than the Fund's price to sell the
currency or (ii) greater than the Fund's price to sell the currency provided the
Fund segregates liquid assets in the amount of the difference. A forward
contract to buy a foreign currency is "covered" if a Fund holds a forward
contract (or put option) permitting the Fund to sell the same currency at a
price that is (i) as high as or higher than the Fund's price to buy the currency
or (ii) lower than the Fund's price to buy the currency provided the Fund
segregates liquid assets in the amount of the difference.
OPTIONS. Each Non-Money Market Fund may buy put options and buy call
options and write covered call and secured put options. Such options may relate
to particular securities, foreign and domestic securities indices, financial
instruments, foreign currencies or (in the case of the International Fixed
Income Fund and the High Yield Fixed Income Fund) the yield differential between
two securities ("yield curve options"), and may or may not be listed on a
domestic or foreign securities exchange and may or may not be issued by the
Options Clearing Corporation. Options trading is a highly specialized activity
which entails greater than ordinary investment risk. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price prior to the expiration of the option, regardless
of the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligation under the option contract. A put
option for a particular security gives the purchaser the right to sell the
security at the stated exercise price prior to the expiration date of the
option, regardless of the market price of the security. Options on indices and
yield curve options provide the holder with the right to make or receive a cash
settlement upon exercise of the option. With respect to options on indices, the
amount of the settlement will equal the difference between the closing price of
the index at the time of exercise and the exercise price of the option expressed
in dollars, times a specified multiple.
-22-
<PAGE> 129
With respect to yield curve options, the amount of the settlement will equal the
difference between the yields of designated securities.
The Funds will write call options only if they are "covered." In the case
of a call option on a security or currency, the option is "covered" if a Fund
owns the instrument underlying the call or has an absolute and immediate right
to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, liquid assets in such amount are
segregated) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Fund maintains with its
custodian securities comprising the index or liquid assets equal to the contract
value. A call option is also covered if a Fund holds a call on the same
instrument or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the Fund
segregates liquid assets in the amount of the difference. The Funds will write
put options only if they are "secured" by segregated liquid assets in an amount
not less than the exercise price of the option at all times during the option
period.
With respect to yield curve options, a call (or put) option is covered if
the International Fixed Income Fund or High Yield Fixed Income Fund holds
another call (or put) option on the spread between the same two securities and
maintains in a segregated account liquid assets sufficient to cover the Fund's
net liability under the two options. Therefore, the Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter, and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
A Fund's obligation to sell an instrument subject to a covered call option
written by it, or to purchase an instrument subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
instrument, exercise price and expiration date) as the option previously
written. Such a purchase does not result in the ownership of an option. A
closing purchase transaction will ordinarily be effected to realize a profit on
an outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated assets (in the case of a secured put option) until the option expires
or the optioned instrument or currency is delivered upon exercise with the
result that the writer in such circumstances will be subject to the risk of
market decline or appreciation in the instrument during such period.
-23-
<PAGE> 130
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on an exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities or currencies; unusual or unforeseen circumstances may interrupt
normal operations on an exchange; the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
value; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money
Market Funds) may purchase and sell futures contracts and may purchase and sell
call and put options on futures contracts. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, persons who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations
-24-
<PAGE> 131
and the rules of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided them by the National Futures Association or any
domestic futures exchange. In particular, a Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised. For a detailed description of futures contracts and related
options, see Appendix B to this Additional Statement.
In connection with a Fund's position in a futures contract or related
option, the Fund will segregate liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a "commodity
pool operator."
REAL ESTATE INVESTMENT TRUSTS. The High Yield Fixed Income Fund, Income
Equity Fund, Small Cap Index Fund and Small Cap Fund may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may subject
the Fund to certain risks. REITs may be affected by changes in the value of the
underlying property owned by the trusts. REITs are dependent upon specialized
management skill, may not be diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation and the possibility of failing to
qualify for the beneficial tax treatment available to REITs under the Internal
Revenue Code of 1986, as amended, and to maintain exemption from the 1940 Act.
As a shareholder in a REIT, the Fund would bear, along with other shareholders,
its pro rata portion of the REIT's operating expenses. These expenses would be
in addition to the advisory and other expenses the Fund bears directly in
connection with its own operations.
SECURITIES LENDING. Collateral for loans of portfolio securities made by a
Fund may consist of cash, cash equivalents, securities issued or guaranteed by
the U.S. Government or its agencies or (except for the U.S. Government Money
Market Fund, U.S. Government Select Money Market Fund, U.S. Government Fund and
Short-Intermediate U.S. Government Fund) irrevocable bank letters of credit (or
any combination thereof). The borrower of securities will be required to
maintain the market value of the collateral at not less than the market value of
the loaned securities, and such value will be monitored on a daily basis. When a
Fund lends its securities, it continues to receive dividends and interest on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The U.S.
Government, Short-Intermediate U.S. Government, Intermediate Tax-Exempt,
California Intermediate Tax-
-25-
<PAGE> 132
Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, Arizona
Tax-Exempt, California Tax-Exempt, International Fixed Income, High Yield
Municipal, High Yield Fixed Income and Income Equity Funds may enter into
interest rate swaps for hedging purposes and not for speculation. The U.S.
Government, Short-Intermediate U.S. Government, Fixed Income, International
Fixed Income, High Yield Municipal and High Yield Fixed Income Funds may also
purchase interest rate floors or caps for hedging purposes and not for
speculation. A Fund will typically use interest rate swaps to preserve a return
on a particular investment or portion of its portfolio or to shorten the
effective duration of its portfolio investments. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. The purchase of an interest rate floor or cap entitles the purchaser
to receive payments of interest on a notional principal amount from the seller,
to the extent the specified index falls below (floor) or exceeds (cap) a
predetermined interest rate. The International Funds and the High Yield Fixed
Income Fund may also enter into currency swaps, which involve the exchange of
the rights of a Fund and another party to make or receive payments in specific
currencies.
A Fund will only enter into interest rate swaps or interest rate floor or
cap transactions on a net basis, i.e. the two payment streams are netted out,
with a Fund receiving or paying, as the case may be, only the net amount of the
two payments. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for the other
designated currency. Inasmuch as these transactions are entered into for good
faith hedging purposes, the Funds and the Investment Advisers believe that such
obligations do not constitute senior securities as defined in the 1940 Act and,
accordingly, will not treat them as being subject to the Funds' borrowing
restrictions.
The net amount of the excess, if any, of the Funds' obligations over their
entitlements with respect to each interest rate or currency swap will be accrued
on a daily basis, and an amount of liquid assets having an aggregate net asset
value at least equal to such accrued excess, will be segregated by the Funds.
Except for the High Yield Fixed Income Fund (which is not subject to any
minimum rating criteria), a Fund will not enter into a currency or interest rate
swap or interest rate floor or cap transaction unless the unsecured commercial
paper, senior debt or the claims-paying ability of the other party thereto is
rated either A or A-1 or better by S&P, Duff or Fitch, or A or P-1 or better by
Moody's. If there is a default by the other party to such transaction, a Fund
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with markets for other similar
instruments which are traded in the Interbank market.
EQUITY SWAPS. Each Equity Fund may enter into equity swap contracts to
invest in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swap
-26-
<PAGE> 133
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Fund may agree to pay to the
counterparty the amount, if any, by which that notional amount would have
decreased in value had it been invested in the stocks. Therefore, the return to
the Fund on any equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
A Fund will enter into equity swaps only on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that a Fund is contractually obligated to make. If
the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Funds' potential
exposure, the Funds and their Investment Advisers believe that transactions do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to a Fund's borrowing restrictions.
The Funds will not enter into any equity swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either A, or A-1 or better by Standard & Poor's, Duff & Phelps or
Fitch IBCA, or A or P-1 or better by Moody's Investors Service. If there is a
default by the other party to such a transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Advisers are incorrect in
their forecasts of market values, the investment performance of a Fund would be
less favorable than it would have been if this investment technique were not
used.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to
-27-
<PAGE> 134
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
In selecting convertible securities, the Investment Advisers will
consider, among other factors: an evaluation of the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Fund's portfolio as to issuers; and whether
the securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in lower quality convertible securities are
subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of medium
or lower quality are also likely to be subject to greater market fluctuation and
to greater risk of loss of income and principal due to default than investments
of higher quality fixed-income securities. Such lower quality securities
generally tend to reflect short-term corporate and market developments to a
greater extent than higher quality securities, which react more to fluctuations
in the general level of interest rates. A Fund will generally reduce risk to the
investor by diversification, credit analysis and attention to current
developments in trends of both the economy and financial markets. However, while
diversification reduces the effect on a Fund of any single investment, it does
not reduce the overall risk of investing in lower quality securities.
-28-
<PAGE> 135
RISKS RELATED TO SMALL COMPANY SECURITIES. 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 Small Cap Fund's primary investments, and stocks of recently
organized companies, in which the Small Cap Fund may also invest, have been more
volatile in price than the larger capitalization stocks included in the S&P 500
Index. Among the reasons for this greater price volatility are the lower degree
of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions. For example,
these companies are associated with higher investment risk due to the greater
business risks of small size and limited product lines, markets, distribution
channels and financial and managerial resources.
The values of small company stocks will frequently fluctuate independently
of the values of larger company stocks. Small company stocks may decline in
price as large company stock prices rise, or rise in price as large company
stock prices decline. You should, therefore, expect that the net asset value of
the Fund's shares will be more volatile than, and may fluctuate independently
of, broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when a Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.
RISKS RELATED TO MEDIUM AND LOWER QUALITY SECURITIES. Investments in
medium and lower quality securities present special risk considerations. Medium
quality securities, although considered investment grade, are also considered to
have speculative characteristics. Lower quality securities are considered
predominately speculative by traditional investment standards. In some cases,
these obligations may be highly speculative and have poor prospects for reaching
investment grade standard. While any investment carries some risk, certain risks
associated with lower quality securities are different from those for
investment-grade securities. The risk of loss through default is greater because
lower quality securities are usually unsecured and are often subordinate to an
issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities may be quite volatile
and may result in wider fluctuations of a Fund's net asset value per share.
There remains some uncertainty about the performance level of the market
for lower quality securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the markets for lower quality securities (resulting in a greater number of
bond defaults) and the value of lower quality securities held in the portfolio
of investments.
-29-
<PAGE> 136
The economy and interest rates can affect lower quality securities
differently than other securities. For example, the prices of lower quality
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher quality investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
The market value of lower quality securities tends to reflect individual
corporate developments to a greater extent than that of higher quality
securities which react primarily to fluctuations in the general level of
interest rates. Lower quality securities are often issued in connection with a
corporate reorganization or restructuring or as a part of a merger, acquisition,
takeover or similar event. They are also issued by less established companies
seeking to expand. Such issuers are often highly leveraged, may not have
available to them more traditional methods of financing and are generally less
able than more established or less leveraged entities to make scheduled payments
of principal and interest in the event of adverse economic developments or
business conditions.
A holder's risk of loss from default is significantly greater for lower
quality securities than is the case for holders of other debt securities because
such securities are generally unsecured and are often subordinated to the rights
of other creditors of the issuers of such securities. Investment by a Fund in
defaulted securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by a Fund of its initial investment
and any anticipated income or appreciation will be uncertain. A Fund may also
incur additional expenses in seeking recovering on defaulted securities. If an
issuer of a security defaults, a Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty would likely result in
increased volatility for the market prices of lower quality securities as well
as a Fund's net asset value. In general, both the prices and yields of lower
quality securities will fluctuate.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as liquid as, and
is more volatile than, the secondary market for higher quality securities. In
addition, market trading volume for high yield fixed income securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the market price and a Fund's ability to dispose of particular
portfolio investments. A less developed secondary market may also make it more
difficult for a Fund to obtain precise valuations of the high yield securities
in its portfolio.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower quality
convertible securities held by a
-30-
<PAGE> 137
Fund, especially in a thinly traded market. Illiquid or restricted securities
held by a Fund may involve special registration responsibilities, liabilities
and costs, and could involve other liquidity and valuation difficulties.
The credit ratings assigned by a rating agency evaluate the safety of a
rated security's principal and interest payments, but do not address market
value risk and, therefore, may not fully reflect the true risks of an
investment. Because the ratings of the rating agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the Investment Adviser performs its own analysis of the
issuers whose lower quality securities a Fund holds. Because of this, a Fund's
performance may depend more on its Investment Adviser's credit analysis than is
the case of mutual funds investing in higher quality securities.
INVESTMENT COMPANIES. With respect to the investments of the Funds in the
securities of other investment companies, such investments will be limited so
that, as determined after a purchase is made, either (a) not more than 3% of the
total outstanding stock of such investment company will be owned by a Fund,
Northern Funds as a whole and their affiliated persons (as defined in the 1940
Act) or (b) (i) not more than 5% of the value of the total assets of a Fund will
be invested in the securities of any one investment company; (ii) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund.
Certain investment companies whose securities are purchased by the Funds
may not be obligated to redeem such securities in an amount exceeding 1% of the
investment company's total outstanding securities during any period of less than
30 days. Therefore, such securities that exceed this amount may be illiquid.
Notwithstanding the foregoing, a Fund may adhere to more restrictive limitations
with respect to its investments in securities issued by other investment
companies if required by the SEC or deemed to be in the best interests of
Northern Funds. If required by the 1940 Act, each Fund expects to vote the
shares of other investment companies that are held by it in the same proportion
as the vote of all other holders of such securities.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which the Funds invest, are dependent on a variety of
factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
Standard & Poor's, Moody's, Duff, Fitch and Thomson BankWatch, Inc. represent
their respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same
-31-
<PAGE> 138
rating, maturity and interest rate may have different market prices. For a more
complete discussion of ratings, see Appendix A to this Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held by
a Portfolio undergoes a rating revision, the Portfolio may continue to hold the
security if the Investment Advisers determine such retention is warranted.
STOCK INDICES. The Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index") is a market value-weighted index consisting of 500 common
stocks which are traded on the New York Stock Exchange, American Stock Exchange
and the Nasdaq National Market System and selected by Standard & Poor's
Corporation ("Standard & Poor's") through a detailed screening process starting
on a macro-economic level and working toward a micro-economic level dealing with
company-specific information such as market value, industry group
classification, capitalization and trading activity. Standard & Poor's primary
objective for the S&P 500 Index is to be the performance benchmark for the U.S.
equity markets. The companies chosen for inclusion in the S&P 500 Index tend to
be leaders in important industries within the U.S. economy. However, companies
are not selected by Standard & Poor's for inclusion because they are expected to
have superior stock price performance relative to the market in general or other
stocks in particular. Standard & Poor's makes no representation or warranty,
implied or express, to purchasers of Stock Index Fund shares or any member of
the public regarding the advisability of investing in the Fund or the ability of
the S&P 500 Index to track general stock market performance.
The Standard & Poor's Midcap 400 Stock Index ("S&P MidCap 400 Index") is a
market-weighted index composed of 400 common stocks chosen by Standard & Poor's
for market size, liquidity and industry group representation. The purpose of the
S&P MidCap 400 Index is to represent the performance of the
medium-capitalization sector of the U.S. securities market. Medium capitalized
stocks which are included in the S&P 500 Index are excluded from the S&P MidCap
400 Index. Except for a limited number of Canadian securities, the S&P MidCap
400 does not include foreign securities. As of 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 Russell 2000 Small Stock Index is a market value-weighted index
composed of the stocks of the smallest 2000 companies in the Russell 3000 Index,
which is composed of the stocks of 3000 large U.S. domiciled companies (based on
market capitalization) that represent approximately 98% of the investable U.S.
equity markets. Because of its emphasis on the smallest 2000 companies, the
Russell Index represents approximately 10% of the total market capitalization of
the Russell 3000 Index. As of 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
-32-
<PAGE> 139
inclusion in the Russell Index because they are expected to have superior stock
price performance relative to the market in general or other stocks in
particular. Russell makes no representation or warranty, implied or express, to
purchasers of Small Cap Index 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.
TRACKING VARIANCE. As discussed in the Prospectus, the Stock Index and
Small Cap Index Funds are subject to the risk of tracking variance. Tracking
variance may result from share purchases and redemptions, transaction costs,
expenses and other factors. Share purchases and redemptions may necessitate the
purchase and sale of securities by a Fund and the resulting transaction costs
which may be substantial because of the number and the characteristics of the
securities held. In addition, transaction costs are incurred because sales of
securities received in connection with spin-offs and other corporate
organizations are made to conform a Fund's holdings with its investment
objective. Tracking variance may also occur due to factors such as the size of a
Fund, the maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Fund's designated Index or the manner in which
the Index is calculated or because the indexing and investment approach of the
Investment Adviser does not produce the intended goal of the Fund. In the event
the performance of a Fund is not comparable to the performance of its designated
Index, the Board of Trustees will evaluate the reasons for the deviation and the
availability of corrective measures. If substantial deviation in a Fund's
performance were to continue for extended periods, it is expected that the Board
of Trustees would consider recommending to shareholders possible changes to the
Fund's investment objective.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Funds is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by, changes in the holdings of specific issuers, changes in country and
currency weightings, cash requirements for redemption of shares and by
requirements which enable the Funds to receive favorable tax treatment. For the
fiscal year ended March 31, 1999, the turnover rates with respect to the U.S.
Government, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed
Income, Tax-Exempt, California Tax-Exempt Fund, International Fixed Income, High
Yield Municipal, High Yield Fixed Income, Income Equity, Stock Index, Growth
Equity, Select Equity, Mid Cap Growth, Small Cap, International Growth Equity,
International Select Equity and Technology Funds were 123.75%, 54.03%, 57.98%,
84.85%, 140.39%, 62.55%, 16.49%, 0.00%, 0.00%, 79.95%, 2.46%, 49.67%, 87.73%,
173.39%, 18.74%, 177.89%, 168.19% and 61.01%, respectively. The
Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt
Fund, Arizona Tax-Exempt Fund and Small Cap Index Fund had not commenced
operations during the fiscal year ended March 31, 1999. The Funds are not
restricted by policy with regard to portfolio turnover and will make changes in
their investment portfolio from time to time as business and economic conditions
as well as market prices may dictate.
-33-
<PAGE> 140
MISCELLANEOUS. Securities may be purchased on margin only to obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities. The Funds will not engage in selling securities short. The Funds
may, however, make short sales against the box although the Funds have no
current intention to do so in the coming year. "Selling short against the box"
involves selling a security that a Fund owns for delivery at a specified date in
the future.
SPECIAL RISK FACTORS AND CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
INSTRUMENTS, FLORIDA MUNICIPAL INSTRUMENTS AND ARIZONA MUNICIPAL INSTRUMENTS
Some of the risk factors relating to investments by the California,
Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds in California,
Florida, and Arizona municipal instruments are summarized below. This summary
does not purport to be a comprehensive description of all relevant factors.
Although the Trust has no reason to believe that the information summarized
herein is not correct in all material respects, this information has not been
independently verified for accuracy or thoroughness by the Trust. Rather, the
information presented herein with respect to California municipal instruments
was culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California available as of the date of this Statement of Additional Information
and, with respect to the Florida Intermediate Tax-Exempt and Arizona Tax-Exempt
Funds, the information is derived principally from official statements relating
to issues of Florida and Arizona municipal instruments released prior to the
date of this Additional Statement. Further, any estimates and projections
presented herein should not be construed as statements of fact. They are based
upon assumptions which may be affected by numerous factors and there can be no
assurance that target levels will be achieved.
CALIFORNIA MUNICIPAL INSTRUMENTS
ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1996-97. By the close of the 1989-90 Fiscal
Year, California's revenues had fallen below projections so that the State's
budget reserve, the Special Fund for Economic Uncertainties (the "Special
Fund"), was fully depleted by June 30, 1990. A recession which had begun in
mid-1990, combined with higher health and welfare costs driven by the State's
rapid population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted a
period of budget imbalance. Beginning with the 1990-91 Fiscal Year and for
several years thereafter, the budget required multi-billion dollar actions to
bring projected revenues and expenditures into balance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund -- approaching
$2.8 billion at its peak on June 30, 1993.
-34-
<PAGE> 141
By the 1993-94 Fiscal Year, the accumulated deficit was too large to
be prudently retired in one year and a two-year program was implemented. This
program used revenue anticipation warrants to carry a portion of the deficit
over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and transfers
of $41.9 billion. Expenditures were projected to be $40.9 billion -- an increase
of $1.6 billion over the prior year. As a result of the improving economy,
however, the fiscal year ultimately produced revenues and transfers of $42.7
billion which more than offset expenditures of $42.0 billion and thereby reduced
the accumulated budget deficit.
With strengthening revenues and reduced caseload growth driven by an
improving economy, the State entered the 1995-96 Fiscal Year budget negotiations
with the smallest nominal "budget gap" to be closed in many years. The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year, and expenditures were budgeted at $43.4
billion. In addition, the Department of Finance projected that after repaying
the last of the carryover budget deficit, there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.
1996-97 FISCAL YEAR
The 1996-97 Governor's Budget, released January 10, 1996, projected
General Fund revenues and transfers of $45.6 billion, a 1.3% increase over
1995-96. The Governor's budget proposed two major initiatives, a 15% personal
and corporate income tax cuts and a revision of the trial court funding program,
which would have the effect of reducing General Fund revenues. The Governor's
Budget proposed General Fund expenditures of $45.2 billion. The Governor's
Budget also proposed Special Fund revenues equal to expenditures, at a level of
$13.3 billion.
The May Revision of the Governor's Budget, released on May 21, 1996
("The May Revision"), updated revenue estimates for the 1996-97 Fiscal Year,
reflecting stronger economic activity in the State and thus greater revenue
growth. The revised estimate was for $47.1 billion of revenues, still assuming
the Governor's tax cut would be enacted, and $46.5 billion of expenditures.
1996-97 BUDGET ACT
The 1996-97 Budget Act was signed by the Governor on July 15, 1996,
along with various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special Fund). With the signing of the
Budget Act, the State implemented its regular cash flow borrowing program with
the issuance of $3.0 billion of Revenue Anticipation Notes to mature on June 30,
1997. The Budget Act appropriated a budget reserve in the Special Fund of $305
million, as of June 30, 1997.
Revenues - The Legislature rejected the Governor's proposed 15% cut
in personal income taxes (to be phased in over three years), approved a 5% cut
in bank and corporation taxes, to be effective for income years commencing on
January 1, 1997.
-35-
<PAGE> 142
Expenditures - The Budget Act contained General Fund appropriations
totaling $47.251 billion, a 4.0 percent increase over the final estimated
1995-96 expenditures. Special Fund expenditures were budgeted at $12.6 billion.
The following were principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion above revised
1995-96 levels. Almost half of this money was budgeted to fund class-size
reductions in kindergarten and grades 1-3. Also, for the second consecutive
year, the full cost of living allowance (3.2 percent) was funded. Proposition 98
increases have brought K-12 expenditures to almost $4,900 per pupil (also called
ADA, or Average Daily Attendance), an almost 15% increase over the level
prevailing during the recession years. Out of this $1.6 billion total community
colleges received an increase in funding of $157 million for 1996-97.
Due to higher than projected revenues in 1995-96, an additional $1.1
billion ($190 per K-12 ADA and $145 million for community colleges) was
appropriated and retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA.
Similar retroactive increases totaling $230 million, based on final figures on
revenues and State population growth, were made to the 1991-92 and the 1994-95
Proposition 98 guarantees, most of which was allocated to each school site.
2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by October
1, 1996. These cuts totaled approximately $163 million of the anticipated $660
million savings. See "Federal Welfare Reform."
3. A 5.2 percent increase in funding for the University of
California ($130 million General Fund) and the California State University
system ($101 million General Fund), with no increases in student fees.
4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund. (For purposes of cash
flow projections, the Department of Finance expects $540 million of this amount
to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for competitive
grants to local governments for programs to combat juvenile crime.
-36-
<PAGE> 143
The Budget Act did not contain any tax increases. As noted, there
was a reduction in bank and corporate taxes. In addition, the Legislature
approved another one-year suspension of the Renters Tax Credit, saving $520
million in expenditures.
1997-98 FISCAL YEAR
On January 9, 1997, the Governor released his proposed budget for
the 1997-98 Fiscal Year (the "Governor's Budget"). The Governor's Proposed
Budget projected General Fund revenues and transfers in 1997-98 of $50.7
billion, a 4.6% increase from revised 1996-97 figures. The Governor proposed
expenditures of $50.3 billion, a 3.9% increase from 1996-97. The Governor's
Budget projected a balance in the SFEU of $553 million on June 30, 1998. The
Governor's Budget also anticipated about $3 billion of external borrowing for
cash flow purposes during the year, with no requirement for cross-fiscal year
borrowing.
At the time of the Department of Finance May Revision, released on
May 14, 1997, the Department of Finance increased its revenue estimate for the
upcoming fiscal year by $1.3 billion, in response to the continued strong growth
in the State's economy. Budget negotiations continued into the summer, with
major issues to be resolved including final agreement on State welfare reform,
an increase in State employee salaries and consideration of the tax cut proposed
by the Governor.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, below, which made final a judgment against the
State requiring an immediate payment from the General Fund to the Public
Employees Retirement Fund ("PERF") to make up certain deferrals in annual
retirement fund contributions which had been legislated in earlier years for
budget savings, and which the courts found to be unconstitutional. On July 30,
1997, following a direction from the Governor, the Controller transferred $1.235
billion from the General Fund to the PERF in satisfaction of the judgment,
representing the principal amount of the improperly deferred payments from
1995-96 and 1996-97. In late 1997, the plaintiffs filed a claim with the State
Board of Control for payment of interest under the Court rulings in an amount of
$308 million. The Department of Finance has recommended approval of this claim.
If approved by the Board of Control, the claim would become part of an annual
claims bill in the 1998-99 Budget.
FISCAL YEAR 1997-98 BUDGET ACT
Following the transfer of funds to the PERF, final agreement was
reached within a few weeks on the welfare package and remainder of the budget.
The Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. Agreement was not finally reached at
that time on one aspect of the budget plan, concerning the Governor's proposal
for a comprehensive educational testing program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $214 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. Approximately
$200 million of this amount was restored in subsequent legislation passed before
the end of the Legislative Session.
-37-
<PAGE> 144
The Budget Act anticipated General Fund revenues and transfers of
$52.8 billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97 levels).
The Budget Act also included Special Fund expenditures of $14.4 billion (as
against estimated Special Fund revenues of $14 billion), and $2.1 billion of
expenditures from various Bond Funds. Subsequent to the Budget Act enactment,
the State undertook its normal cash flow borrowing program by issuing $3 billion
of Notes which mature June 30, 1998.
Among the major initiatives and features of the Governor's Budget
are the following:
1. A proposed 10% cut in the Bank and Corporation Tax rate, to be
phased in over two years.
2. Proposition 98 funding for K-14 schools was increased again, as a
result of stronger revenues. Per-pupil funding for K-12 schools would reach
$5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year. Part of the
new funding was proposed to be dedicated to the completion of the program to
reduce class size to 20 pupils in lower elementary grades, and to expand the
program by one grade, so that it would cover K-3rd grade.
3. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brings funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
4. Continuing the third year of a four-year "compact" which the
Administration had made with higher education units, funding from the General
Fund for the University of California and the California State University system
was increased by approximately 6 percent ($121 million and $107 million,
respectively). There was no increase in student fees.
5. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
6. Health and welfare costs were contained, continuing generally the
grant levels from prior years, as part of the initial implementation of the new
CalWORKs program.
7. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in general funds, already included in
the federal FY 1997 and 1998 budgets, were included in the Budget Act, to offset
incarceration costs for illegal aliens.
8. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately $500
million. The Legislature has not made any decision on conformity of State tax
laws to the recent federal tax reduction bill; a comprehensive review of this
subject is expected to take place next year.
-38-
<PAGE> 145
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
PROPOSED 1998-99 FISCAL YEAR BUDGET
On January 9, 1998, the Governor released his Budget Proposal for
the 1998-99 Fiscal Year (the "Governor's Budget"). The Governor's Budget
projects total General Fund revenues and transfers of $55.4 billion, a $2.5
billion increase (4.7 percent) over revised 1997-98 revenues. The revenue
increase takes into account reduced revenues of approximately $600 million from
the 1997 tax cut package, but also assume approximately $500 million additional
revenues primarily associated with capital gains realizations. The Governor's
Budget notes, however, that capital gains activity and the resultant revenues
derived from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion, an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments PERS v. Wilson (See "1997-98
Fiscal Year" above). The Governor's Budget projects that the State will carry
out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3 billion. The Governor's Budget projects that the budget
reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower than
the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7
billion, and Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal
Year. A total of $3.2 billion of bond fund expenditures are also proposed.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California
-39-
<PAGE> 146
public entities -- substantially all of which are public agencies within the
county -- had various bonds, notes or other forms of indebtedness outstanding.
In some instances the proceeds of such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after closing on
a $900 million recovery bond transaction. At that time, the County and its
financial advisors stated that the County had emerged from the bankruptcy
without any structural fiscal problems and assured that the County would not
slip back into bankruptcy. However, for many of the cities, schools and special
districts that lost money in the County portfolio, repayment remains contingent
on the outcome of litigation which is pending against investment firms and other
finance professionals. Thus, it is impossible to determine the ultimate impact
of the bankruptcy and its aftermath on these various agencies and their claims.
In May 1996, a taxpayer action was filed against the City of San Diego
("San Diego") and the San Diego Convention Center Expansion Authority (the
"Authority") challenging the validity of a lease revenue financing involving a
lease (the "San Diego Lease") having features similar to the leases commonly
used in California lease-based financings such as certificates of participation
(the "Rider Case"). The Rider Case plaintiffs alleged that voter approval is
required for the San Diego Lease (a) since the lease constituted indebtedness
prohibited by Article XVI, Section 18 of the California Constitution without a
two-thirds vote of the electorate, and (b) since San Diego was prohibited under
its charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgment, the trial court rejected
the plaintiffs' arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds did
not require voter approval. The plaintiffs appealed the matter to the Court of
Appeals for the Fourth District, which affirmed the validity of the plaintiffs
appealed the matter to the Court of Appeals for the Fourth District, which
affirmed the validity of the San Diego Lease and of the lease revenue bond
financing arrangements. The plaintiffs then filed a petition for review with the
California State Supreme Court, and, on April 2, 1997, the Court granted the
plaintiff's petition for review. A decision from the Supreme Court is expected
within the 1998 term.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS.
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain California municipal instruments may
be obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.
-40-
<PAGE> 147
HEALTH CARE LEGISLATION. Certain California municipal instruments
may be obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Instruments.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These California municipal instruments may also be insured by the
State of California pursuant to an insurance program implemented by the Office
of Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured municipal instruments, the State Treasurer
will issue debentures payable out of a reserve fund established under the
insurance program or will pay principal and interest on an unaccelerated basis
from unappropriated State funds. At the request of the Office of Statewide
Health Planning
-41-
<PAGE> 148
and Development, Arthur D. Little, Inc. prepared a study in December 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
MORTGAGES AND DEEDS. Certain California municipal instruments may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement
of the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state
-42-
<PAGE> 149
action," and could hold that the private-right-of-sale proceedings violate the
due process requirements of the Federal or State Constitutions, consequently
preventing an issuer from using the nonjudicial foreclosure remedy described
above.
Certain California municipal instruments may be obligations which
finance the acquisition of single family home mortgages for low and moderate
income mortgagors. These obligations may be payable solely from revenues derived
from the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
PROPOSITION 13. Certain California municipal instruments may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters approved an
amendment to the California Constitution known as Proposition 13, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA was to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad
valorem tax on real property to 1% of full cash value to be collected by the
counties and apportioned according to law. The 1% limitation does not apply to
ad valorem taxes or special assessments to pay the interest and redemption
charges on any bonded indebtedness for the acquisition or improvement of real
property approved by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under 'full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement
Article XIIIA provides that notwithstanding any other law, local agencies may
not levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will levy the
maximum tax permitted by Article XIIIA.
-43-
<PAGE> 150
PROPOSITION 9. On November 6, 1979, an initiative known as
"Proposition 9" or the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under Article XIIIB,
State and local governmental entities have an annual "appropriations limit" and
are not allowed to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded from the
definition of "appropriations subject to limitation," including debt service on
indebtedness existing or authorized as of January 1, 1979, or bonded
indebtedness subsequently approved by the voters. In general terms, the
"appropriations limit" is required to be based on certain 1978/79 expenditures,
and is to be adjusted annually to reflect changes in consumer prices,
population, and certain services provided by these entities. Article XIIIB also
provides that if these entities' revenues in any year exceed the amounts
permitted to be spent, the excess is to be returned by revising tax rates or fee
schedules over the subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both
houses, with the Governor's concurrence -- to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court
-44-
<PAGE> 151
determined that almost $2 billion in "loans" which had been provided to school
districts during the recession violated the constitutional protection of support
for public education. A settlement was reached on April 12, 1996 which ensures
that future school funding will not be in jeopardy over repayment of these
so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature
enacted Senate Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the education funding
provisions of Proposition 98. Senate Constitutional Amendment 1 -- on the June
5, 1990 ballot as Proposition 111 -- was approved by the voters and took effect
on July 1, 1990. Among a number of important provisions, Proposition 111
recalculated spending limits for the State and for local governments, allowed
greater annual increases in the limits, allowed the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduced the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removed the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts in
the base calculation for the next year, limited the amount of State tax revenue
over the limit which would be transferred to school districts and community
college districts, and exempted increased gasoline taxes and truck weight fees
from the State appropriations limit. Additionally, Proposition 111 exempted from
the State appropriations limit funding for capital outlays.
PROPOSITION 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental
entity;
2. Requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the voters
within that jurisdiction;
3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article
XIIIA;
5. Prohibits the imposition of transaction taxes and sales
taxes on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate
within two years of the adoption of the initiative;
-45-
<PAGE> 152
7. Requires that, in the event a local government fails to
comply with the provisions of this measure, a reduction in the amount
of property tax revenue allocated to such local government occurs in an
amount equal to the revenues received by such entity attributable to
the tax levied in violation of the initiative; and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept.
28, 1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th
344e, the California Supreme Court upheld the constitutionality of Proposition
62's popular vote requirements for future taxes, and specifically disapproved of
the City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would
make the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution adopted before December 14, 1995. The California
State Senate passed the Bill on May 16, 1996 and it is currently pending in the
California State Assembly. It is not clear whether the Bill, if enacted, would
be constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
PROPOSITION 218. On November 5, 1996,the voters of the State
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and
XIII D to the California Constitution and contains a number of interrelated
provisions affecting the ability of local governments to levy and collect both
existing and future taxes, assessments, fees and charges. Proposition 218 became
effective on November 6, 1996. The Sponsors are unable to predict whether and to
what extent Proposition 218 may be held to be constitutional or how its terms
will be interpreted and applied by the courts. However, if upheld, Proposition
218 could substantially restrict certain local governments' ability to raise
future revenues and could subject certain existing sources of revenue to
reduction or repeal, and increase local government costs to
-46-
<PAGE> 153
hold elections, calculate fees and assessments, notify the public and defend
local government fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter approval
for the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes, including
special taxes deposited into a local government's general fund. Proposition 218
also provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition
218, by its terms, applies to all local taxes, assessments, fees and charges and
is not limited to local taxes, assessments, fees and charges that are property
related.
Article XIII D of Proposition 218 adds several new requirements
making it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined to
mean any levy or charge upon real property for a special benefit conferred upon
the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to
-47-
<PAGE> 154
the record owner of each parcel of land affected by such fee or charges. The
local government must then hold a hearing upon the proposed imposition or
increase of such property based fee, and if written protests against the
proposal are presented by a majority of the owners of the identified parcels,
the local government may not impose or increase the fee or charge. Moreover,
except for fees or charges for sewer, water and refuse collection services, no
property related fee or charge may be imposed or increased without majority
approval by the property owners subject to the fee or charge or, at the option
of the local agency, two-thirds voter approval by the electorate residing in the
affected area.
PROPOSITION 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
FLORIDA MUNICIPAL INSTRUMENTS
The financial condition of the State of Florida may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities but also by entities that are not under the control of the
State. Adverse developments affecting the State's financing activities, its
agencies or its political subdivisions could adversely affect the State's
financial condition.
The State's revenues increased from $29,115,034,000 during the
1993-94 fiscal year ended June 30, 1994 to $31,178,025,000 during the fiscal
year ended June 30, 1995. The State's expenses increased from $27,878,146,000
during the 1993-94 fiscal year ended June 30, 1994 to $30,775,597,000 during the
1994-95 fiscal year ended June 30, 1995. The Florida Comptroller also projected
non-agricultural jobs to gross 3.2% and 3.0% in fiscal years 1995-96 and
1996-97, respectively.
The Constitution of the State of Florida limits the right of the
State and its local governments to tax. The Constitution requires the State to
have a balanced budget and to raise revenues to defray its operating expenses.
The State may not borrow for the purpose of maintaining ordinary operating
expenses, but may generally borrow for capital improvements.
There are a number of methods by which the State of Florida may
incur debt. The State may issue bonds backed by the State's full faith and
credit to finance or refinance certain capital projects authorized by its
voters. The State also may issue certain bonds backed by the State's full faith
and credit to finance or refinance pollution control, solid waste disposal and
water facilities for local governments; county roads; school districts and
capital public education projects without voter authorization. The State may
also, pursuant to specific constitutional authorization, directly guarantee
certain obligations of the State's authorities, agencies and instrumentalities.
Payments of debt service on State bonds backed by the State's full faith and
credit and State-guaranteed bonds and notes are legally enforceable obligations
of the State. Revenue bonds to finance or refinance certain capital projects
also may be issued by the State of
-48-
<PAGE> 155
Florida without voter authorization. However, revenue bonds are payable solely
from funds derived directly from sources other than state tax revenues.
The State of Florida currently imposes, among other taxes, an ad
valorem tax on intangible property and a corporate income tax. The Florida
Constitution prohibits the levying of a personal income tax. Certain other taxes
the State of Florida imposes include: an estate or inheritance tax which is
limited by the State's Constitution to an amount not in excess of the amount
allowed to be credited upon or deducted from federal estate taxes or the estate
taxes of another state; and a 6% sales tax on most goods and certain services
with an option for counties to impose up to an additional 1% sales tax on such
goods and services.
The Constitution reserves the right to charge an ad valorem tax on
real estate and tangible personal property to Florida's local governments. All
other forms of taxation are preempted to the State of Florida except as may be
provided by general law. Motor vehicles, boats, airplanes, trailers, trailer
coaches and mobile homes, as defined by law, may be subject to a license tax for
their operation, but may not be subject to an ad valorem tax.
Under the Constitution, ad valorem taxes may not be levied in excess
of the following millage upon the assessed value of real estate and tangible
personal property: for all county purposes, ten mills; for all municipal
purposes, ten mills; for all school purposes, ten mills; for water management
purposes for the northwest portion of the State, .05 mills; for water management
purposes for the remaining portion of the State, one mill; and for all other
special districts a millage authorized by law and approved by referendum. When
authorized by referendum, the above millage caps may be exceeded for up to two
years. Counties, school districts, municipalities, special districts and local
governmental bodies with taxing powers may issue bonds to finance or refinance
capital projects payable from ad valorem taxes in excess of the above millage
cap when approved by referendum. It should be noted that several municipalities
and counties have charters that further limit either ad valorem taxes or the
millage that may be assessed.
The Florida legislature has passed a number of mandates which limit
or place requirements on local governments without providing the local
governments with compensating changes in their fiscal resources. The Florida
legislature enacted a comprehensive growth management act which forces local
governments to establish and implement comprehensive planning programs to guide
and control future development. This legislation prohibits public or private
development that does not conform with the locality's comprehensive plan. Local
governments may face greater requirements for services and capital expenditures
than they had previously experienced if their locality experiences increased
growth or development. The burden for funding these potential services and
capital expenditures which has been left to the local governments may be quite
large.
The State of Florida enacted an amendment to the Florida
Constitution ("Amendment 10") which limits ad valorem taxes on homestead real
property, effective as of January 1994. Beginning in 1995, Amendment 10 limits
the assessed value of homestead real property for ad valorem tax purposes to the
lower of (A) three percent (3%) of the assessed value for the prior year; or (B)
the percentage change in the Consumer Price Index for the preceding
-49-
<PAGE> 156
calendar year. In addition, no such assessed value shall exceed "just value" and
such just value shall be reassessed (notwithstanding the 3% cap) as of January 1
of the year following a change of ownership of the assessed real property.
The payment on most Florida municipal instruments held by the
Florida Intermediate Tax-Exempt Fund will depend upon the issuer's ability to
meet its obligations. If the State or any of its political subdivisions were to
suffer serious financial difficulties jeopardizing their ability to pay their
obligations, the marketability of obligations issued by the State or localities
within the State, and the value of the Florida Intermediate Tax-Exempt Fund's
portfolio, could be adversely affected.
ARIZONA MUNICIPAL INSTRUMENTS
Under its constitution, the State of Arizona is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The State
enters into certain lease transactions which are subject to annual renewal at
the option of the State. Local governmental units in the State are also
authorized to incur indebtedness. The major source of financing for such local
government indebtedness is an ad valorem property tax. In addition, in order to
finance public projects, local governments in the State can issue revenue bonds
payable from the revenues of a utility or enterprise or from the proceeds of an
excise tax, or assessment bonds payable from special proceeds of an excise tax,
or assessment bonds payable from special assessments. Arizona local governments
have also financed public projects through leases which are subject to annual
appropriation at the option of the local government.
There is a statutory restriction on the amount of annual increases in
taxes that can be levied by the various taxing jurisdictions in the State
without electoral approval. This restriction does not apply to taxes levied to
pay general obligation debt.
There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions without voter approval.
It is possible that if such a proposal were enacted, there would be an adverse
impact on State or local government financing. It is not possible to predict
whether any such proposals will be enacted in the future or what would be their
possible impact on state or local government financing.
Arizona is required by law to maintain a balanced budget. To achieve this
objective, the State has, in the past, utilized a combination of spending
reductions and tax increases. In recent years, the State's fiscal situation has
improved, even while tax reduction measures have been enacted each year since
1992. In 1992, Arizona voters passed a measure that requires a two-thirds vote
of the legislature to increase state taxes. Accordingly, it will be more
difficult to reverse tax reductions, which may adversely affect state fund
balances and fiscal conditions.
Arizona state government general fund revenue growth for fiscal years
1996, 1997 and 1998 is forecast to increase 4.1%, 3.7% and 3.2%, respectively,
although growth would be
-50-
<PAGE> 157
projected at 10.9%, 4.8% and 7.6%, respectively, for the three years but for
legislative changes, principally income and property tax reduction measures as
described below. The 5.5% increase in sales and use tax revenue adjusted for
reductions resulting from legislative changes, reflects continued strong
economic growth in the state. With revenue growth outpacing increased
expenditures, the state general fund is projected to end fiscal year 1997 with a
total general fund balance of approximately $431 million. The amount of this
balance is approximately 8.9% of total general fund revenue for fiscal year
1997. Included in the total balance is a general fund ending balance of
approximately $190 million, and a budget stabilization ("rainy day") fund
balance of approximately $241 million.
The fiscal year 1997 budget adopted by the legislature assumed that the
total general fund balance carried forward from fiscal year 1996 would be drawn
down by approximately $157 million during the course of fiscal year 1997. Based
on this assumption and state projections, the total general fund balance at the
end of fiscal year 1997 will be lower than for fiscal year 1996.
Additionally, the 1995 legislature enacted a $200 million income tax
reduction package, the 1996 legislature enacted a $200 million property tax
reduction package, and the 1997 legislature enacted a $110 million income tax
reduction package. There may be additional legislative action during 1998 in the
area of tax and school reform, and the 1998 general election ballot may include
one or more questions related to these issues and the state's tax structure
generally. The outcomes of any legislative actions or ballot questions may
adversely affect state fund balances and fiscal conditions.
Arizona has a diversified economic base which is not dependent on any
single industry. Principal economic sectors include services, manufacturing,
mining, tourism, and the military. Agriculture, which was at one time a major
sector, now plays a much smaller role in the State's economy. For several
decades, the population of the State has grown at a substantially higher rate
than the population of the United States. While the State's economy flourished
during the early 80's, a substantial amount of overbuilding occurred, adversely
affecting Arizona-based financial institutions, many of which were placed under
the control of the Resolution Trust Corporation. The spillover effects produced
further weakening in the State's economy. The Arizona economy has begun to grow
again, albeit at a slower pace than experienced before the real estate collapse.
The Northern American Free Trade Agreement is generally viewed as beneficial to
the State. However, further proposed reductions in Federal military expenditures
may adversely affect the Arizona economy.
OTHER INFORMATION ON CALIFORNIA, FLORIDA AND ARIZONA MUNICIPAL
INSTRUMENTS
Northern Trust believes that it is likely that sufficient California,
Florida and Arizona municipal instruments and certain specified federal
obligations should be available to satisfy the respective investment objectives,
policies and limitations of the California, Florida Intermediate Tax-Exempt and
the Arizona Tax-Exempt Funds and, with respect to the California Funds, to
enable those Funds to invest at least 50% of their respective assets in
California municipal instruments. If Northern Funds' Board of Trustees, after
consultation with Northern Trust, should for any reason determine that it is
impracticable to satisfy a Fund's investment objective, policies and limitations
because of the unavailability of suitable investments, the
-51-
<PAGE> 158
Board would re-evaluate the particular Fund's investment objective and policies
and consider changes in its structure and name or possible dissolution.
INVESTMENT RESTRICTIONS
The Funds are subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Fund only by
a vote of the holders of a majority of such Fund's outstanding shares.
No Fund may:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers,
dealers and other financial institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent a Fund from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real estate
investment trusts or other issuers that deal in real estate.
(4) Purchase or sell commodities or commodity contracts or oil
or gas or other mineral exploration or development programs or leases,
except that each Fund may, to the extent appropriate to its investment
policies, purchase securities of companies engaging in whole or in part
in such activities, and (other than the Money Market Funds) may enter
into futures contracts and related options and forward currency
exchange contracts in accordance with its investment objective and
policies.
(5) Invest in companies for the purpose of exercising control.
(6) Act as underwriter of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase and sale of portfolio instruments
in accordance with its investment objective and portfolio management
policies.
(7) Write puts, calls or combinations thereof, except for
transactions in options on securities, financial instruments,
currencies and indices of securities; futures contracts; options on
futures contracts; forward currency exchange contracts; short sales
against the box; interest rate and currency swaps; and pair-off
transactions. (This restriction does not apply to the
Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, Small Cap Index Fund, High
Yield Municipal Fund and High Yield Fixed Income Fund. In addition,
this restriction does not apply to any type of option, futures
contract, forward contract, short sale, swap
-52-
<PAGE> 159
or pair-off transaction unless it involves a put, call or combination
thereof written by a Fund.)
(8) Purchase the securities of any issuer if such purchase
would cause more than 10% of the voting securities of such issuer to be
held by the Fund, except that up to 25% of the value of its total
assets may be invested without regard to this 10% limitation; provided
that this restriction does not apply to the International Fixed Income
Fund, the Florida Intermediate Tax-Exempt Fund, the California
Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund or the
California Tax-Exempt Fund. (Investments by the Short-Intermediate U.S.
Government Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield
Municipal Fund and High Yield Fixed Income Fund in the securities of
other investment companies are also not subject to this investment
restriction.)
In addition, as summarized in the Prospectus, no Fund may:
(9) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations) if,
except for the Technology Fund, such purchase would cause 25% or more
in the aggregate of the market value of the total assets of the Fund to
be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that with
respect to each Money Market Fund there is no limitation, and each
Money Market Fund reserves freedom of action, when otherwise consistent
with its investment policies, to concentrate its investments in
obligations (other than commercial paper) issued or guaranteed by U.S.
banks (including foreign branches of U.S. banks) and U.S. branches of
foreign banks and repurchase agreements and securities loans
collateralized by such bank obligations. For the purposes of this
restriction, state and municipal governments and their agencies and
authorities are not deemed to be industries; as to utility companies,
the gas, electric, water and telephone businesses are considered
separate industries; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industries
of their parents if their activities are primarily related to financing
the activities of their parents. The Technology Fund may not, except
during temporary defensive periods, purchase the securities of any
issuer, if, as a result of such purchase, less than 25% of the assets
of the Technology Fund would be invested in the securities of issuers
principally engaged in technology business activities. (Investments by
the Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, Small Cap Index Fund, Mid Cap
Growth Fund, High Yield Municipal Fund and High Yield Fixed Income Fund
in the securities of other investment companies are not subject to this
investment restriction.)
(10) Borrow money (other than pursuant to reverse repurchase
agreements), except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of a Fund's total assets or (b)
from banks, provided that immediately after any such borrowing all
borrowings of the Fund do not exceed one-third of the Fund's total
assets. The exceptions in (a) and (b) to this restriction are not for
investment
-53-
<PAGE> 160
leverage purposes but are solely for extraordinary or emergency
purposes or to facilitate management of a Fund by enabling Northern
Funds to meet redemption requests when the liquidation of portfolio
instruments is deemed to be disadvantageous or not possible. If due to
market fluctuations or other reasons the total assets of a Fund fall
below 300% of its borrowings, Northern Funds will reduce the borrowings
of such Fund in accordance with the 1940 Act. In addition, as a matter
of fundamental policy, the Funds may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of their respective
total assets.
(11) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, if immediately after such purchase more than 5%
of the value of such Fund's total assets would be invested in such
issuer, except that: (a) up to 50% of the value of the California
Municipal Money Market Fund's total assets (so long as no more than 25%
of the value of its total assets are invested in the securities of any
one issuer) and up to 25% of the value of the total assets of each of
the other Funds may be invested in any securities without regard to
this 5% limitation; and (b) with respect to each Fund, such 5%
limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its agencies or instrumentalities.
(This restriction does not apply to the International Fixed Income
Fund, the Florida Intermediate Tax-Exempt Fund, the California
Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund and the
California Tax-Exempt Fund.) (Investments by the Short-Intermediate
U.S. Government Fund, Small Cap Index Fund, High Yield Municipal Fund
and High Yield Fixed Income Fund in the securities of other investment
companies are also not subject to this investment restriction.)
In addition, as a matter of fundamental policy, the Funds will not
issue senior securities except as stated in the Prospectus or this Additional
Statement.
Also, as a matter of fundamental policy, changeable only with the
approval of the holders of a majority of the outstanding shares of a Fund, at
least 80% of the annual gross income of the Municipal Money Market Fund,
California Municipal Money Market Fund, Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund and High Yield
Municipal Fund will be derived from debt instruments, the interest on which is,
in the opinion of bond counsel or counsel for issuers, exempt from regular
income tax, 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.
As a non-fundamental investment restriction, the International Fixed
Income, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt,
Arizona Tax-Exempt and California Tax-Exempt Funds may not, at the end of any
tax quarter, more than 10% of the outstanding voting securities of any one
issuer, except that up to 50% of the total value of the assets of each Fund may
be invested in any securities without regard to this 10% limitation so long as
no more than 25% of the total value of its assets is invested in the securities
of any one
-54-
<PAGE> 161
issuer (except the U.S. Government, its agencies and instrumentalities). Also,
as a non-fundamental investment restriction, these Funds will not hold any
securities (except U.S. government securities) that would cause, at the end of
any tax quarter, more than 5% of their respective total assets to be invested in
the securities of any one issuer, except that up to 50% of the respective Fund's
total assets may be invested without regard to this limitation so long as no
more than 25% of the Fund's total assets are invested in any one issuer (except
the U.S. government, its agencies and instrumentalities).
Except as otherwise provided in Investment Restriction (9), for the
purpose of such restriction in determining industry classification with respect
to the Funds other than the International Funds and the Technology Fund,
Northern Funds intends to use the industry classification titles in the Standard
Industrial Classification Manual. With respect to the International Funds,
Northern Funds intends to use the Morgan Stanley Capital International industry
classification titles. With respect to the Technology Fund, Northern Funds
intends to consider an issuer to be principally engaged in technology business
activities if such issuer is listed in the Morgan Stanley Index, the H&Q Index,
the SoundView Technology Index, the technology grouping of the S&P 500 Index or
any other comparable index. The freedom of action reserved in Investment
Restriction (9) above with respect to U.S. branches of foreign banks is subject
to the requirement that they are subject to the same regulation as domestic
branches of U.S. banks, and such freedom with respect to foreign branches of
U.S. banks is subject to the requirement that the domestic parent be
unconditionally liable in the event that a foreign branch fails to pay on its
instruments for any reason. Securities held in escrow or separate accounts in
connection with the Funds' investment practices described in this Additional
Statement and in the Prospectus are not deemed to be mortgaged, pledged or
hypothecated for purposes of the foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by a Fund, does not exceed 10% of the
value of the Fund's total assets.
The Money Market, U.S. Government Money Market, U.S. Government Select
Money Market, Municipal Money Market and California Municipal Money Market Funds
intend, as a non-fundamental policy, to diversify their investments in
accordance with current SEC regulations. Investments in the securities of any
single issuer (excluding cash, cash items, certain repurchase agreements, U.S.
Government securities and securities of other investment companies) will be
limited to not more than 5% of the value of a Fund's total assets at the time of
purchase, except that (a) 25% of the total assets of the California Municipal
Money Market Fund may be invested in fewer than five issuers; and 25% of the
value of the total assets of the other Money Market Funds may be invested in the
securities of any one issuer for a period of up to three Business Days. A
security that has an unconditional guarantee meeting special SEC requirements (a
"Guarantee") does not need to satisfy the foregoing issuer diversification
requirements that would otherwise apply, but the Guarantee is instead subject to
the following diversification requirements: Immediately after the acquisition of
the security, a Money Market Fund may not have invested more than 10% of its
total assets in securities issued by or subject to Guarantees from the same
person, except that a Fund, subject to certain conditions, may invest
-55-
<PAGE> 162
up to 25% of its total assets in securities issued or subject to Guarantees of
the same persons. This percentage is 100% if the Guarantee is issued by the U.S.
Government or an agency thereof. In addition, the Municipal Money Market and
California Municipal Money Market Funds will limit their investments in certain
conduit securities that are not in the highest rating category as prescribed by
SEC regulations ("Second Tier Securities") to 5% of their total assets, with
investments in any one such issuer being limited to no more than 1% of a Fund's
total assets or $1 million, whichever is greater, measured at the time of
purchase. Conduit securities subject to this limitation are municipal
instruments that are not subject to a Guarantee and involve an arrangement
whereunder a person, other than a municipal issuer, provides for or secures
repayment of the security and are not: (i) fully and unconditionally guaranteed
by a municipal issuer; or (ii) payable from the general revenues of the
municipal issuer or other municipal issuers; or (iii) related to a project owned
and operated by a municipal issuer; or (iv) related to a facility leased to and
under the control of an industrial or commercial enterprise that is part of a
public project which, as a whole, is owned and under the control of a municipal
issuer. The Money Market, U.S. Government and U.S. Government Select Money
Market Funds will limit their investments in all Second Tier Securities (that
are not subject to Guarantees) in accordance with the foregoing percentage
limitations.
In addition to the foregoing, each Money Market Fund is subject to
additional diversification requirements imposed by SEC regulations on the
acquisition of securities subject to other types of demand features and puts
whereunder a Fund has the right to sell the securities to third parties.
Each Investment Restriction which involves a maximum percentage (other
than the restriction set forth above in Investment Restriction (10)) will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of the Fund. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (10), the
Fund involved will, within three days thereafter (not including Sundays and
holidays), reduce the amount of its borrowings to an extent that the net asset
coverage of such borrowings shall conform to such limits.
Although the foregoing Investment Restrictions would permit the Money
Market Funds to acquire options, enter into forward currency contracts and
engage in short sales and interest rate and currency swaps, they are not
currently permitted to engage in these transactions under SEC regulations. In
addition, the U.S. Government Select Money Market Fund does not intend to
purchase any bank or corporate obligation during the current fiscal year.
ADDITIONAL TRUST INFORMATION
CLASSIFICATION AND HISTORY
Northern Funds is an open-end, management investment company. Each Fund
is classified as diversified under the 1940 Act, except the California Municipal
Money Market, California Intermediate Tax-Exempt, Florida Intermediate
Tax-Exempt, Arizona
-56-
<PAGE> 163
Tax-Exempt, California Tax-Exempt and International Fixed Income Funds. Each
Fund is a series of the Trust which was formed as a Massachusetts business trust
on October 12, 1993 under an Agreement and Declaration of Trust.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of Northern Funds
is set forth below.
Mr. Silas S. Cathcart,*** Chairman of the Board and President, Age 73
222 Wisconsin Avenue, Suite 305, Lake Forest, Illinois 60045. Chairman of Kidder
Peabody Inc. from May 1987 until his retirement in December 1989. Director of
General Electric Co., Baxter International, Inc. (worldwide development,
distribution and manufacture of health care products, systems and services), The
Quaker Oats Co., Montgomery Ward, American Academics, Inc., and Allegiance
Corporation (healthcare products, systems and services). Retired Director and
Trustee of Illinois Tool Works, Inc., and Bradley Trust, respectively.
Mr. James W. Cozad, Trustee, Age 72, 12094 Lost Tree Way, North Palm
Beach, Florida 33408. Vice Chairman of Amoco Corporation from September 1983 to
December 1989 and Chairman and CEO of Whitman Corporation (holding company for
Pepsi-Cola General Bottlers, Inc.), Midas International Corporation (automotive
services) and Hussmann Corporation (refrigeration systems and equipment) from
January 1990 until his retirement in May 1992. Retired Director of Whitman
Corporation, Eli Lilly and Company (life science products), Inland Steel
Company, Inland Steel Industries, Inc., Sears, Roebuck & Company and GATX
Corporation (transportation, distribution and warehousing).
Mr. Wesley M. Dixon, Jr.,* Trustee, Age 71, 400 Skokie Blvd., Suite
300, Northbrook, Illinois 60062. Director of Earl Kinship Capital Corporation
since 1985. Vice Chairman and Director of G.D. Searle & Co. (manufacture and
sale of food products and pharmaceuticals) from 1977 to 1983 and President of
G.D. Searle & Co. prior thereto.
Mr. William J. Dolan, Jr., Trustee, Age 67, 1534 Basswood Circle,
Glenview, Illinois 60025. Partner of Arthur Andersen & Co. S.C. (accounting
firm) from 1966 until his retirement in December 1989. Financial Consultant,
Ernst & Young from 1992 to 1993 and 1997, Director of Household Bank, Federal
Savings Bank since May 1995, and Director of First Central National Life
Insurance Company since July 1998.
Mr. Raymond E. George, Jr.,** Trustee, Age 69, 703 Prospect Avenue,
Winnetka, Illinois 60093. Senior Vice President and Senior Fiduciary Officer of
The Northern Trust Company from 1990 until his retirement in October 1993.
* Messrs. Cathcart and Dixon are first cousins.
** Messrs. Cathcart, George and Murphy, and Ms. Skinner are considered to
be "interested persons" of Northern Funds as defined in the 1940 Act.
-57-
<PAGE> 164
Mr. Michael E. Murphy,** Trustee, Age 62, Suite 2222, 20 South Clark
Street, Chicago, Illinois, 60603. President of Sara Lee Foundation since
November 1997. Vice Chairman and Chief Administrative Officer of Sara Lee
Corporation (consumer products) from November 1994 to October 1997. Vice
Chairman and Chief Financial and Administrative Officer of Sara Lee Corporation
from July 1993 to November 1994. Executive Vice President and Chief Financial
and Administrative Officer of Sara Lee Corporation from June 1979 to June 1993.
Director of Payless Shoe Source, Inc., True North Communications, Inc., American
General Corporation, GATX Corporation, and Bassett Furniture Industries, Inc.
Mary Jacobs Skinner, Esquire,** Trustee, Age 41, One First National
Plaza, Chicago, Illinois 60603. Partner in the law firm of Sidley & Austin.
Miriam M. Allison, Vice President and Treasurer, Age 52, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. President and Director of
Sunstone Financial Group, Inc. since 1990, President and Treasurer of Sunstone
Distribution Services, LLC since October 1996, President of Northern Funds
Distributors, LLC since August 1998 and Vice President of Firstar Trust Company
prior thereto.
Mary M. Tenwinkel, Vice President, Age 51, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone
Financial Group, Inc. since August of 1993 and Senior Vice President since
January, 1996, Vice President of Sunstone Distribution Services, LLC from
October 1996 to July 1998, and First Vice President and head of Personal
Services Group at Firstar Trust Company prior thereto.
Anita M. Zagrodnik, Assistant Treasurer, Age 39, 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone Financial
Group, Inc. since 1994. Client Services Manager of Sunstone Financial Group,
Inc. from 1990 to 1994.
Jeffrey A. Dalke, Secretary, Age 48, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107. Partner in the
law firm of Drinker Biddle & Reath LLP.
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern Trust, Sunstone and their respective affiliates.
Northern Funds has been advised by such Trustees and officers that all such
transactions have been and are expected to be in the ordinary course of business
and the terms of such transactions, including all loans and loan commitments by
such persons, have been and are expected to be substantially the same as the
prevailing terms for comparable transactions for other customers. Ms. Allison
holds similar positions with one or more investment companies that are
distributed by Sunstone. As a result of the responsibilities assumed by Northern
Trust under its Advisory Agreement, Transfer Agency Agreement and Custodian
Agreement and by Sunstone under its Administration Agreement and Distribution
Agreement, Northern Funds itself requires no employees.
Each Trustee, except the Chairman, earns an annual fee of $25,000 and
an additional fee of $1,250 for each meeting attended, plus reimbursement of
expenses incurred as a Trustee. The
-58-
<PAGE> 165
Chairman of the Board earns an annual fee of $30,000 and an additional fee of
$1,250 for each meeting attended, plus reimbursement of expenses incurred as a
Trustee. Northern Funds' officers do not receive fees from Northern Funds for
services in such capacities, although Sunstone, of which Mmes. Allison,
Tenwinkel and Zagrodnik are also officers, receives fees from Northern Funds for
administrative services. Drinker Biddle & Reath LLP, of which Mr. Dalke is a
partner, receives legal fees as counsel to Northern Funds.
For the fiscal year ended March 31, 1999, the Trustees received the
following compensation:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Compensation
Compensation from as Part of Trust from the Trust
Name of Trustee the Trust Expense Complex*
- -------------------------- ----------------- ---------------- ---------------
<S> <C> <C> <C>
Silas S. Cathcart $35,000 None $35,000
James W. Cozad $30,000 None $30,000
Wesley M. Dixon, Jr. $27,500 None $27,500
William J. Dolan, Jr. $30,000 None $30,000
Raymond E. George, Jr. $30,000 None $30,000
Michael E. Murphy $30,000 None $30,000
Mary Jacobs Skinner(1) $22,500 None $22,500
</TABLE>
* This column presents the same information as the first column because
none of the Trustees served on a board of another mutual fund related
to the Trust.
(1) Ms. Skinner was appointed to the Board of Trustees on September 18,
1998.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with subsidiaries in
Colorado, Illinois, Florida, Michigan, New York, Arizona, Georgia, California
and Texas. Northern Trust has for more than 100 years managed the assets of
individuals, charitable organizations, foundations and large corporate
investors. One of the nation's leading providers of trust and investment
management services, Northern Trust first entered the mutual fund business in
1983 by offering money market funds to institutional clients. As part of its
investment advisory services, Northern Trust offers extensive research services
to its clients. As of the date of this Additional Statement, nearly 300
financial institutions nationwide purchase Northern Trust's economic advisory
services. As of March 31, 1999, Northern Trust Corporation and its subsidiaries
had approximately $27.6 billion in assets and $16.6 billion in deposits.
Northern Trust is one of the strongest banking organizations in the United
States and its clients include public and private retirement funds, endowments,
foundations, trusts, corporations and individuals. Northern Funds complements
the banking and personal trust services available through Northern Trust by
-59-
<PAGE> 166
allowing Northern Trust's banking and trust clients to consolidate the
management of their finances and thereby move one step closer to one-stop
financial shopping. Northern Funds utilizes a state-of-the-art investor services
center. Also, trained investment representatives are available at Northern
Trust's offices to assist investors in allocating their investments. Northern
Trust believes it has built its organization by serving clients with integrity,
a commitment to quality, and personal attention. Its stated mission with respect
to all its financial products and services is to achieve unrivaled client
satisfaction. Northern Trust manages the Funds through a team of professionals,
led by portfolio managers who follow a disciplined process to develop investment
strategies. The purpose of this approach is to promote consistent management.
The portfolio managers draw upon the resources of Northern Trust's research
department with specialists in economic analysis, investment strategy, credit
quality and tax law, and which supplies information on interest rates, GNP
growth, corporate profits and other factors. NTQA, also a wholly-owned
subsidiary of Northern Trust Corporation, serves as investment adviser
principally to defined benefit and defined contribution plans and manages over
60 equity and bond commingled and common trust funds. As of March 31, 1999, the
Investment Advisers and their affiliates administered approximately $1.3
trillion in assets, including $242.7 billion for which the Investment Advisers
had investment management responsibility, for clients including public and
private retirement funds, endowments, foundations, trusts, corporations, other
investment companies and individuals.
Subject to the general supervision of the Board of Trustees, Northern
Trust makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Funds (other than the Stock Index, Small
Cap Index and Small Cap Funds), and also provides certain ancillary services.
NTQA provides similar services to the Stock Index, Small Cap Index and Small Cap
Funds. The Investment Advisers are also responsible for monitoring and
preserving the records required to be maintained under the regulations of the
SEC (with certain exceptions unrelated to its activities for Northern Funds). In
making investment recommendations for the Funds, investment advisory personnel
may not inquire or take into consideration whether issuers of securities
proposed for purchase or sale for the Funds' accounts are customers of Northern
Trust's commercial banking department. These requirements are designed to
prevent investment advisory personnel for the Funds from knowing which companies
have commercial business with Northern Trust and from purchasing securities
where they know the proceeds will be used to repay loans to the bank.
Northern Funds' Investment Advisory and Ancillary Services Agreement
with Northern Trust and NTQA (the "Advisory Agreement") has been approved by the
Board of Trustees, including the "non-interested" Trustees, and the initial
shareholder of Northern Funds. The Advisory Agreement provides that in executing
portfolio transactions and in selecting brokers or dealers (a) with respect to
common and preferred stocks, the Investment Advisers shall use their best
judgment to obtain the best overall terms available, and (b) with respect to
other securities, the Investment Advisers shall attempt to obtain best net price
and execution. Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
-60-
<PAGE> 167
In assessing the best overall terms available for any transaction, the
Investment Advisers are to consider all factors they deem relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available and in
selecting the broker or dealer to execute a particular transaction, the
Investment Advisers may consider the brokerage and research services provided to
the Funds and/or other accounts over which the Investment Advisers or an
affiliate of the Investment Advisers exercise investment discretion. A broker or
dealer providing brokerage and/or research services may receive a higher
commission than another broker or dealer would receive for the same transaction.
These brokerage and research services may include industry and company analyses,
portfolio services, quantitative data, market information systems and economic
and political consulting and analytical services.
Supplemental research information so received is in addition to, and
not in lieu of, services required to be performed by the Investment Advisers and
does not reduce the advisory fees payable to the Investment Advisers by the
Funds. The Trustees will periodically review the commissions paid by the Funds
to consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Funds. It is
possible that certain of the supplemental research or other services received
will primarily benefit one or more other investment companies or other accounts
for which investment discretion is exercised. Conversely, a Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
For the fiscal years or periods indicated, the amount of commissions
paid by each Fund was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Income Equity Fund $______ $ 91,382 $ 67,369
Stock Index Fund $______ $ 32,541 $ 27,972
Growth Equity Fund $______ $ 475,781 $ 364,847
Select Equity Fund $______ $ 312,832 $ 96,747
Mid Cap Growth Fund(1) $______ N/A N/A
Small Cap Fund $______ $ 324,908 $ 170,785
International Growth Equity Fund $______ $1,455,258 $2,043,586
International Select Equity Fund $______ $ 610,796 $ 634,588
Technology Fund $______ $ 79,005 $ 40,228
</TABLE>
1. The Mid Cap Growth Fund commenced operations on March 31, 1998.
-61-
<PAGE> 168
No commissions were paid by the Funds to any "affiliated" persons (as
defined in the 1940 Act) of the Funds. Transactions on foreign stock exchanges
involve payment for brokerage commissions which are generally fixed.
Over-the-counter issues, including corporate debt and government securities, are
normally traded on a "net" basis (i.e., without commission) through dealers, or
otherwise involve transactions directly with the issuer of an instrument. With
respect to over-the-counter transactions, the Investment Advisers will normally
deal directly with dealers who make a market in the instruments involved except
in those circumstances where more favorable prices and execution are available
elsewhere. The cost of foreign and domestic securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down.
Northern Funds is required to identify any securities of its "regular
brokers or dealers" or their parents which Northern Funds acquired during its
most recent fiscal year.
[UPDATE]
During the fiscal year ended March 31, 1998, the Money Market Fund
acquired or sold securities of Banque Paribas, Bear Stearns & Co., Inc.,
Donaldson, Lufkin & Jenrette, General Electric Capital, Goldman, Sachs & Co. and
Lehman Brothers. As of March 31, 1998 the Money Market Fund owned securities of
Banque Paribas and Donaldson, Lufkin & Jenrette in the amounts of $60,494,000
and $250,000,000 respectively.
During the fiscal year ended March 31, 1998, the U.S. Government Money
Market Fund acquired or sold securities of HSBC Security and SBC Warburg. As of
March 31, 1998, the U.S. Government Money Market Fund owned securities of HSBC
Security and SBC Warburg in the amounts of $100,000,000 and $71,125,000
respectively.
During the fiscal year ended March 31, 1998, the U.S. Government Select
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1998, the Municipal Money Market
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1998, the California Municipal
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1998, the U.S. Government Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1998, the Intermediate
Tax-Exempt Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1998; the Florida Intermediate
Tax-Exempt Fund did not acquire or sell securities of its regular
broker-dealers.
-62-
<PAGE> 169
During the fiscal year ended March 31, 1998, the Fixed Income Fund
acquired or sold securities of Donaldson, Lufkin & Jenrette, its regular
broker-dealer. As of March 31, 1998, the Fixed Income Fund owned securities of
Donaldson, Lufkin & Jenrette in the amount of $166,000.
During the fiscal year ended March 31, 1998, the Tax-Exempt Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1998, the International Fixed
Income Fund acquired or sold securities of Banque Paribas, Deutsche Bank and
Societe Generale Securities. As of March 31, 1998, the International Fixed
Income Fund owned securities of Banque Paribas in the amount of $1,000.
During the fiscal year ended March 31, 1998, the Income Equity Fund
acquired or sold securities of Societe Generale Securities, its regular
broker-dealer.
During the fiscal year ended March 31, 1998, the Stock Index Fund
acquired or sold securities of Banque Paribas, Toronto Dominion and West
Deutsche Landesbank. As of March 31 1998, the Stock Index Fund owned securities
of Banque Paribas in the amount of $4,376,000.
During the fiscal year ended March 31, 1998, the Growth Equity Fund
acquired or sold securities of Banque Paribas, Credit Agricole and Societe
Generale Securities. As of March 31, 1998, the Growth Equity Fund owned
securities of Banque Paribas in the amount of $4,729,000.
During the fiscal year ended March 31, 1998, the Select Equity Fund
acquired or sold securities of Banque Paribas and Societe Generale Securities.
As of March 31, 1998, the Select Equity Fund owned securities of Banque Paribas
in the amount of $644,000.
During the fiscal year ended March 31, 1998, the Small Cap Fund
acquired or sold securities of Banque Paribas and Societe Generale Securities.
As of March 31, 1998, the Small Cap Fund owned securities of Banque Paribas in
the amount of $6,115,000.
During the fiscal year ended March 31, 1998, the International Growth
Equity Fund acquired or sold securities of Banque Paribas, Deutsche Bank and
Societe Generale Securities. As of March 31, 1998 the International Growth
Equity Fund owned securities of Deutsche Bank and Societe Generale Securities in
the amount of $3,010,000 and $3,202,000, respectively.
During the fiscal year ended March 31, 1998, the International Select
Equity Fund acquired or sold securities of Banque Paribas and Societe Generale.
As of March 31, 1998, the International Select Equity Fund owned securities of
Banque Paribas and Societe Generale Securities in the amount of $4,684,000 and
$2,402,000, respectively.
During the fiscal year ended March 31, 1998, the Technology Fund
acquired or sold securities of Banque Paribas and Societe Generale Securities.
As of March 31, 1998, the Technology Fund owned securities of Banque Paribas in
the amount of $1,786,000.
-63-
<PAGE> 170
During the fiscal year ended March 31, 1998 the Mid Cap Growth Fund,
Small Cap Index Fund, Short-Intermediate U.S. Government Fund, California
Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt
Fund, High Yield Municipal Fund and High Yield Fixed Income Fund had not yet
commenced operations.
During the fiscal year ending March 31, 1998, Northern Funds directed
brokerage transactions to brokers because of research services provided. The
amount of such transactions and related commissions were as follows: for the
Income Equity Fund, $49,163,298 in research commission transactions and $76,541
in research commissions; for the Stock Index Fund, $62,748,694 in research
commission transactions and $32,228 in research commissions; for the Growth
Equity Fund, $302,474,555 in research commission transactions and $393,830 in
research commissions; for the Select Equity Fund, $191,006,224 in research
commission transactions and $251,643 in research commissions; for the Small Cap
Fund, $8,875,175 in research commission transactions and $16,309 in research
commissions; for the International Growth Equity Fund, $229,881,000 in research
commission transactions and $713,913 in research commissions; for the
International Select Equity Fund, $110,614,844 in research commission
transactions and $319,271 in research commissions; and for the Technology Fund,
$49,775,366 in research commission transactions and $69,816 in research
commissions.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Investment
Advisers believe such practice to be in the Funds' interests.
Northern Trust's investment advisory duties for Northern Funds are
carried out through its Trust Department. On occasions when an Investment
Adviser deems the purchase or sale of a security to be in the best interests of
a Fund as well as other fiduciary or agency accounts managed by it (including
any other portfolio, investment company or account for which an Investment
Adviser acts as adviser), the Agreement provides that the Investment Adviser, to
the extent permitted by applicable laws and regulations, may aggregate the
securities to be sold or purchased for such Fund with those to be sold or
purchased for such other accounts in order to obtain the best overall terms
available with respect to common and preferred stocks and the best net price and
execution with respect to other securities. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Investment Adviser in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the Fund
and other accounts involved. In some instances, this procedure may adversely
affect the size of the position obtainable for the Fund or the amount of the
securities that are able to be sold for the Fund. To the extent that the
execution and price available from more than one broker or dealer are believed
to be comparable, the Agreement permits each Investment Adviser, at its
discretion but subject to applicable law, to select the executing broker or
dealer on the basis of the Investment Adviser's opinion of the reliability and
quality of the broker or dealer.
The Advisory Agreement provides that the Investment Advisers may render
similar services to others so long as their services under such Agreement are
not impaired thereby. The
-64-
<PAGE> 171
Advisory Agreement also provides that Northern Funds will indemnify the
Investment Advisers against certain liabilities (including liabilities under the
federal securities laws relating to untrue statements or omissions of material
fact and actions that are in accordance with the terms of the Agreement) or, in
lieu thereof, contribute to resulting losses.
From time to time, the Investment Advisers may voluntarily waive a
portion or all of their fees otherwise payable to it with respect to the Funds.
For the fiscal years or periods indicated, Northern Trust received
advisory fees, after fee waivers, as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
--------------- --------------- ---------------
<S> <C> <C> <C>
Money Market Fund $15,349,562 $ 9,490,597 $ 5,197,260
U.S. Government Money Market Fund $ 1,730,444 $ 1,364,316 $ 950,352
U.S. Government Select Money Market $ 1,450,638 $ 673,956 $ 297,792
Fund
Municipal Money Market Fund $ 8,162,930 $ 6,064,365 $ 4,796,468
California Municipal Money Market Fund $ 1,091,368 $ 719,108 $ 494,616
U.S. Government Fund $ 1,895,842 $ 1,527,868 $ 1,199,667
Intermediate Tax-Exempt Fund $ 2,242,387 $ 1,973,661 $ 1,741,679
Florida Intermediate Tax-Exempt Fund $ 196,206 $ 125,977 $ 0
Fixed Income Fund $ 1,752,818 $ 1,105,332 $ 779,240
Tax-Exempt Fund $ 1,365,071 $ 1,035,810 $ 874,423
California Tax-Exempt Fund $ 404,924 $ 88,551 N/A
International Fixed Income Fund $ 118,107 $ 129,287 $ 111,384
High Yield Municipal Fund $ 0 N/A N/A
High Yield Fixed Income Fund $ 0 N/A N/A
Income Equity Fund $ 978,113 $ 818,335 $ 519,235
Stock Index Fund(4) $ 490,454 $ 226,431 $ 0
Growth Equity Fund $ 4,529,273 $ 3,339,695 $ 2,267,044
Select Equity Fund $ 1,249,368 $ 802,297 $ 369,460
Mid Cap Growth Fund $ 216,101 N/A N/A
Small Cap Fund(4) $ 2,669,690 $ 2,460,252 $ 1,468,705
International Growth Equity Fund $ 1,946,058 $ 1,756,185 $ 1,817,708
</TABLE>
-65-
<PAGE> 172
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
--------------- --------------- ---------------
<S> <C> <C> <C>
International Select Equity Fund $ 1,195,310 $ 1,138,571 $ 1,111,449
Technology Fund $ 1,757,940 $ 754,963 $ 198,909
</TABLE>
1. The High Yield Municipal and High Yield Fixed Income Funds commenced
operations on December 31, 1998 and the Mid Cap Growth Fund commenced
operations on March 31, 1998.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996
and the Technology Fund commenced operations on April 1, 1996.
4. NTQA assumed investment advisory responsibilities for these Funds on April 1,
1998.
For the fiscal years or periods indicated, Northern Trust voluntarily
waived and reimbursed advisory fees for each of the Funds as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Fund $7,674,790 $4,745,304 $2,622,157
U.S. Government Money Market Fund $ 865,224 $ 682,159 $ 519,441
U.S. Government Select Money Market Fund $ 725,320 $ 632,972 $ 419,570
Municipal Money Market Fund $4,081,471 $3,032,186 $2,417,444
California Municipal Money Market Fund $ 545,685 $ 568,061 $ 497,282
U.S. Government Fund $ 0 $ 0 $ 31,267
Intermediate Tax-Exempt Fund $ 160,168 $ 140,974 $ 153,096
Florida Intermediate Tax-Exempt Fund $ 23,427 $ 26,197 $ 53,960
Fixed Income Fund $ 0 $ 0 $ 36,750
Tax-Exempt Fund $ 97,545 $ 73,985 $ 99,421
California Tax-Exempt Fund $ 28,923 $ 53,795 N/A
International Fixed Income Fund $ 15,857 $ 10,037 $ 34,638
High Yield Municipal Fund $ 10,562 N/A N/A
High Yield Fixed Income Fund $ 41,621 N/A N/A
Income Equity Fund $ 172,607 $ 144,411 $ 138,239
Stock Index Fund(4) $ 245,227 $ 117,685 $ 70,191
Growth Equity Fund $ 799,277 $ 589,353 $ 440,662
Select Equity Fund $ 514,443 $ 330,356 $ 209,152
</TABLE>
-66-
<PAGE> 173
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Mid Cap Growth Fund $ 93,569 N/A N/A
Small Cap Fund(4) $1,099,279 $1,013,041 $ 639,770
International Growth Equity Fund $ 389,208 $ 351,234 $ 368,198
International Select Equity Fund $ 239,060 $ 227,712 $ 225,196
Technology Fund $ 351,585 $ 150,991 $ 89,958
</TABLE>
1. The High Yield Municipal and High Yield Fixed Income Funds commenced
operations on December 31, 1998 and the Mid Cap Growth Fund commenced
operations on March 31, 1998.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996
and the Technology Fund commenced operations on April 1, 1996.
4. NTQA assumed investment advisory responsibilities for these Funds on
April 1, 1998.
Under its Transfer Agency Agreement with Northern Funds, Northern Trust
has undertaken, among other things, to perform the following services: (1)
answer shareholder inquiries and respond to requests for information regarding
Northern Funds; (2) process purchase and redemption transactions; (3) establish
and maintain shareholder accounts and subaccounts; (4) furnish confirmations in
accordance with applicable law, and provide periodic account statements to each
shareholder; (5) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend, distribution and tax notices to
shareholders; (6) act as income disbursing agent; and (7) maintain appropriate
records relating to its services. Northern Trust may appoint one or more
sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of each
of the Funds.
For the fiscal years or periods indicated, the amount of transfer
agency fees incurred by each of the Funds was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
--------------- ----------------- ------------------
<S> <C> <C> <C>
Money Market Fund $3,837,356 $2,372,628 $1,299,295
U.S. Government Money Market Fund $ 432,607 $ 341,076 $ 244,185
U.S. Government Select Money $ 362,656 $ 217,819 $ 119,115
Market Fund
Municipal Money Market Fund $2,040,714 $1,516,077 $1,199,098
</TABLE>
-67-
<PAGE> 174
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
--------------- ----------------- ------------------
<S> <C> <C> <C>
California Municipal Money Market $ 272,840 $ 214,526 $ 164,871
Fund
U.S. Government Fund $ 252,777 $ 203,714 $ 164,123
Intermediate Tax-Exempt Fund $ 320,338 $ 281,949 $ 251,858
Florida Intermediate Tax-Exempt $ 29,284 $ 20,290 $ 6,302
Fund
Fixed Income Fund $ 233,707 $ 147,377 $ 108,797
Tax-Exempt Fund $ 195,008 $ 147,971 $ 129,549
California Tax-Exempt Fund $ 57,846 $ 18,926 N/A
International Fixed Income Fund $ 14,885 $ 15,480 $ 16,224
High Yield Municipal Fund $ 1,408 N/A N/A
High Yield Fixed Income Fund $ 5,549 N/A N/A
Income Equity Fund $ 115,071 $ 96,274 $ 65,560
Stock Index Fund $ 122,613 $ 57,352 $ 8,670
Growth Equity Fund $ 532,850 $ 392,901 $ 270,025
Select Equity Fund $ 146,983 $ 94,387 $ 48,045
Mid Cap Growth Fund $ 30,967 N/A N/A
Small Cap Fund $ 314,078 $ 289,438 $ 175,244
International Growth Equity Fund $ 194,604 $ 175,617 $ 181,765
International Select Equity Fund $ 119,530 $ 113,856 $ 111,143
Technology Fund $ 175,792 $ 75,496 $ 23,916
</TABLE>
1. The High Yield Municipal and High Yield Fixed Income Funds commenced
operations on December 31, 1998 and the Mid Cap Growth Fund commenced
operations on March 31, 1998.
2. The California Tax-Exempt Fund commenced operations on April 8, 1997.
3. The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Northern Trust maintains custody of the assets of the Funds (other than
the International Funds) pursuant to the terms of its Custodian Agreement with
Northern Funds. Northern Trust maintains custody of the assets of the
International Funds pursuant to the terms of its Foreign Custody Agreement with
Northern Funds. Under each of these agreements, Northern Trust (l) holds each
Fund's cash and securities, (2) maintains such cash and securities in separate
accounts
-68-
<PAGE> 175
in the name of the Fund, (3) makes receipts and disbursements of funds on behalf
of the Fund, (4) receives, delivers and releases securities on behalf of the
Fund, (5) collects and receives all income, principal and other payments in
respect of the Fund's investments held by Northern Trust under the agreement,
and (6) maintains the accounting records of Northern Funds. Northern Trust may
employ one or more subcustodians under the Custody Agreement, provided that
Northern Trust shall, subject to certain monitoring responsibilities, have no
more responsibility or liability to Northern Funds on account of any action or
omission of any subcustodian so employed than such subcustodian has to Northern
Trust and that the responsibility or liability of the subcustodian to Northern
Trust shall conform to the resolution of the Trustees of Northern Funds
authorizing the appointment of the particular subcustodian. Northern Trust may
also appoint an agent to carry out such of the provisions of the Custody
Agreement as Northern Trust may from time to time direct. Under its Foreign
Custody Agreement, Northern Trust has entered into agreements with financial
institutions and depositories located in foreign countries with respect to the
custody of the International Funds' foreign securities.
As compensation for the services rendered to each Fund (other than the
International Funds) under the Custodian Agreement, and the assumption by
Northern Trust of certain related expenses, Northern Trust is entitled to
payment from each of the Funds as follows: (a) a basic custodial fee of (i)
$18,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's
average daily net assets to the extent they exceed $100 million, plus (b) a
basic accounting fee of (i) $25,000 annually for each Fund, plus (ii) 1/100th of
1% annually of each Fund's average daily net assets to the extent they exceed
$50 million, plus (c) a fixed dollar fee for each trade in portfolio securities,
plus (d) a fixed dollar fee for each time that Northern Trust as Custodian
receives or transmits funds via wire, plus (e) reimbursement of expenses
incurred by Northern Trust as Custodian for telephone, postage, courier fees,
office supplies and duplicating. The fees referred to in clauses (c) and (d) are
subject to annual upward adjustments based on increases in the Consumer Price
Index for All Urban Consumers, provided that Northern Trust may permanently or
temporarily waive all or any portion of any upward adjustment.
As compensation for the services rendered to the International Funds
under the Foreign Custody Agreement, and the assumption by Northern Trust of
certain related expenses, Northern Trust is entitled to payment from each of
those Funds as follows: (i) $35,000 annually for each Fund, plus (ii) 9/100th of
1% annually of each Fund's average daily net assets, plus (iii) reimbursement
for fees incurred by Northern Trust as foreign Custodian for telephone, postage,
courier fees, office supplies and duplicating. As compensation for basic
accounting services rendered to the International Funds by Northern Trust,
Northern Trust is entitled to receive $25,000 for the first $50 million of each
of those Fund's average daily net assets and 1/100th of 1% of each Fund's
average daily net assets in excess of $50 million.
Northern's fees under the Custodian Agreement and Foreign Custody
Agreement are subject to reduction based on the Funds' daily uninvested cash
balances (if any).
-69-
<PAGE> 176
For the fiscal years or periods indicated, the amount of custody and
fund accounting fees incurred by each of the Funds was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Fund $844,081 $540,182 $319,698
U.S. Government Money Market $136,794 $114,701 $ 90,285
Fund
U.S. Government Select Money $110,597 $ 79,062 $ 61,237
Market Fund
Municipal Money Market Fund $478,551 $358,220 $280,150
California Municipal Money $100,159 $ 86,643 $ 72,486
Market Fund
U.S. Government Fund $ 85,772 $ 72,223 $ 65,101
Intermediate Tax-Exempt Fund $103,042 $ 91,127 $ 87,303
Florida Intermediate Tax-Exempt $ 48,986 $ 46,979 $ 31,173
Fund
Fixed Income Fund $ 84,111 $ 64,094 $ 57,834
Tax-Exempt Fund $ 78,492 $ 64,384 $ 60,461
California Tax-Exempt Fund $ 50,725 $ 48,223 N/A
International Fixed Income Fund $ 77,396 $ 74,075 $ 75,592
High Yield Municipal Fund $ 14,132 N/A N/A
High Yield Fixed Income Fund $ 14,132 N/A N/A
Income Equity Fund $ 61,425 $ 56,325 $ 54,136
Stock Index Fund $122,803 $133,408 $ 64,425
Growth Equity Fund $143,431 $115,833 $ 92,102
Select Equity Fund $ 72,051 $ 60,090 $ 51,726
Mid Cap Growth Fund $ 44,274 N/A N/A
Small Cap Fund $141,187 $136,631 $ 88,231
International Growth Equity Fund $257,479 $228,550 $239,257
</TABLE>
-70-
<PAGE> 177
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
International Select Equity Fund $182,139 $167,301 $168,250
Technology Fund $ 78,748 $ 55,245 $ 63,987
</TABLE>
(1.) The High Yield Municipal and High Yield Fixed Income Funds commenced
operations on December 31, 1998 and the Mid Cap Growth Fund commenced
operations on March 31, 1998.
(2.) The California Tax-Exempt Fund commenced operations on April 8, 1997.
(3.) The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Unless sooner terminated, Northern Funds' Advisory Agreement, Transfer
Agency Agreement, Custodian Agreement and Foreign Custody Agreement will
continue in effect with respect to a particular Fund until March 31, 2000, and
thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (a) by the vote of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval and (b) by the Trustees or by the vote of a
majority of the outstanding shares of the Fund (as defined under "Description of
Shares"). Each agreement is terminable at any time without penalty by Northern
Funds (by specified Trustee or shareholder action) on 60 days' written notice to
Northern Trust (or NTQA) and by Northern Trust (or NTQA) on 60 days' written
notice to Northern Funds.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, but such banking laws and regulations do
not prohibit such a holding company or affiliate or banks generally from acting
as investment adviser, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Northern Trust and NTQA believe that they may perform the
services contemplated by their agreements with Northern Funds without violation
of such banking laws or regulations, which are applicable to them. It should be
noted, however, that future changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Northern Trust and NTQA from continuing to perform such services
for Northern Funds.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of Northern Trust or NTQA in connection with the
provision of services on behalf of Northern Funds, Northern Funds might be
required to alter materially or discontinue its arrangements with Northern Trust
and NTQA and change its method of operations. It is not anticipated, however,
that any change in Northern Funds' method of operations would affect the net
asset value per share of any Fund or result in a financial loss to any
shareholder. Moreover, if current
-71-
<PAGE> 178
restrictions preventing a bank from legally sponsoring, organizing, controlling
or distributing shares of an open-end investment company were relaxed, Northern
Funds expects that Northern Trust and its affiliates would consider the
possibility of offering to perform some or all of the services now provided by
Sunstone. It is not possible, of course, to predict whether or in what form such
restrictions might be relaxed or the terms upon which Northern Trust and its
affiliates might offer to provide services for consideration by the Trustees.
Northern is active as an underwriter of municipal instruments. Under
the 1940 Act, the Funds are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which Northern is serving as a principal underwriter. In the opinion of
Northern, this limitation will not significantly affect the ability of the Funds
to pursue their respective investment objectives.
In the Advisory Agreement, Northern Trust agrees that the name
"Northern" may be used in connection with Northern Funds' business on a
royalty-free basis. Northern Trust has reserved to itself the right to grant the
non-exclusive right to use the name "Northern" to any other person. The Advisory
Agreement provides that at such time as the Agreement is no longer in effect,
Northern Funds will cease using the name "Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed, subject to the
direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Funds timely Notices to the SEC
required pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual Reports on
Form N-SAR; (3) prepare for execution by Northern Funds and file all federal
income and excise tax returns and state income tax returns (and such other
required tax filings as may be agreed to by the parties) other than those
required to be made by Northern Funds' custodian and transfer agent; (4) prepare
compliance filings relating to the registration of the securities of the Funds
pursuant to state securities laws with the advice of Northern Funds' counsel;
(5) assist the Fund accountants with preparing the Annual and Semi-Annual
Reports required pursuant to Section 30(d) under the 1940 Act; (6) assist to the
extent requested by Northern Funds with the preparation of the Registration
Statement for the Funds (on Form N-1A or any replacement therefor) and any
amendments thereto, and proxy materials; (7) prepare and monitor each Fund's
expense accruals and cause all appropriate expenses to be paid from Fund assets
on proper authorization from the Fund; (8) assist in the acquisition of the
Funds' fidelity bond required by the 1940 Act, monitor the amount of the bond
and make the necessary SEC filings related thereto; (9) from time to time as
Northern Funds may reasonably request or as Sunstone deems appropriate, check
each Fund's compliance with the policies and limitations relating to portfolio
investments as set forth in the Prospectus, Additional Statement and Declaration
of Trust and monitor each Fund's status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (but this function shall
not relieve the Fund's Investment Adviser of its day-to-day responsibility for
such compliance); (10) maintain, and/or coordinate with the other service
providers the maintenance of, the accounts, books and other documents required
pursuant to Rule 31a-1(a) and (b) under the 1940 Act; and (11) generally assist
in each
-72-
<PAGE> 179
Fund's administrative operations. In addition, Sunstone has agreed to monitor
Northern Funds' arrangements with respect to services provided by Service
Organizations. Under the Administration Agreement, Sunstone is not liable for
any error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Sunstone in the performance of its duties or from its reckless disregard of its
duties and obligations under the Agreement.
For its administrative services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
0.15% of the Funds' average aggregate daily net assets. For the fiscal years or
periods indicated, Sunstone received, after waivers, administrative fees as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Fund $2,447,894 $1,186,568 $1,164,584
U.S. Government Money Market $ 294,367 $ 217,652 $ 218,281
Fund
U.S. Government Select Money $ 226,085 $ 124,207 $ 23,962
Market Fund
Municipal Money Market Fund $1,339,727 $ 929,212 $1,075,662
California Municipal Money $ 176,849 $ 131,467 $ 81,496
Market Fund
U.S. Government Fund $ 171,664 $ 124,997 $ 195,647
Intermediate Tax-Exempt Fund $ 215,890 $ 178,379 $ 301,417
Florida Intermediate Tax-Exempt $ 17,638 $ 11,284 $ 7,174
Fund
Fixed Income Fund $ 154,709 $ 85,293 $ 129,589
Tax-Exempt Fund $ 128,048 $ 92,041 $ 154,841
California Tax-Exempt Fund $ 35,426 $ 6,684 N/A
International Fixed Income Fund $ 10,053 $ 10,534 $ 19,435
High Yield Municipal Fund $ 708 N/A N/A
High Yield Fixed Income Fund $ 2,958 N/A N/A
Income Equity Fund $ 78,886 $ 57,142 $ 77,746
Stock Index Fund $ 77,739 $ 30,318 $ 9,252
</TABLE>
-73-
<PAGE> 180
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth Equity Fund $ 349,439 $ 235,526 $ 320,662
Select Equity Fund $ 94,686 $ 53,548 $ 56,368
Mid Cap Growth Fund $ 14,391
Small Cap Fund $ 224,567 $ 157,708 $ 208,264
International Growth Equity Fund $ 132,079 $ 115,012 $ 219,176
International Select Equity Fund $ 82,930 $ 74,312 $ 133,479
Technology Fund $ 87,044 $ 41,187 $ 27,287
</TABLE>
(1.) The High Yield Municipal Fund and High Yield Fixed Income Funds
commenced operations on December 31, 1998 and the Mid Cap Growth Fund
commenced operations on March 31, 1998.
(2.) The California Tax-Exempt Fund commenced operations on April 8, 1997.
(3.) The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
For the fiscal years or periods indicated, Sunstone waived
administrative fees with respect to each Fund as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Fund $3,308,194 $2,372,408 $ 790,270
U.S. Government Money Market Fund $ 354,550 $ 293,967 $ 149,167
U.S. Government Select Money Market $ 317,904 $ 202,525 $ 155,378
Fund
Municipal Money Market Fund $1,721,373 $1,344,926 $ 727,816
California Municipal Money Market Fund $ 232,414 $ 244,331 $ 166,479
U.S. Government Fund $ 207,505 $ 180,577 $ 51,170
Intermediate Tax-Exempt Fund $ 264,621 $ 244,548 $ 77,538
Florida Intermediate Tax-Exempt Fund $ 26,288 $ 19,151 $ 2,308
Fixed Income Fund $ 195,856 $ 135,774 $ 34,026
Tax-Exempt Fund $ 164,475 $ 129,918 $ 39,928
California Tax-Exempt Fund $ 51,343 $ 21,785 N/A
International Fixed Income Fund $ 12,274 $ 12,687 $ 4,953
</TABLE>
-74-
<PAGE> 181
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999(1) March 31, 1998(2) March 31, 1997(3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
High Yield Municipal Fund $ 1,405 N/A N/A
High Yield Fixed Income Fund $ 5,367 N/A N/A
Income Equity Fund $ 93,722 $ 87,270 $ 20,875
Stock Index $ 106,182 $ 55,711 $ 3,836
Growth Equity Fund $ 449,843 $ 353,831 $ 85,494
Select Equity Fund $ 125,790 $ 88,034 $ 15,958
Mid Cap Growth Fund $ 32,060 N/A N/A
Small Cap Fund $ 246,554 $ 276,453 $ 55,295
International Growth Equity Fund $ 159,830 $ 148,415 $ 54,062
International Select Equity Fund $ 96,366 $ 96,473 $ 33,602
Technology Fund $ 176,646 $ 72,057 $ 8,821
</TABLE>
(1.) The High Yield Municipal Fund and High Yield Fixed Income Funds
commenced operations on December 31, 1998 and the Mid Cap Growth Fund
commenced operations on March 31, 1998.
(2.) The California Tax-Exempt Fund commenced operations on April 8, 1997.
(3.) The Florida Intermediate Tax-Exempt Fund commenced operations on August
15, 1996; the Stock Index Fund commenced operations on October 7, 1996;
and the Technology Fund commenced operations on April 1, 1996.
Northern Funds has also entered into a Distribution Agreement under
which Northern Funds Distributors, LLC, as agent, sells shares of each Fund on a
continuous basis. Northern Funds Distributors, LLC pays the cost of printing and
distributing prospectuses to persons who are not shareholders of Northern Funds
(excluding preparation and typesetting expenses) and of certain other
distribution efforts. No compensation is payable by Northern Funds to Northern
Funds Distributors, LLC for such distribution services. Northern Funds
Distributors, LLC is an affiliate of Sunstone. Miriam M. Allison, Vice President
and Treasurer of Northern Funds is President of Northern Funds Distributors,
LLC.
The Administration Agreement and the Distribution Agreement provide
that Sunstone and Northern Funds Distributors, LLC, respectively, may render
similar services to others so long as their services under the respective
Agreements are not impaired thereby. The Administration and Distribution
Agreements provide that Northern Funds will indemnify Sunstone and Northern
Funds Distributors, LLC, respectively, against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
such Agreements) under certain circumstances.
Under a Service Mark License Agreement, Northern Trust Corporation
agrees that the name "Northern Funds" may be used in connection with Northern
Funds' business on a royalty-free basis. Northern Trust Corporation has reserved
to itself the right to grant the non-exclusive right to use the name "Northern
Funds" to any other person. The
-75-
<PAGE> 182
Agreement provides that at such time as the Agreement is no longer in effect,
Northern Funds Distributors, LLC will cease using the name "Northern Funds."
SERVICE ORGANIZATIONS
As stated in the Funds' Prospectus, the Funds may enter into agreements
from time to time with Service Organizations providing for support and/or
distribution services to customers of the Service Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Funds may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(a) processing dividend and distribution payments from a Fund; (b) providing
information periodically to customers showing their share positions; (c)
arranging for bank wires; (d) responding to customer inquiries; (e) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (f) forwarding shareholder
communications; (g) assisting in processing share purchase, exchange and
redemption requests from customers; (h) assisting customers in changing dividend
options, account designations and addresses; and (i) other similar services
requested by the Funds. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Funds' arrangements with Service Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees and (in the case of the
Distribution and Service Plan) by the initial shareholder of Northern Funds.
Because the Distribution and Service Plan contemplates the provision of services
related to the distribution of Fund shares (in addition to support services),
that Plan has been adopted in accordance with Rule 12b-1 under the 1940 Act. In
accordance with the Plans, the Board of Trustees reviews, at least quarterly, a
written report of the amounts expended in connection with the Funds'
arrangements with Service Organizations and the purposes for which the
expenditures were made. In addition, the Funds' arrangements with Service
Organizations must be approved annually by a majority of the Trustees, including
a majority of the Trustees who are not "interested persons" of the Funds as
defined in the 1940 Act and have no direct or indirect financial interest in
such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit each Fund and
its shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to a Fund must be approved by the holders of a majority of the
outstanding shares of the Fund involved. So long as the Distribution and Service
Plan is in effect, the selection and nomination of the members of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Northern Funds will be committed to the discretion of such disinterested
Trustees.
-76-
<PAGE> 183
For the fiscal period ended March 31, 1999, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Stock
Index Fund, Select Equity Fund, Small Cap Fund, International Growth Equity
Fund, International Select Equity Fund and Technology Fund paid fees of $25,567,
$29,542, $146, $37, $37, $73, $110, $957, $37 and $2,103, respectively, under
the Service Plan. No other Funds paid fees under either Plan.
For the fiscal period ended March 31, 1998, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Select
Equity Fund, Small Cap Fund, International Select Equity Fund and Technology
Fund paid fees of $107, $40,296, $181, $145, $440, $368, $78 and $449,
respectively, under the Service Plan. No other Funds paid fees under either
Plan.
For the fiscal period ended March 31, 1997, the Municipal Money Market
Fund and the U.S. Government Money Market Fund paid fees of $98 and $59,754,
respectively, under the Service Plan. No other Funds paid fees under either
Plan.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at 1345 Chestnut Street, Suite
1100, Philadelphia, Pennsylvania 19107, serve as counsel to Northern Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds. The financial
statements dated March 31, 1999, incorporated by reference into this Additional
Statement have been incorporated in reliance on the report of Arthur Andersen
LLP given on the authority of said firm as experts in auditing and accounting.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of a Fund may, in the discretion of Northern Trust,
be made in the form of securities that are permissible investments for the Fund
as described in the Prospectus. For further information about this form of
payment, contact the Transfer Agent. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
Although each Fund generally will redeem shares in cash, each Fund
reserves the right to pay redemptions by a distribution in kind of securities
(instead of cash) from such Fund. The securities distributed in kind would be
readily marketable and would be valued for this purpose using the same method
employed in calculating the Fund's net asset value per share. If a shareholder
receives redemption proceeds in kind, the shareholder should
-77-
<PAGE> 184
expect to incur transaction costs upon the disposition of the securities
received in the redemption.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This may
help investors reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher share prices. In order to
be effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. Dollar Cost Averaging does not assure a profit
and does not protect against losses in a declining market. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent a
loss if an investor ultimately redeems shares at a price which is lower than
their purchase price. An investor may want to consider his or her financial
ability to continue purchases through periods of low price levels.
DIRECTED REINVESTMENTS
In addition to having your income dividends and/or capital gains
distributions reinvested in shares of the Fund from which such distributions are
paid, you may elect the directed reinvestment option and have dividends and
capital gains distributions automatically invested in another Northern Fund.
Reinvestments can only be directed to an existing Northern Funds account (which
must meet the minimum investment requirement). Directed reinvestments may be
used to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account. Directed reinvestments from a qualified plan
account to a regular account may have adverse tax consequences including
imposition of a penalty tax and, therefore, you should consult your own tax
adviser before commencing these transactions.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares
of the Funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Funds involved in the request are priced will be processed on the next
Business Day in the manner described above.
Northern Funds may redeem shares involuntarily to reimburse a Fund for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares
-78-
<PAGE> 185
purchased by the shareholder or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to Fund shares as
provided in the Funds' Prospectus from time to time. Northern Funds may also
redeem shares involuntarily if the redemption is appropriate to carry out
Northern Funds' responsibilities under the 1940 Act (see, e.g., "Amortized Cost
Valuation").
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern Trust. To
invest through any of the tax-sheltered retirement plans, please call Northern
Trust for information and the required separate application. To determine
whether the benefits of a tax-sheltered retirement plan are available and/or
appropriate, a shareholder should consult with a tax adviser.
EXPENSES
Except as set forth above and in this Additional Statement, each Fund
is responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the organization
of Northern Funds, taxes, interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Funds' shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Funds' expenses and/or reduce their advisory and administrative fees from
the Funds during the current fiscal year. The result of these reimbursements and
fee reductions will be to increase the performance of the Funds during the
periods for which the reductions and reimbursements are made.
PERFORMANCE INFORMATION
MONEY MARKET FUNDS
From time to time Northern Funds may advertise quotations of "yields"
and "effective yields" with respect to each Money Market Fund, and the Municipal
Money Market Fund and
-79-
<PAGE> 186
the California Municipal Money Market Fund may advertise their "tax-equivalent
yields" and "tax-equivalent effective yields." These yield figures will
fluctuate, are based on historical earnings and are not intended to indicate
future performance. "Yield" refers to the net investment income generated by an
investment in the Fund over a seven-day period identified in the advertisement.
This net investment income is then "annualized." That is, the amount of net
investment income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment.
In arriving at quotations as to "yield," Northern Funds first
determines the net change during the period in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, then divides such net change by the value of the account at the
beginning of the period to obtain the base period return, and then multiplies
the base period return by 365/7.
"Effective yield" is calculated similarly but, when annualized, the net
investment income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "effective
yield" with respect to the shares of a Money Market Fund is computed by adding 1
to the base period return (calculated as above), raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after-tax yield equivalent to a Fund's tax-free yield.
It is calculated by taking that portion of the seven-day "yield" which is
tax-exempt and adjusting it to reflect the tax savings associated with a stated
tax rate. The "tax-equivalent current yield" will always be higher than the
Fund's yield.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion
of the yield by 1 minus a stated income tax rate and then adding the quotient to
the taxable portion of the yield, if any. There may be more than one
tax-equivalent yield if more than one stated income tax rate is used.
The "tax-equivalent effective yield" demonstrates the level of taxable
yield necessary to produce an after-tax yield equivalent to a Fund's tax-free
effective yield. It is calculated by taking that portion of the seven-day
"effective yield" which is tax-exempt and adjusting it to reflect the tax
savings associated with a stated tax rate. The "tax-equivalent effective yield"
will always be higher than the Fund's effective yield.
"Tax-equivalent effective yield" is computed by dividing the tax-exempt
portion of the effective yield by 1 minus a stated income tax-rate, and then
adding the quotient to the taxable portion of the effective yield, if any. There
may be more than one tax-equivalent effective yield, if more than one stated
income tax rate is used.
The annualized yield of each Money Market Fund for the seven-day period
ended March 31, 1999 was as follows (1):
-80-
<PAGE> 187
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Money Market Fund 4.50% 4.60% N/A N/A
U.S. Government Money Market Fund 4.46% 4.56% N/A N/A
U.S. Government Select Money Market Fund 4.38% 4.47% N/A N/A
Municipal Money Market Fund 2.49% 2.52% 3.61% 3.65%
California Municipal Money Market Fund 2.41% 2.44% 3.49% 3.54%
</TABLE>
(1.) An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian" and "Administrator and
Distributor." In the absence of such fee reductions and expense limitations, the
annualized yield of each Fund for the same seven-day period would have been as
follows(1):
<TABLE>
<CAPTION>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Money Market Fund 4.46% 4.56% N/A N/A
U.S. Government Money Market Fund 4.39% 4.39% N/A N/A
U.S. Government Select Money Market Fund 4.30% 4.39% N/A N/A
Municipal Money Market Fund 2.44% 2.47% 3.54% 3.58%
California Municipal Money Market Fund 2.36% 2.39% 3.42% 3.46%
</TABLE>
(1.) An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
A Money Market Fund may also quote, from time to time, total return
information using the formula described in the following section.
-81-
<PAGE> 188
NON-MONEY MARKET FUNDS
The Non-Money Market Funds calculate their total returns separately on
an "average annual total return" basis for various periods. Average annual total
return reflects the average annual percentage change in value of an investment
in the Fund over the measuring period. Total returns for each Non-Money Market
Fund may also be calculated on an "aggregate total return" basis for various
periods. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return reflect
changes in the price of the shares and assume that any dividends and capital
gain distributions made by a Fund during the period are reinvested in the shares
of the Fund. When considering average total return figures for periods longer
than one year, it is important to note that the annual total return of a Fund
for any one year in the period might have been more or less than the average for
the entire period. The Non-Money Market Funds may also advertise from time to
time the total return on a year-by-year or other basis for various specific
periods by means of quotations, charts, graphs or schedules.
A Non-Money Market Fund calculates its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
1
-
(ERV)n
T = (---) - 1
( P )
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Where: T = average annual total return;
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year
(or other) periods at the end of the
applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000;
and
n = period covered by the computation, expressed
in years.
</TABLE>
A Non-Money Market Fund calculates its "aggregate total return" by
determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
[(ERV)]
Aggregate Total Return = T = [(---)] - 1
[( P )]
-82-
<PAGE> 189
The calculations set forth below are made assuming that (a) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per share existing on the reinvestment date, and (b) all
recurring fees charged to all shareholder accounts are included. The ending
redeemable value (variable "ERV" in the formula) is determined by assuming
complete redemption of the hypothetical investment after deduction of all
nonrecurring charges at the end of the measuring period.
-83-
<PAGE> 190
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 1999
AVERAGE ANNUAL TOTAL RETURNS (%)
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT FUND 6.01% 5.99% N/A 5.99%
(4/1/94 inception)
INTERMEDIATE TAX-EXEMPT FUND 4.88% 5.27% N/A 5.27%
(4/1/94 inception)
FLORIDA INTERMEDIATE TAX-EXEMPT FUND 5.38% N/A N/A 6.28%
(8/15/96 inception)
FIXED INCOME FUND 5.18% 7.35% N/A 7.35%
(4/1/94 inception)
TAX-EXEMPT FUND 5.47% 6.73% N/A 6.73%
(4/1/94 inception)
CALIFORNIA TAX-EXEMPT FUND 6.20% N/A N/A 9.09%
(4/8/97 inception)
INTERNATIONAL FIXED INCOME FUND 9.68% 6.78% N/A 6.78%
(4/1/94 inception)
INCOME EQUITY FUND 0.67% 13.18% N/A 13.18%
(4/1/94 inception)
STOCK INDEX FUND 17.78% N/A N/A 28.82%
(10/7/96 inception)
GROWTH EQUITY FUND 24.72% 22.54% N/A 22.54%
(4/1/94 inception)
SELECT EQUITY FUND 28.79% N/A N/A 24.90%
(4/6/94 inception)
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURNS (%)
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT FUND 6.01% 33.74% N/A 33.74%
(4/1/94 inception)
INTERMEDIATE TAX-EXEMPT FUND 4.88% 29.28% N/A 29.28%
(4/1/94 inception)
FLORIDA INTERMEDIATE TAX-EXEMPT FUND 5.38% N/A N/A 17.36%
(8/15/96 inception)
FIXED INCOME FUND 5.18% 42.55% N/A 42.55%
(4/1/94 inception)
TAX-EXEMPT FUND 5.47% 38.50% N/A 38.50%
(4/1/94 inception)
CALIFORNIA TAX-EXEMPT FUND 6.20% N/A N/A 18.80%
(4/8/97 inception)
INTERNATIONAL FIXED INCOME FUND 9.68% 38.84% N/A 38.84%
(4/1/94 inception)
INCOME EQUITY FUND 0.67% 85.70% N/A 85.70%
(4/1/94 inception)
STOCK INDEX FUND 17.78% N/A N/A 87.49%
(10/7/96 inception)
GROWTH EQUITY FUND 24.72% 176.29% N/A 176.29%
(4/1/94 inception)
SELECT EQUITY FUND 28.79% N/A N/A 203.19%
(4/6/94 inception)
</TABLE>
-84-
<PAGE> 191
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 1999
AVERAGE ANNUAL TOTAL RETURNS (%)
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
MID CAP GROWTH FUND 17.19% N/A N/A 17.19%
(3/31/98 inception)
SMALL CAP FUND (23.46)% 8.92% N/A 8.92%
(4/1/94 inception)
INTERNATIONAL GROWTH EQUITY FUND 13.04% 8.28% N/A 8.28%
(4/1/94 inception)
INTERNATIONAL SELECT EQUITY FUND 9.16% N/A N/A 7.44%
(4/5/94 inception)
TECHNOLOGY FUND 79.97% N/A N/A 49.16%
(4/1/96 inception)
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURNS (%)
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
------ ------ ------- ---------
<S> <C> <C> <C> <C>
MID CAP GROWTH FUND 17.19% N/A N/A 17.19%
(3/31/98 inception)
SMALL CAP FUND (23.46)% 53.32% N/A 53.32%
(4/1/94 inception)
INTERNATIONAL GROWTH EQUITY FUND 13.04% 48.82% N/A 48.82%
(4/1/94 inception)
INTERNATIONAL SELECT EQUITY FUND 9.16% N/A N/A 43.08%
(4/5/94 inception)
TECHNOLOGY FUND 79.97% N/A N/A 231.84%
(4/1/96 inception)
</TABLE>
-85-
<PAGE> 192
The yield of a Non-Money Market Fund is computed based on the Fund's
net income during a specified 30-day (or one month) period. More specifically,
the Fund's yield is computed by dividing the per share net income during the
relevant period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis.
A Non-Money Market Fund calculates its 30-day (or one month) standard
yield in accordance with the method prescribed by the SEC for mutual funds:
[(a-b ) 6 ]
YIELD = 2[(--- + 1) - 1]
[(cd ) ]
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding
during the period entitled to receive dividends;
and
d = net asset value per share on the last day of the
period.
</TABLE>
Based on the foregoing calculations, for the 30-day period ended March
31, 1999, the yields for the U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt,
International Fixed Income, High Yield Municipal, High Yield Fixed Income and
Income Equity Funds, after fee waivers, were 4.77%, 3.26%, 3.42%, 5.20%, 3.84%,
3.77%, 2.55%, 3.26%, 7.43% and 2.83%, respectively. Also for the 30-day period
ended March 31, 1999, the yields for the U.S. Government, Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt,
California Tax-Exempt, International Fixed Income, High Yield Municipal and High
Yield Fixed Income Funds, absent fee waivers, were 4.68%, 3.18%, 3.16%, 5.01%,
3.75%, 3.61%, 1.64%, (0.80)%, 6.29% and 2.69%, respectively.
A Non-Money Market Fund's "tax-equivalent" yield is computed by: (a)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (b)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax. For the 30-day period ended March 31, 1999, and
using a federal income tax rate of 31%, the 30-day tax-equivalent yields, after
fee waivers, were 4.72%, 4.96%, 5.57%, 5.46% and 4.72% for the Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, California Tax-Exempt
and High Yield Municipal Funds, respectively. Also, for the 30-day period ended
March 31, 1999, and using a federal income tax rate of 31%, the 30-day
tax-equivalent yields, absent fee waivers, were 4.61%, 4.58%, 5.43%, 5.23% and
(0.80)% for the Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt,
Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds, respectively.
-86-
<PAGE> 193
GENERAL INFORMATION
The performance information set forth above includes the reinvestment
of dividends and distributions. Certain performance information set forth above
reflects fee waivers in effect; in the absence of fee waivers, these performance
figures would be reduced. Any fees imposed by Northern Trust, NTQA or other
Service Organizations on their customers in connection with investments in the
Funds are not reflected in Northern Funds' calculations of performance for the
Funds.
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and
-87-
<PAGE> 194
differences in the methods used in valuing their portfolio instruments,
computing net asset value and determining performance.
The performance of each Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or to the S&P 500 Index, the S&P MidCap 400 Index, the Russell
2000 or 1000 Small Stock Index, the Consumer Price Index of the Dow Jones
Industrial Average. In addition, performance of the U.S. Government and Fixed
Income Funds may be compared to the Lehman Brothers Government Bond Index (or
its two components, the Treasury Bond Index and Agency Bond Index), the Lehman
Brothers Corporate Bond Index, the Lehman Brothers Intermediate Government Bond
Index and the Lehman Brothers Government/Corporate Bond Index. Performance of
the Intermediate Tax-Exempt and Tax-Exempt Funds may be compared to the Lehman
Brothers Municipal Bond or 5-Year Municipal Bond Indices; performance of the
California Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers
Mutual Fund California Intermediate Index; performance of the Florida
Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers Florida
Intermediate Tax-Exempt Index; performance of the Arizona Tax-Exempt Fund may be
compared to the Lehman Brothers Arizona Municipal Bond Index; performance of the
California Tax-Exempt Fund may be compared to the Lehman Brothers California
Municipal Exempt Index and performance of the California Intermediate Tax-Exempt
Fund, Florida Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and
California Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund
Intermediate Municipal Index. Performance of the High Yield Municipal Fund may
be compared to Lehman Brothers Municipal Non-Investment Grade Bond Index.
Performance of the High Yield Fixed Income Fund may be compared to Merrill Lynch
High Yield Master II Index, Lehman Brothers High Yield Corporate Bond Index and
Salomon Brothers Extended High-Yield Market Index. Performance of the Income
Equity Fund may be compared to the Merrill Lynch Investment Grade Convertible
Bond Index. Performance of the International Funds may be compared to the Mortan
Stanley Capital International Europe, Australia and Far East Index ("EAFE"), the
Morgan Stanley EAFE blended with Emerging Markets Free Index and the J.P. Morgan
International Government Bond Index. Performance of the Technology Fund may be
compared to the Morgan Stanley Index, the Hambrecht and Quist Technology Index,
the SoundView Technology Index, the technology grouping of the S&P 500 Index and
any other comparable technology index. Performance data as reported in national
financial publications such as Money, Forbes, Barron's The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of a Fund. From time to time, the
Funds may also quote the mutual fund ratings of Morningstar, Inc. and other
services in their advertising materials.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds,
-88-
<PAGE> 195
Treasury bills, the U.S. rate of inflation (based on the Consumer Price Index),
and combinations of various capital markets. The performance of these capital
markets is based on the returns of different indices. The Funds may use the
performance of these capital markets in order to demonstrate general
risk-versus-reward investment scenarios. Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
The risks associated with the security types in any capital market may or may
not correspond directly to those of the Funds. The Funds may also compare
performance to that of other compilations or indices that may be developed and
made available in the future.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic and political conditions, the relationship
between sectors of the economy and the economy as a whole, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and Treasury bills. From time to time advertisements,
sales literature, communications to shareholders or other materials may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Northern Trust and NTQA as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Funds may also include in advertisements, sales literature,
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of a Fund. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Fund and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternative to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may include lists of representative clients of Northern Trust
and NTQA. Materials may refer to the CUSIP numbers of the Funds and may
illustrate how to find the
-89-
<PAGE> 196
listings of the Funds in newspapers and periodicals. Materials may also include
discussions of other Funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
A Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include
information regarding the background and experience of its portfolio managers.
NET ASSET VALUE
As stated in the Prospectus, each Money Market Fund seeks to maintain a
net asset value of $1.00 per share and, in this connection, values its
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Fund would receive if the Fund sold the
instrument. During such periods the yield to investors in the Fund may differ
somewhat from that obtained in a similar entity which uses available indications
as to market value to value its portfolio instruments. For example, if the use
of amortized cost resulted in a lower (higher) aggregate Fund value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher (lower) yield and ownership interest than would result from
investment in such similar entity and existing investors would receive less
(more) investment income and ownership interest. However, Northern Funds expects
that the procedures and limitations referred to in the following paragraphs of
this section will tend to minimize the differences referred to above.
Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the
Funds' operations and delegating special responsibilities involving portfolio
management to Northern Trust, has
-90-
<PAGE> 197
established procedures that are intended, taking into account current market
conditions and the Funds' investment objectives, to stabilize the net asset
value of each Money Market Fund, as computed for the purposes of purchases and
redemptions, at $1.00 per share. The Trustees' procedures include periodic
monitoring of the difference (the "Market Value Difference") between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. Available indications of market value
consist of actual market quotations or appropriate substitutes which reflect
current market conditions and include (a) quotations or estimates of market
value for individual portfolio instruments and/or (b) values for individual
portfolio instruments derived from market quotations relating to varying
maturities of a class of money market instruments. In the event the Market Value
Difference exceeds 1/2 of 1%, the Trustees' procedures provide that the Trustees
will take such steps as they consider appropriate (e.g., selling portfolio
instruments to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a net asset value per share based upon available indications
of market value which under such circumstances would vary from $1.00) to
eliminate or reduce to the extent reasonably practicable any material dilution
or other unfair results to investors or existing shareholders which might arise
from Market Value Differences. In particular, if losses were sustained by a
Fund, the number of outstanding shares might be reduced in order to maintain a
net asset value per share of $1.00. Such reduction would be effected by having
each shareholder proportionately contribute to the Fund's capital the necessary
shares to restore such net asset value per share. Each shareholder will be
deemed to have agreed to such contribution in these circumstances by investing
in the Fund.
Rule 2a-7 requires that each Money Market Fund limit its investments to
instruments which Northern Trust determines to present minimal credit risks and
which are "Eligible Securities" as defined by the SEC and described in the
Prospectus. The Rule also requires that each Money Market Fund maintain a
dollar-weighted average portfolio maturity (not more than 90 days) appropriate
to its policy of maintaining a stable net asset value per share and precludes
the purchase of any instrument deemed under the Rule to have a remaining
maturity of more than 397 days. Should the disposition of a portfolio security
result in a dollar-weighted average portfolio maturity of more than 90 days, the
Rule requires a Money Market Fund to invest its available cash in such a manner
as to reduce such maturity to the prescribed limit as soon as reasonably
practicable.
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
-91-
<PAGE> 198
good faith by Northern Trust under the supervision of the Board of Trustees.
Temporary short-term investments are valued at amortized cost which Northern
Trust has determined, pursuant to Board authorization, approximates market
value. Securities may be valued on the basis of prices provided by independent
pricing services when those prices are believed to reflect the fair market value
of the securities.
Northern Trust is not required to calculate the net asset value of a
Fund on days during which no shares are tendered to a Fund for redemption and no
orders to purchase or sell shares are received by a Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
The discussions of federal and state tax consequences in the Prospectus
and this Additional Statement are based on the Code and the laws and regulations
issued thereunder as in effect on the date of this Additional Statement. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
Each Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, each Fund is
generally exempt from federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of 90% of its tax-exempt income
and 90% of its investment company taxable income (net investment income and the
excess of net short-term capital gain over net long-term capital loss), if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
-92-
<PAGE> 199
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of each Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer), and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
Each Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain") for
each taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder has held the shares, whether such gain was recognized by
the Fund prior to the date on which a shareholder acquired shares of the Fund
and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.
Dividends and distributions from each Fund will generally be taxable to
you in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Fund in October, November or December and paid in
January are taxed as though they were paid by December 31.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Income Equity Fund, Stock Index Fund,
Growth Equity Fund, Select Equity Fund, Mid Cap Growth, Small Cap Index Fund,
Small Cap Fund and Technology Fund, may constitute "qualifying dividends." The
other Funds, however, are not expected to pay qualifying dividends.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of such Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
-93-
<PAGE> 200
Although each Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, each Fund may be subject
to the tax laws of such states or localities.
FEDERAL - TAX-EXEMPT INFORMATION
As described in the Prospectus, the Municipal Money Market, California
Municipal Money Market, Intermediate Tax-Exempt, California Intermediate
Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt,
California Tax-Exempt and High Yield Municipal Funds are designed to provide
investors with federally tax-exempt interest income. The Funds are not intended
to constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Funds would not be suitable for
tax-exempt institutions or for retirement plans qualified under Section 401 of
the Code, H.R. 10 plans and individual retirement accounts because such plans
and accounts are generally tax-exempt and, therefore, would not gain any
additional benefit from the Funds' dividends being tax-exempt. In addition, the
Funds may not be an appropriate investment for persons or entities that are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person which regularly uses a part of such facilities in
its trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, which occupies more than 5% of
the usable area of such facilities or for which such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
In order for the Municipal Money Market, California Municipal Money
Market, Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt, California
Tax-Exempt or High Yield Municipal Funds to pay federal exempt-interest
dividends with respect to any taxable year, at the close of each taxable quarter
at least 50% of the aggregate value of the Fund must consist of tax-exempt
obligations. An exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by a Fund with respect to any taxable year which qualifies as federal
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a tax exempt Fund generally is not deductible for federal income tax
purposes to the extent attributable
-94-
<PAGE> 201
to exempt-interest-dividends. If a shareholder holds Fund shares for six months
or less, any loss on the sale or exchange of those shares will be disallowed to
the extent of the amount of exempt-interest dividends earned with respect to the
shares. The Treasury Department, however, is authorized to issue regulations
reducing the six-month holding requirement to a period of not less than the
greater of 31 days or the period between regular distributions for investment
companies that regularly distribute at least 90% of its net tax-exempt interest.
No such regulations had been issued as of the date of this Additional Statement.
Corporate taxpayers will be required to take into account all
exempt-interest dividends from the Tax-Exempt Funds and the Municipal Funds in
determining certain adjustments for alternative minimum tax purposes.
The Funds will determine annually the percentages of their respective net
investment income which are exempt from tax, which constitute an item of tax
preference for purposes of the federal alternative minimum tax, and which are
fully taxable, and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Funds.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments and
futures contacts and options that may be engaged in by a Fund, and investments
in passive foreign investment companies ("PFICs"), are complex and, in some
cases, uncertain. Such transactions and investments may cause a Fund to
recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as
ordinary income.
In addition, in the case of any shares of a PFIC in which a Fund invests,
the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA FUNDS
Assuming each of the California Funds qualifies as a regulated investment
company, it will be relieved of liability for California state franchise and
corporate income tax to the extent its earnings are distributed to its
shareholders. Each of the California Funds may be taxed on its undistributed
taxable income. If for any year one of the California Funds does not qualify as
a regulated investment company, all of that Fund's taxable income (including
interest income on
-95-
<PAGE> 202
California municipal instruments for franchise tax purposes only) may be subject
to California state franchise or income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of a regulated investment company, or series thereof,
consists of (i) obligations the interest on which, if held by an individual, is
exempt from taxation by California ("California municipal instruments") and (ii)
certain U.S. Government and U.S. possession obligations ("Federal Obligations"),
then a regulated investment company, or series thereof, will be qualified to pay
dividends exempt from California state personal income tax to its non-corporate
shareholders (hereinafter referred to as "California exempt-interest
dividends"). "Series" of a regulated investment company is defined as a
segregated portfolio of assets, the beneficial interest in which is defined as a
series of stock of the company. Each of the California Funds intends to qualify
under the above requirements so that it can pay California exempt-interest
dividends. If one of the California Funds fails to so qualify, no part of that
Fund's dividends to shareholders will be exempt from the California state
personal income tax. Each of the California Funds may reject purchase orders for
shares if it appears desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, each of the California
Funds will notify each shareholder of the portion of the dividends paid by the
Fund to the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California
exempt-interest dividends paid by the Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the Fund for such
year on California municipal instruments and Federal Obligations over any
amounts that, if the Fund were treated as an individual, would be considered
expenses related to tax-exempt income or amortizable bond premium and would thus
not be deductible under federal income or California state personal income tax
law. The percentage of total dividends paid by the Fund with respect to any
taxable year which qualifies as California exempt-interest dividends will be the
same for all shareholders receiving dividends from the Fund with respect to such
year.
In cases where shareholders are "substantial users" or "related persons"
with respect to California municipal instruments held by one of the California
Funds, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection, rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See "Federal - Tax-Exempt Information" above.
To the extent any dividends paid to shareholders are derived from the
excess of net long-term capital gains over net short-term capital losses, such
dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gain dividends for federal income tax
purposes. See "Federal - General Information" above. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of one of the
California Funds is not deductible for California state personal income tax
purposes if that Fund distributes California exempt-interest dividends during
the shareholder's taxable year.
-96-
<PAGE> 203
California may tax income derived from repurchase agreements involving
federal obligations because such income represents a premium paid at the time
the government obligations are repurchased rather than interest paid by the
issuer of the obligations.
The foregoing is only a summary of some of the important California state
personal income tax considerations generally affecting the California Funds and
their shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the California Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of a Fund's dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
one of the California Funds, including, in particular, corporate investors which
may be subject to either California franchise tax or California corporate income
tax, should consult their tax advisers with respect to the application of such
taxes to the receipt of Fund dividends and as to their own California state tax
situation, in general.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE FLORIDA INTERMEDIATE
TAX-EXEMPT FUND
The State of Florida does not currently impose an income tax on
individuals. Thus, individual shareholders of the Florida Intermediate
Tax-Exempt Fund will not be subject to any Florida income tax on distributions
received from the Fund. However, Florida does currently impose an income tax on
certain corporations. Consequently, distributions may be taxable to corporate
shareholders.
The State of Florida currently imposes an "intangibles tax" at the annual
rate of 2 mills or 0.20% on certain securities and other intangible assets owned
by Florida residents. With respect to the first mill, or first .10%, 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
1 mill, or last .10%, 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. Notes, bonds and other obligations issued by the State of Florida or
its municipalities, counties, and other taxing districts, or by the United
States Government, its agencies and certain U.S. territories and possessions
(such as Guam, Puerto Rico and the Virgin Islands) as well as cash are exempt
from this intangibles tax. If on December 31 of any year the portfolio of the
Florida Intermediate Tax-Exempt Fund consists solely of such exempt assets, then
the Fund's shares will be exempt from the Florida intangibles tax payable in the
following year.
In order to take advantage of the exemption from the intangibles tax in
any year, the Fund must sell any non-exempt assets held in its portfolio during
the year and reinvest the proceeds in exempt assets including cash prior to
December 31. Transaction costs involved in restructuring
-97-
<PAGE> 204
the portfolio in this fashion would likely reduce the Fund's investment return
and might exceed any increased investment return the Fund achieved by investing
in non-exempt assets during the year.
Outside the State of Florida, income distributions may be taxable to
shareholders under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. Government obligations which, if realized directly, would be
exempt from such income taxes. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE ARIZONA TAX-EXEMPT FUND
Individuals, trusts and estates who are subject to Arizona income tax will
not be subject to such tax on dividends paid by the Arizona Tax-Exempt Fund, to
the extent that such dividends qualify as exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Code and are
attributable to either (i) obligations of the State of Arizona or its political
subdivisions thereof or (ii) obligations issued by the governments of Guam,
Puerto Rico, or the Virgin Islands. In addition, dividends paid by the Arizona
Tax-Exempt Fund which are attributable to interest payments on direct
obligations of the United States government will not be subject to Arizona
income tax to the extent the Arizona Tax-Exempt Fund qualifies as a regulated
investment company under Subchapter M of the Code. Other distributions from the
Arizona Tax-Exempt Fund, however, such as distributions of short-term or
long-term capital gains, will generally not be exempt from Arizona income tax.
There are no municipal income taxes in Arizona. Moreover, because shares
of the Arizona Tax-Exempt Fund are intangibles, they are not subject to Arizona
property tax. Shareholders of the Arizona Tax-Exempt Fund should consult their
tax advisors about other state and local tax consequences of their investment in
the Arizona Tax-Exempt Fund.
DESCRIPTION OF SHARES
The Trust Agreement permits Northern Funds' Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in different investment portfolios.
Northern Funds may hereafter create series in addition to Northern Funds'
existing series, which represent interests in twenty-seven portfolios, each of
which is discussed in this Additional Statement. Under the terms of the Trust
Agreement, each share of each Fund has a par value of $.0001, represents a
proportionate interest in the particular Fund with each other share of its class
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. Upon any liquidation of a Fund,
shareholders of each class of a Fund are entitled to share pro rata in the net
assets belonging to that class available for distribution. Shares do not have
any preemptive or conversion rights. The right of redemption is described under
"Redeeming and Exchanging Shares" in the Prospectus. Pursuant to the terms of
the 1940 Act, the right of a shareholder to redeem shares and the date of
payment by a Fund may be suspended for more than seven days (a) for any period
during which the New York Stock Exchange is closed, other than the
-98-
<PAGE> 205
customary weekends or holidays, or trading in the markets the Fund normally
utilizes is closed or is restricted as determined by the SEC, (b) during any
emergency, as determined by the SEC, as a result of which it is not reasonably
practicable for the Fund to dispose of instruments owned by it or fairly to
determine the value of its net assets, or (c) for such other period as the SEC
may by order permit for the protection of the shareholders of the Fund. Northern
Funds may also suspend or postpone the recordation of the transfer of its shares
upon the occurrence of any of the foregoing conditions. In addition, Northern
Funds reserves the right to adopt, by action of the Trustees, a policy pursuant
to which it may, without shareholder approval, redeem upon not less than 30
days' notice all of a Fund's shares if such shares have an aggregate value below
a designated amount and if the Trustees determine that it is not practical,
efficient or advisable to continue the operation of such Fund and that any
applicable requirements of the 1940 Act have been met. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below. In the interests of economy and convenience,
certificates representing shares of the Funds are not issued.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of Northern Funds. Expenses with respect to the portfolios of
Northern Funds are normally allocated in proportion to the net asset value of
the respective portfolios except where allocations of direct expenses can
otherwise be fairly made.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each Fund entitled to
vote on a matter will vote in the aggregate and not by Fund, except as required
by law or when the matter to be voted on affects only the interests of
shareholders of a particular series.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as Northern Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each investment portfolio affected by such matter. Rule 18f-2 further
provides that an investment portfolio shall be deemed to be affected by a matter
unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any
change in a fundamental investment policy would be effectively acted upon with
respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also provides
that the ratification of the appointment of independent accountants, the
approval of principal underwriting contracts and the election of Trustees are
exempt from the separate voting requirements stated above.
The term "majority of the outstanding shares" of either Northern Funds or
a particular Fund or investment portfolio means, with respect to the approval of
an investment advisory
-99-
<PAGE> 206
\agreement, a distribution plan or a change in a fundamental investment policy,
the vote of the lesser of (i) 67% or more of the shares of Northern Funds or
such Fund or portfolio present at a meeting, if the holders of more than 50% of
the outstanding shares of Northern Funds or such Fund or portfolio are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of
Northern Funds or such Fund or portfolio.
As of May 19, 1999 Northern and its affiliates held of record
substantially all of the outstanding shares of the Non-Money Market Funds as
agent, custodian, trustee or investment adviser on behalf of their customers. At
such date, The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois
60675, and its affiliate banks held as beneficial owner five percent or more of
the outstanding shares of the Non-Money Market Funds because they possessed sole
or shared voting or investment power with respect to such shares. As of May 19,
1999 the names and share ownership of the entities or individuals which held of
record or beneficially more than 5% of the outstanding shares of any Fund were
as follows: Money Market Fund: Northern Trust Bank - Miami on behalf of its
customers, 17.09%, Short Term Investment Fund, 20.83%, Northern Trust Bank - M&I
Sweep Account, 5.22%; U.S. Government Money Market Fund: Sahara Enterprises,
Inc. Fixed Income Portfolio, 10.09%, Northern Trust Bank - M&I Sweep Account,
11.98%; Municipal Money Market Fund: Northern Trust Bank - Miami on behalf of
its customers, 28.96% and Northern Trust Bank - M&I Sweep Account, 5.47%; U.S.
Government Select Money Market Fund: Northern Trust Bank - Miami on behalf of
its customers, 31.12%; Florida Intermediate Tax-Exempt Fund: Abraham General
Partnership, 5.59%, Donaldson, Lufkin & Jenrette, 11.78% and John C. Schumann,
Jr., 7.40%; California Municipal Money Market Fund: Northern Trust Bank - M&I
Sweep Account, 12.03%; Stock Index Fund: Donaldson, Lufkin & Jenrette, 7.75%;
Select Equity Fund: Donaldson, Lufkin & Jenrette, 11.65%; International Select
Equity Fund: James L. Knight, 6.56%; California Tax-Exempt Fund: Julius Epstein
Residuary T/U/W, 5.93%; Technology Fund: Donaldson, Lufkin & Jenrette, 6.40%.
The address of all of the above persons is c/o The Northern Trust Bank, 50 S.
LaSalle Street, Chicago, Illinois 60675.
As of May 31, 1999, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than 50% of the
outstanding shares of Northern Funds.
As a general matter, Northern Funds does not hold annual or other meetings
of shareholders. This is because the Trust Agreement provides for shareholder
voting only for the election or removal of one or more Trustees, if a meeting is
called for that purpose, and for certain other designated matters. Each Trustee
serves until the next meeting of shareholders, if any, called for the purpose of
considering the election or reelection of such Trustee or of a successor to such
Trustee, and until the election and qualification of his successor, if any,
elected at such meeting, or until such Trustee sooner dies, resigns, retires or
is removed by the shareholders or two-thirds of the Trustees. In addition, the
Trustees have adopted a by-law (changeable without shareholder approval) that
provides that a Trustee will cease to serve as a Trustee effective as of the
last calendar day in the semi-annual fiscal period of Northern Funds in which
the earlier of the following events occurs: (a) the date such Trustee attains
the age of seventy-three years; and (b) the twelfth anniversary of the date of
such Trustee's written acceptance to serve as a Trustee.
-100-
<PAGE> 207
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder communications
in connection with the meeting.
Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the trust. The Trust Agreement contains an
express disclaimer of shareholder (as well as Trustee and officer) liability for
acts or obligations of Northern Funds and requires that notice of such
disclaimer be given in each contract, undertaking or instrument entered into or
executed by Northern Funds or the Trustees. The Trust Agreement provides for
indemnification out of Trust property of any shareholder charged or held
personally liable for the obligations or liabilities of Northern Funds solely by
reason of being or having been a shareholder of Northern Funds and not because
of such shareholder's acts or omissions or for some other reason. The Trust
Agreement also provides that Northern Funds shall, upon proper and timely
request, assume the defense of any charge made against any shareholder as such
for any obligation or liability of Northern Funds and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Northern Funds itself
would be unable to meet its obligations.
The Trust Agreement provides that each Trustee of Northern Funds will be
liable for his own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee
("disabling conduct"), and for nothing else, and will not be liable for errors
of judgment or mistakes of fact or law. The Trust Agreement provides further
that Northern Funds will indemnify Trustees and officers of Northern Funds
against liabilities and expenses incurred in connection with litigation and
other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Trust Agreement and to have become a party thereto.
FINANCIAL STATEMENTS
The audited financial statements and related report of the Trust's
independent auditors, contained in the annual report to shareholders for the
fiscal year ended March 31, 1999 (the "Annual Report") are hereby incorporated
herein by reference. No other part of the Annual Report is incorporated by
reference herein. Copies of the Annual Report may be obtained, without charge,
from the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986,
Chicago, Illinois 60690-9069 or by calling 1-800-595-9111.
-101-
<PAGE> 208
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by Northern Funds' Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
-102-
<PAGE> 209
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established
A-1
<PAGE> 210
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-2
<PAGE> 211
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse
A-3
<PAGE> 212
developments (both internal and external) than those with higher ratings, the
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-4
<PAGE> 213
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
A-5
<PAGE> 214
"A" - Bonds possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
A-6
<PAGE> 215
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
A-7
<PAGE> 216
"CCC", "CC", "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-8
<PAGE> 217
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection that are ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
A-9
<PAGE> 218
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-10
<PAGE> 219
APPENDIX B
As stated in the Prospectus, the Funds (other than the Money Market
Funds) may enter into certain futures transactions. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, by using futures contracts.
Interest rate future contracts can also be used by a Fund for
non-hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus
B-1
<PAGE> 220
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
General. A stock or bond index assigns relative values to the stocks
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes, such as the Standard & Poor's 100 or
indexes based on an industry or market indexes, such as Standard & Poor's 100 or
indexes based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract. To the extent consistent with its investment objective, a Fund may
also engage in transactions, from time to time, in foreign stock index futures
such as the ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the
FTSE-100 (United Kingdom).
A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a Fund
will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures
B-2
<PAGE> 221
contracts in connection with this strategy, in order to protect against the
possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Index futures contracts may also be used by a Fund for non-hedging
(speculative) purposes to increase total return.
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation
on one party to deliver, and a corresponding obligation on another party to
accept delivery of, a stated quantity of foreign currency, for an amount fixed
in U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. Margin Payments
Unlike purchases or sales of portfolio securities, no price is paid
or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with a custodian or sub-custodian an amount of liquid assets, known as
initial margin, based on the value of the contract. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when a particular Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund
will be entitled to receive from the broker a variation margin payment equal to
that increase in value. Conversely, where the Fund has purchased a futures
contract and the price of the future contract has declined in response to a
decrease in the underlying instruments, the position would be less valuable and
the Fund would be required to make a variation margin payment to the broker.
Prior to expiration of the futures contract, Northern Trust or NTQA may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the futures and movements in the price of the instruments which are
the subject of the hedge. The price of the
B-3
<PAGE> 222
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility over
a particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the Investment Advisers. Conversely, a Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Investment Advisers. It is also possible that, where a Fund
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Fund may decline. If
this occurred, the Fund would lose money on the futures and also experience a
decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in
the price of securities or a currency before a Fund is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
B-4
<PAGE> 223
Positions in futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by a Fund is also subject to the
Investment Advisers' ability to predict correctly movements in the direction of
the market. For example, if a particular Fund has hedged against the possibility
of a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
VI. Options on Futures Contracts
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an
B-5
<PAGE> 224
example, in anticipation of a decline in interest rates, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the securities held by
a Fund is expected to decline as a result of an increase in interest rates, the
Fund might purchase put options or sell call options on futures contracts rather
than sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
VII. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-6
<PAGE> 225
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated herein by reference:
(a) (1) Agreement and Declaration of Trust dated October 12, 1993
filed as Exhibit 1(a) to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, filed on
July 29, 1996 ("PEA No. 11").
(2) Amendment No. 1 to Agreement and Declaration of Trust filed
as Exhibit 1(b) to PEA No. 11.
(3) Amendment No. 2 to Agreement and Declaration of Trust filed
as Exhibit 1(c) to PEA No. 11.
(4) Amendment No. 3 to Agreement and Declaration of Trust filed
as Exhibit 1(d) to PEA No. 11.
(5) Amendment No. 4 to Agreement and Declaration of Trust filed
as Exhibit 1(e) to PEA No. 11.
(6) Amendment No. 5 to Agreement and Declaration of Trust dated
May 26, 1995 filed as Exhibit 1(f) to Post-Effective
Amendment No. 9 to Registrant's Registration Statement on
Form N-1A, filed on June 12, 1996 ("PEA No. 9").
(7) Amendment No. 6 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(g) to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on
Form N-1A, filed on October 30, 1996 ("PEA No. 12").
(8) Amendment No. 7 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(h) to PEA No. 12.
(9) Amendment No. 8 to Agreement and Declaration of Trust dated
February 12, 1996 filed as Exhibit 1(i) to Post-Effective
Amendment No. 15 to Registrant's Registration Statement on
Form N-1A, filed on February 26, 1997 ("PEA No. 15").
(10) Amendment No. 9 to Agreement and Declaration of Trust dated
February 12, 1997 filed as Exhibit 1(j) to Post-Effective
Amendment No. 16 to
C-1
<PAGE> 226
Registrant's Registration Statement on Form N-1A, filed on
July 31, 1997 ("PEA No. 16").
(11) Amendment No. 10 to Agreement and Declaration of Trust
dated November 18, 1997 filed as Exhibit 1(k) to
Post-Effective Amendment No. 19 to Registrant's
Registration Statement on Form N-1A, filed on March 20,
1998 ("PEA No. 19").
(b) (1) By-Laws filed as Exhibit 2 to PEA No. 11.
(2) Amendment to the By-Laws dated August 4, 1994 filed as
Exhibit 2(a) to PEA No. 11.
(3) Amendment No. 2 to the By-Laws dated May 22, 1997 filed as
Exhibit 2(b) to PEA No. 16.
(c) None.
(d) (1) Investment Advisory and Ancillary Services Agreement
between Registrant and The Northern Trust Company dated
April 1, 1994 ("Investment Advisory Agreement") filed as
Exhibit 5 to PEA No. 11.
(2) Addendum No. 1 to the Investment Advisory Agreement dated
November 29, 1994 filed as Exhibit 5(a) to PEA No. 11.
(3) Addendum No. 2 to the Investment Advisory Agreement dated
March 29, 1996 filed as Exhibit 5(b) to PEA No. 9.
(4) Addendum No. 3 to the Investment Advisory Agreement dated
August 7, 1996 filed as Exhibit 5(c) to PEA No. 12.
(5) Addendum No. 4 to the Investment Advisory Agreement dated
March 24, 1997 filed as Exhibit 5(d) to PEA No. 16.
(6) Addendum No. 5 to the Investment Advisory Agreement dated
February 12, 1997 filed as Exhibit 5(e) to PEA No. 19.
(7) Addendum No. 6 to the Investment Advisory Agreement dated
November 18, 1997 filed as Exhibit 5(f) to PEA No. 19.
(8) Assumption Agreement between The Northern Trust Company and
Northern Trust Quantitative Advisors, Inc. dated April 1,
1998 filed as exhibit 5(g) to Post-Effective Amendment No.
20 to Registrant's Registration Statement on Form N-1A,
filed on July 31, 1998 ("PEA No. 20").
C-2
<PAGE> 227
(e) (1) Distribution Agreement between Registrant and Sunstone
Distribution Services, LLC dated January 1, 1997
("Distribution Agreement") filed as Exhibit 6(e) to
Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A, filed on January 27,
1997 ("PEA No. 14").
(2) Amended and Restated Schedule A to the Distribution
Agreement dated November 18, 1997 filed as Exhibit 6(a) to
Exhibit 6(a) to PEA No. 19.
(f) None.
(g) (1) Custodian Agreement between Registrant and The Northern
Trust Company dated April 1, 1994 ("Custodian Agreement")
filed as Exhibit 8(a) to PEA No. 11.
(2) Addendum No. 1 to the Custodian Agreement dated November
29, 1994 filed as Exhibit 8(d) to PEA No. 11.
(3) Addendum No. 2 to the Custodian Agreement dated March 29,
1996 filed as Exhibit 8(f) to PEA No. 9.
(4) Foreign Custody Agreement between the Registrant and The
Northern Trust Company dated April 1, 1994 filed as Exhibit
8(g) to PEA No. 11.
(5) Addendum No. 3 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(i) to PEA No. 12.
(6) Addendum No. 4 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(j) to PEA No. 12.
(7) Addendum No. 5 to the Custodian Agreement dated March 24,
1997 filed as Exhibit 8(n) to PEA No. 16.
(8) Addendum No. 6 to the Custodian Agreement dated February
12, 1997 filed as Exhibit 8(l) to PEA No. 19.
(9) Addendum No. 7 to the Custodian Agreement dated November
18, 1997 filed as Exhibit 8(o) to PEA No. 19.
(10) Addendum No. 1 to the Foreign Custody Agreement dated April
1, 1998 filed as Exhibit 8(p) to PEA No. 19.
C-3
<PAGE> 228
(11) Foreign Custody Monitoring Agreement between the Registrant
and The Northern Trust Company dated February 18, 1998
filed as exhibit 8(r) to PEA No. 20.
(h) (1) Transfer Agency Agreement between Registrant and The
Northern Trust Company dated April 1, 1994 ("Transfer
Agency Agreement") filed as Exhibit 8(b) to PEA No. 11.
(2) Addendum No. 1 to the Transfer Agency Agreement dated
November 29, 1994 filed as Exhibit 8(c) to PEA No. 11.
(3) Addendum No. 2 to the Transfer Agency Agreement dated March
29, 1996 filed as Exhibit 8(e) to PEA No. 9.
(4) Addendum No. 3 to the Transfer Agency Agreement dated
August 7, 1996 filed as Exhibit 8(h) to PEA No. 12.
(5) Addendum No. 4 to the Transfer Agency Agreement dated March
24, 1997 filed as Exhibit 8(m) to PEA No. 16.
(6) Addendum No. 5 to the Transfer Agency Agreement dated
February 12, 1997 filed as Exhibit 8(k) to PEA No. 19.
(7) Addendum No. 6 to the Transfer Agency Agreement dated
November 18, 1997 filed as Exhibit 8(q) to PEA No. 19.
(8) Administration Agreement between Registrant and Sunstone
Financial Group, Inc. dated April 1, 1994 ("Administration
Agreement") filed as Exhibit 9(a) to PEA No. 11.
(9) Service Plan and Related Agreement filed as Exhibit 9(b) to
PEA No. 9.
(10) Amended and Restated Schedule A to the Administration
Agreement dated November 18, 1997 filed as Exhibit 9(c) to
PEA No. 19.
(i) Filed as Exhibit 10 to PEA No. 18.
(k) None.
(l) (1) Purchase Agreement between Registrant and The Northern
Trust Company dated March 31, 1994 filed as Exhibit 13(a)
to PEA No. 11.
(2) Purchase Agreement between Registrant and Miriam M. Allison
dated March 14, 1994 filed as Exhibit 13(b) to PEA No. 11.
C-4
<PAGE> 229
(m) Distribution and Service Plan and Related Agreement filed
as Exhibit 15 to PEA No. 9.
(n) None
(o) None.
The following exhibits to the Registration Statement are filed herewith
electronically pursuant to EDGAR rules:
(a) (12) Amendment No. 11 to Agreement and Declaration of Trust
dated September 18, 1998.
(13) Amendment No. 12 to Agreement and Declaration of Trust
dated November 18, 1998.
(d) (9) Addendum No. 7 to the Investment Advisory Agreement dated
December 21, 1998.
(e) (3) Amended and Restated Schedule A to the Distribution
Agreement dated December 21, 1998.
(4) Distribution Agreement between Registrant and Northern
Funds Distributors, LLC dated March 31, 1999.
(5) Termination of Distribution Agreement dated March 31, 1999,
relating to the Distribution Agreement between Northern
Funds and Sunstone Distribution Services, LLC dated January
1, 1999.
(g) (12) Addendum No. 8 to the Custodian Agreement dated December
21, 1998.
(h) (11) Addendum No. 7 to the Transfer Agency Agreement dated
December 21, 1998.
(12) Amended and Restated Schedule A to the Administration
Agreement dated December 21, 1998.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of Independent Public Accountants.
(l) (3) Purchase Agreement between Registrant and Miriam M. Allison
dated March 31, 1998 for shares of the Mid Cap Growth Fund.
C-5
<PAGE> 230
(4) Purchase Agreement between Registrant and Miriam M. Allison
dated December 31, 1998 for shares of the High Yield Fixed
Income Fund.
(5) Purchase Agreement between Registrant and Miriam M. Allison
dated December 31, 1998 for shares of the High Yield
Municipal Fund.
(m) Amended and Restated Distribution and Service Plan, adopted
April 11, 1994, as revised May 20, 1999, and Related
Agreement.
(n) Financial Data Schedules with respect to the Money Market,
U.S. Government Money Market, U.S. Government Select Money
Market, Municipal Money Market, California Municipal Money
Market, U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt,
California Tax-Exempt, International Fixed Income, High
Yield Municipal, High Yield Fixed Income, Income Equity,
Stock Index, Growth Equity, Select Equity, Mid Cap Growth,
Small Cap, International Growth Equity, International
Select Equity and Technology Funds.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
ITEM 25. INDEMNIFICATION
Section 7 of the Investment Advisory and Ancillary Services Agreement
between the Registrant and The Northern Trust Company ("Northern") provides for
indemnification of Northern or, in lieu thereof, contribution by Registrant, in
connection with certain claims and liabilities to which Northern, in its
capacity as Registrant's Adviser, may be subject. A copy of the Investment
Advisory and Ancillary Services Agreement is incorporated by reference herein as
Exhibit (d)(1).
Section 5 of the Administration Agreement between the Registrant and
Sunstone Financial Group, Inc. ("Sunstone") provides for indemnification of
Sunstone in connection with certain claims and liabilities to which Sunstone, in
its capacity as Registrant's Administrator, may be subject. A copy of the
Administration Agreement is incorporated by reference herein as Exhibit (h)(8).
Section 2.8(a) of the Distribution Agreement between the Registrant and
Northern Funds Distributors, LLC provides for indemnification of Northern Funds
Distributors, LLC, an affiliate of Sunstone, in connection with certain claims
and liabilities to which Northern Funds Distributors, LLC, in its capacity as
Registrant's Distributor, may be subject. A copy of the Distribution Agreement
is filed herewith as Exhibit (e)(1).
C-6
<PAGE> 231
In addition, Section 6.3 of Registrant's Agreement and Declaration of
Trust, a copy of which is incorporated by reference herein as Exhibit (a)(1),
provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall be
subject to any personal liability whatsoever to any person in
connection with property of the Trust or the acts, obligations or
affairs of the Trust or any Series thereof. The Trust shall
indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become
subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or his or
her heirs, executors, administrators or other legal
representatives or in the case of a corporation or other entity,
its corporate or other general successor) out of the property of
the Trust for all legal and other expenses reasonably incurred by
him in connection with any such claim or liability. The
indemnification and reimbursement required by the preceding
sentence shall be made only out of assets of the one or more
Series whose Shares were held by said Shareholder at the time the
act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a
Shareholder under this Section shall not impair any other right to
which such Shareholder may be lawfully entitled, nor shall
anything herein contained restrict the right of the Trust or any
Series thereof to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided
herein.
Section 6.4 of Registrant's Agreement and Declaration of Trust, a copy of
which is incorporated by reference herein as Exhibit (a)(1), provides for
indemnification of Trustees and officers, as follows:
6.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify each of its Trustees and officers and persons who
serve at the Trust's request as directors, officers or trustees of
another organization in which the Trust has any interest as a
shareholder, creditor or otherwise (hereinafter referred to as a
"Covered Person") against all liabilities, including but not
limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred by any Covered
Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which
such Covered Person may be or may have been involved as a party or
otherwise or with which such person may be or may have been
threatened, while in office or
C-7
<PAGE> 232
thereafter, by reason of being or having been such a Trustee or
officer, director or trustee, except that no Covered Person shall
be indemnified against any liability to the Trust or its
Shareholders to which such Covered Person would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (such willful misfeasance,
bad faith, gross negligence or reckless disregard being referred
to herein as "Disabling Conduct"). Expenses, including
accountants' and counsel fees so incurred by any such Covered
Person (but excluding amounts paid in satisfaction of judgments,
in compromise or as fines or penalties), may be paid from time to
time by the Trust in advance of the final disposition of any such
action, suit or proceeding upon receipt of (a) an undertaking by
or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of
such expenses is not authorized under this Article VI and either
(b) such Covered Person provides security for such undertaking,
(c) the Trust is insured against losses arising by reason of such
payment, or (d) a majority of a quorum of disinterested, non-party
Trustees, or independent legal counsel in a written opinion,
determines, based on a review of readily available facts, that
there is reason to believe that such Covered Person ultimately
will be found entitled to indemnification.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
C-8
<PAGE> 233
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Northern Trust Company, Registrant's investment adviser, is a full
service commercial bank and also provides a full range of trust and fiduciary
services. Set forth below is a list of all of the directors, senior officers and
those officers primarily responsible for Registrant's affairs of The Northern
Trust Company and, with respect to each such person, the name and business
address of the company (if any) with which such person has been connected at any
time since March 31, 1997, as well as the capacity in which such person was
connected.
C-9
<PAGE> 234
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Gregg D. Behrens
Executive Vice President None
J. David Brock
Executive Vice President None
Duane L. Burnham Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Chairman of the
100 Abbott Park Road Board and Director
Abbott Park, IL 60064-3500
Sara Lee Corp. Director
Three First National Plaza
Chicago, IL 60602
Dr. Dolores E. Cross Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Morris Brown College President (6/99)
Administration Building, 2nd Floor President -
643 Martin Luther King Jr. Drive Elect (10/98)
Atlanta, GA 30314
General Electric Company Former President
3135 Easton Turnpike GE Fund
Fairfield, CT 06432
The Graduate School and University Center Ge Fund
The City University of New York Distinguished
33 W. 42nd Street, Room 1400 N Professor of
New York, NY 10036 Leadership and
Diversity
Susan Crown Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
</TABLE>
C-10
<PAGE> 235
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Susan Crown Henry Crown & Co. Vice President
(continued) 222 North LaSalle Street
Suite 2000
Chicago, IL 60601
Baxter International Director
One Baxter Parkway
Deerfield, IL 60015
Illinois Tool Works Director
3600 West Lake Ave
Glenview, IL 60025-5811
John R. Goodwin NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director, Chief
Chicago, IL 60675 Investment Officer
Robert S. Hamada Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
The University of Chicago Dean and Edward
Graduate School of Business Eagle Brown
1101 East 58th Street Distinguished
Chicago, IL 60637 Service Professor of
Finance
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604
</TABLE>
C-11
<PAGE> 236
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Barry G. Hastings Northern Trust Corporation President and Chief
President and Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director
Northern Trust of California Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Vice Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Mayer, Brown & Platt Partner
190 South LaSalle Street, 38th Fl.
Chicago, IL 60603
Zenith Electronics Director
1000 Milwaukee Ave.
Glenview, IL 60025
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Dreyer's Grand Ice Cream, Inc. Director
5929 College Ave.
Oakland, CA 94618
</TABLE>
C-12
<PAGE> 237
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Arthur L. Kelly Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
KEL Enterprises L.P. Managing Partner
Two First National Plaza
20 S. Clark St., Suite 2222
Chicago, IL 60603
Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
A.G Deere & Company Director
John Deere Road
Moline, IL 61265
Thyssen Industries AG
Am Thyssenhaus 1
45128 Essen
Germany
Frederick A. Krehbiel Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Molex Incorporated Chairman, CEO and
2222 Wellington Court Director
Lisle, IL 60532-1682
</TABLE>
C-13
<PAGE> 238
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Frederick A. Krehbiel Nalco Chemical Company Director
(continued) One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
Devry, Inc. Director
One Tower Lane
Suite 1000
Oak Brook Terrace, IL 60181
John V.N. McClure None
Executive Vice President
James J. Mitchell, III The Northern Trust Company Director
Executive Vice President of New York
40 Broad Street
8th Floor
New York, NY 10004
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Chairman, Chief
One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
</TABLE>
C-14
<PAGE> 239
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Edward J. Mooney Morton International, Inc. Director
(continued) 100 North Riverside Plaza
Chicago, IL 60606
FMC Corp. Director
200 E. Randolph Drive
Chicago IL 60601
J. Terrance Murray None
Executive Vice President
William A. Osborn Northern Trust Corporation Director
Chairman and Chief 50 South LaSalle Street
Executive Officer Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Sheila A. Penrose Northern Trust Global Director
President - Advisors, Inc.
Corporate and Institutional 29 Federal Street
Services and Executive Stamford, CT 06901
Vice President
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
</TABLE>
C-15
<PAGE> 240
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President and Chief Chicago, IL 60675
Financial Officer
Northern Investment Corporation President and,
50 South LaSalle Street Director
Chicago IL 60675
Northern Trust Global Director
Advisors, Inc.
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
Stephen N. Potter NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Peter L. Rossiter None
Executive Vice President
and General Counsel
Lee Selander Northern Trust Retirement Manager
Executive Vice President Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Jean Sheridan None
Executive Vice President
</TABLE>
C-16
<PAGE> 241
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Harold B. Smith Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Illinois Tool Works Inc. Chairman of the
3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and Director
W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202
William D. Smithburg Northern Trust Corporation Director
Chairman 50 South LaSalle Street
Director Chicago, IL 60675
The Quaker Oats Company Retired
321 North Clark Street Chairman,
Chicago, IL 60610 President and
Chief
Executive
Officer
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
10275 W. Higgins Road
Suite 200
Rosemont, IL 60018
</TABLE>
C-17
<PAGE> 242
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
James M. Snyder NTQA Chairman, CEO and
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Global Advisors, Inc. Director
29 Federal Street
Stamford, CT 06901
Mark Stevens None
Executive Vice President
Bide L. Thomas Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
MYR Group Inc. Director
*(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008
* Name change
Stephen B. Timbers Northern Trust Global Director
President- Northern Trust Advisors, Inc.
Global Investments and 29 Federal Street
Executive Vice President Stamford, CT 06901
LTV Steel Co. Director
200 Public Square
Cleveland, OH 44114-2308
Zurich-Kemper Investments Former
222 S. Riverside Plaza President and
Chicago, IL 60606 Chief Executive Officer
(January 1996 -
December 1997)
NTQA Director
50 S. LaSalle Street
Chicago, IL 60675
</TABLE>
C-18
<PAGE> 243
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
William S. Trukenbrod None
Executive Vice President
Frederick Waddell None
Executive Vice President
Jeffrey H. Wessel NTQA President,
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Northern Trust Global Advisors, Inc Director
29 Federal Street
Stamford, CT 06901
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITER
(a) None.
(b) To the best of Registrant's knowledge, the executive
officers of Northern Funds Distributors, LLC, distributor for Registrant, are
as follows:
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
- --------------------- --------------------- ----------
<S> <C> <C>
Miriam M. Allison President Vice President
207 E. Buffalo Street and Treasurer
Suite 400
Milwaukee, WI 53202
Peter Hammond Secretary None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
</TABLE>
C-19
<PAGE> 244
<TABLE>
<S> <C> <C>
Christine Mortensen Treasurer None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Terry Ladwig Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
(c) None
</TABLE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute books of the
Registrant are in the physical possession of Drinker Biddle & Reath LLP, 1100
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107. Records relating to Sunstone Financial Group, Inc.'s
functions as administrator, and Northern Funds Distributors, LLC's functions as
distributor, for the Registrant are located at 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202. All other accounts, books and other documents
required to be maintained under Section 31(a) of the Investment Company Act of
1940 and the Rules promulgated thereunder are in the physical possession of The
Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois 60675 or 801 S.
Canal Street, Chicago, Illinois 60607 (relating to transfer agent).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-20
<PAGE> 245
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 22 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee and State of Wisconsin on the 28th day of May, 1999.
<TABLE>
NORTHERN FUNDS
<S> <C>
By: /s/ Miriam M. Allison
----------------------------------
Miriam M. Allison
Treasurer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 22 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
Name Title Date
<S> <C> <C>
/*/ Silas S. Cathcart* Trustee and President May 28, 1999
- --------------------------------- (Chief Executive Officer)
Silas S. Cathcart
/s/ Miriam M. Allison Treasurer May 28, 1999
- --------------------------------- (Chief Financial
Miriam M. Allison and Accounting
Officer)
/*/ James W. Cozad* Trustee May 28, 1999
- ---------------------------------
James W. Cozad
/*/ Wesley M. Dixon, Jr.* Trustee May 28, 1999
- ---------------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan* Trustee May 28, 1999
- ---------------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee May 28, 1999
- ---------------------------------
Raymond E. George, Jr.
/*/ Michael E. Murphy* Trustee May 28, 1999
- ---------------------------------
Michael E. Murphy
/*/ Mary Jacobs Skinner* Trustee May 28, 1999
- ---------------------------------
Mary Jacobs Skinner
*By: /s/ Miriam M. Allison May 28, 1999
---------------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
<PAGE> 246
NORTHERN FUNDS
(A Massachusetts Business Trust)
CERTIFICATE OF SECRETARY
The foregoing resolution was duly adopted by the Board of Trustees
of Northern Funds at a Meeting of the Board of Trustees held on February 9,
1999, and remains in effect on the date hereof:
RESOLVED, that the trustees and officers of Northern Funds who may
be required to execute any amendment to the Registration Statement of Northern
Funds be, and each of them hereby is, authorized to execute a Power of Attorney
appointing Jeffrey A. Dalke and Miriam M. Allison, or either of them, their true
and lawful attorney or attorneys, to execute in their name, place and stead, in
their capacity as trustee or officer, or both, of Northern Funds, any and all
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission; and either of said attorneys shall have full power and
authority to do in the name and on behalf of said trustees and officers, or any
or all of them, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises, as fully and to all intents and purposes
as each of said trustees or officers, or any or all of them, might or could do
in person, said acts of said attorneys, or either of them, being hereby ratified
and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of
May, 1999.
/s/Jeffrey A. Dalke
-------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 247
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Silas S.
Cathcart, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.
DATED: October 13, 1993
/s/ Silas S. Cathcart
- --------------------------
Silas S. Cathcart
<PAGE> 248
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Miriam M.
Allison, hereby constitutes and appoints Jeffrey A. Dalke her true and lawful
attorney, to execute in her name, place, and stead, in her capacity as officer
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorney shall have
full power of substitution and resubstitution; and said attorney shall have full
power and authority to do and perform in her name and on her behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as she might or could do in person, said acts of
said attorney being hereby ratified and approved.
DATED: March 7, 1994
/s/ Miriam A. Allison
- --------------------------
Miriam A. Allison
- 2 -
<PAGE> 249
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, James W.
Cozad, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.
DATED: October 13, 1993
/s/ James W. Cozad
- --------------------------
James W. Cozad
- 3 -
<PAGE> 250
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Wesley M.
Dixon, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 24, 1994
/s/ Wesley M. Dixon, Jr.
- --------------------------
Wesley M. Dixon, Jr.
- 4 -
<PAGE> 251
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, William J.
Dolan, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 28, 1994
/s/ William J. Dolan, Jr.
- --------------------------
William J. Dolan, Jr.
- 5 -
<PAGE> 252
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Raymond E.
George, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 23, 1994
/s/ Raymond E. George, Jr.
- --------------------------
Raymond E. George, Jr.
- 6 -
<PAGE> 253
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Michael E.
Murphy, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorney shall have full power
and authority to do and perform in his name and on his behalf, in any and all
capacities, every act whatsoever requisite or necessary to be done, as fully and
to all intents and purposes as he might or could do in person, said acts of said
attorney being hereby ratified and approved.
DATED: May 21, 1998
/s/ Michael E. Murphy
- --------------------------
Michael E. Murphy
- 7 -
<PAGE> 254
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Mary Jacobs
Skinner, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, her true and lawful attorney, to execute in her name, place,
and stead, in her capacity as Trustee or officer, or both, of Northern Funds
(the "Trust"), the Registration Statement of the Trust and all amendments
thereto and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission; and each of said
attorneys shall have full power of substitution and resubstitution; and each of
said attorney shall have full power and authority to do and perform in her name
and on her behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as she might or
could do in person, said acts of said attorney being hereby ratified and
approved.
DATED: September 18, 1998
/s/ Mary Jacobs Skinner
- --------------------------
Mary Jacobs Skinner
- 8 -
<PAGE> 255
NORTHERN FUNDS
EXHIBIT INDEX
(a) (12) Amendment No. 11 to Agreement and Declaration of Trust
dated September 18, 1998.
(13) Amendment No. 12 to Agreement and Declaration of Trust
dated November 18, 1998.
(d) (9) Addendum No. 7 to the Investment Advisory Agreement dated
December 21, 1998.
(e) (3) Amended and Restated Schedule A to the Distribution
Agreement dated December 21, 1998.
(4) Distribution Agreement between Registrant and Northern Funds
Distributors, LLC dated March 31, 1999.
(5) Termination of Distribution Agreement dated March 31, 1999
relating to the Distribution Agreement between Northern Funds
and Sunstone Distribution Services, LLC dated January 1, 1997.
(g) (12) Addendum No. 8 to the Custodian Agreement dated December
21, 1998.
(h) (11) Addendum No. 7 to the Transfer Agency Agreement dated
December 21, 1998.
(12) Amended and Restated Schedule A to the Administration
Agreement dated December 21, 1998.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of Independent Public Accountants.
(l) (3) Purchase Agreement between Registrant and Miriam M.
Allison dated March 31, 1998 for shares of the Mid Cap Growth
Fund.
(4) Purchase Agreement between Registrant and Miriam M. Allison
dated December 31, 1998 for shares of the High Yield Fixed
Income Fund.
(5) Purchase Agreement between Registrant and Miriam M. Allison
dated December 31, 1998 for shares of the High Yield Municipal
Fund.
<PAGE> 256
(m) Amended and Restated Distribution and Service Plan, adopted
April 11, 1994, as revised May 20, 1999, and Related
Agreement.
(n) Financial Data Schedules with respect to the Money Market,
U.S. Government Money Market, U.S. Government Select Money
Market, Municipal Money Market, California Municipal Money
Market, U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt,
California Tax-Exempt, International Fixed Income, High
Yield Municipal, High Yield Fixed Income, Income Equity,
Stock Index, Growth Equity, Select Equity, Mid Cap Growth,
Small Cap, International Growth Equity, International
Select Equity and Technology Funds.
<PAGE> 1
EXHIBIT (a)(12)
NORTHERN FUNDS
AMENDMENT NO. 11 TO AGREEMENT AND
DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of Trust dated
October 12, 1993 (the "Declaration") of Northern Funds (the "Trust") provides
that the Declaration may be amended to establish and designate new Series or
Classes of Shares by an instrument in writing executed by a majority of the
Trustees of the Trust and setting forth such establishment and designation and
the relative rights and preferences of such Series or Classes;
NOW, THEREFORE, the undersigned, being a majority of the Trustees of
the Trust, hereby:
(1) amend the Declaration by designating and establishing two
additional Series and Classes of Shares ("Additional Series and Classes")
to be known as the Initial Classes of the "High Yield Tax-Exempt Fund" and
the "High Yield Fixed Income Fund," each Additional Series and Class to
have the relative rights and preferences set forth in Section 4.2(a)
through (m) of the Declaration; and
(2) determine that, pursuant to Section 7.3 of the Declaration, the
foregoing amendment shall be effective as of the date set forth below.
WITNESS our hands as of this 18th day of September, 1998.
/s/ Silas S. Cathcart
- --------------------------- -----------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
/s/ James W. Cozad /s/ William J. Dolan, Jr.
- --------------------------- -----------------------------
James W. Cozad William J. Dolan, Jr.
/s/ Raymond E. George, Jr. /s/ Michael E. Murphy
- --------------------------- -----------------------------
Raymond E. George, Jr. Michael E. Murphy
<PAGE> 1
EXHIBIT (a)(13)
CERTIFICATE
NORTHERN FUNDS
AMENDMENT NO. 12 TO AGREEMENT AND DECLARATION OF TRUST
Pursuant to Section 7.3 of the Agreement and Declaration of Trust
dated October 12, 1993 (the "Declaration") of Northern Funds (the "Trust"), the
undersigned, being a majority of the Trustees of the Trust, certify that the
following amendment to the Declaration was duly adopted by the Trustees at a
meeting held on November 18, 1998:
RESOLVED, that the Agreement and Declaration of Trust
dated October 12, 1993 of Northern Funds, as amended to date, be,
and hereby is, further amended to change the designation and name of
the Initial Class of "High Yield Tax-Exempt Fund Shares" to "High
Yield Municipal Fund Shares."
WITNESS our hands as of this 18th day of November, 1998.
/s/ Silas S. Cathcart /s/ Wesley M. Dixon, Jr.
- ------------------------------ --------------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
/s/ James W. Cozad /s/ William J. Dolan, Jr.
- ------------------------------ --------------------------------
James W. Cozad William J. Dolan, Jr.
/s/ Raymond E. George, Jr. /s/ Michael E. Murphy
- ------------------------------ --------------------------------
Raymond E. George, Jr. Michael E. Murphy
/s/ Honey Jacobs Skinner
- ------------------------------
Honey Jacobs Skinner
<PAGE> 1
EXHIBIT (d)(9)
NORTHERN FUNDS
ADDENDUM NO. 7 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the 21st day of December, 1998, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois
state bank.
WHEREAS, the Trust and the Investment Adviser have entered into an
Investment Advisory and Ancillary Services Agreement dated as of April 1, 1994
as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated
March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated
March 24, 1997, by Addendum No. 5 dated February 12, 1997 and by Addendum No. 6
dated November 18, 1997 (the "Advisory Agreement") pursuant to which the Trust
has appointed the Investment Adviser to act as investment adviser to the Trust
for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund, California Municipal
Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity
Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International
Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock
Index Fund, Short-Intermediate U.S. Government Fund, California Intermediate
Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Florida
Intermediate Tax-Exempt Fund, Small Cap Index Fund and the Mid Cap Growth Fund;
and
WHEREAS, Section 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional investment portfolios with
respect to which it desires to retain the Investment Adviser to act as
investment adviser under the Advisory Agreement, the Trust shall so notify the
Investment Adviser in writing and if the Investment Adviser is willing to render
such services it shall notify the Trust in writing, and the compensation to be
paid to the Investment Adviser shall be that which is agreed to in writing by
the Trust and the Investment Adviser; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the
Trust has notified the Investment Adviser that it is establishing the High Yield
Muncipal and the High Yield Fixed Income Funds (the "Funds"), and that it
desires to retain the Investment Adviser to act as the investment adviser for
the Funds, and the Investment Adviser has notified the Trust that it is willing
to serve as investment adviser for the Funds;
<PAGE> 2
NOW THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to
act as investment adviser to the Trust for the Funds in accordance with the
terms set forth in the Advisory Agreement. The Investment Adviser hereby accepts
such appointment and agrees to render the services set forth in the Advisory
Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement regarding each Fund, the Trust will pay the
Investment Adviser, and the Investment Adviser will accept as full compensation
therefor from the Trust, a fee at the annual rate of 0.75% of each Fund's
average net assets.
3. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Advisory Agreement shall be deemed to include the
Funds. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Advisory Agreement.
4. Miscellaneous. The initial term of the Advisory Agreement with
respect to the Funds shall continue, unless sooner terminated in accordance with
the Advisory Agreement, until March 31, 1999. Except to the extent supplemented
hereby, the Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as supplemented
hereby.
All signatures need not appear on the same copy of this Addendum.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as
of the date and year first above written.
NORTHERN FUNDS
Attest: /s/ Illegible By: /s/ Miriam M. Allison
------------------- -----------------------------------
Title: Vice President
--------------------------------
THE NORTHERN TRUST COMPANY
Attest: /s/ Illegible By: /s/ Lloyd A. Wennlund
-------------------- -----------------------------------
Title: Senior Vice President
--------------------------
<PAGE> 1
EXHIBIT (e)(3)
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
DATED DECEMBER 21, 1998
Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund U.S. Government Money Market Fund
Income Equity Fund International Fixed Income Fund
Small Cap Fund California Municipal Money Market Fund
Select Equity Fund Stock Index Fund
International Growth Equity Fund Florida Intermediate Tax-Exempt Fund
International Select Equity Fund Arizona Tax-Exempt Fund
Technology Fund California Intermediate Tax-Exempt Fund
Municipal Money Market Fund California Tax-Exempt Fund
U.S. Government Select Money Market Fund Short-Intermediate U.S. Government Fund
Fixed Income Fund Small Cap Index Fund
U.S. Government Fund Mid Cap Growth Fund
Intermediate Tax-Exempt Fund High Yield Municipal Fund
Tax-Exempt Fund High Yield Fixed Income Fund
Money Market Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By: /s/ Silas S. Cathcart
----------------------------
Title: President
-------------------------
Date: December 21, 1998
--------------------------
SUNSTONE DISTRIBUTION SERVICES, LLC
By: /s/ Miriam M. Allison
----------------------------
Title: President
-------------------------
Date: December 21, 1998
--------------------------
<PAGE> 1
EXHIBIT (e)(4)
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 31st day of March, 1999, by and between
Northern Funds, a Massachusetts business trust ("Northern Funds") and Northern
Funds Distributors, LLC, a Wisconsin limited liability company (the
"Distributor").
W I T N E S S E T H :
WHEREAS, Northern Funds is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
and is authorized to issue shares of beneficial interest ("Shares") in separate
series with each such series representing the interests in a separate portfolio
of securities and other assets;
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD"); and
WHEREAS, the Fund and Distributor desire to enter into an agreement
pursuant to which Distributor shall be the distributor of the Shares of Northern
Funds representing the investment portfolios listed on Schedule A hereto and any
additional investment portfolios Northern Funds and Distributor may agree upon
and include on Schedule A as such Schedule may be amended from time to time
(such investment portfolios and any additional investment portfolios are
individually referred to as a "Fund" and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Appointment of the Distributor.
Northern Funds hereby appoints the Distributor as agent for the
distribution of the Shares, on the terms and for the period set forth in this
Agreement. Distributor hereby accepts such appointment as agent for the
distribution of the Shares on the terms and for the period set forth in this
Agreement.
2. Services as Distributor.
2.1(a) Distributor will act as agent for the distribution of Shares in
accordance with the instructions of Northern Funds' Board of Trustees and the
registration statement and prospectuses then in effect with respect to the Funds
under the Securities Act of 1933, as
-1-
<PAGE> 2
amended (the "1933 Act"), and will transmit promptly any orders received for the
purchase or redemption of Shares either directly to the transfer agent for the
Funds or to any qualified broker/dealer for transmittal to said agent.
2.1(b) Distributor shall use appropriate efforts to solicit orders for
the sale of Shares. Distributor, at its own expense, shall finance appropriate
activities which it deems reasonable which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, the printing and
mailing of prospectuses to other than current shareholders, and the printing and
mailing of sales literature. In addition, Distributor will provide at least one
person, during normal business hours, to respond to telephone questions with
respect to the Funds. Distributor may enter into servicing and/or selling
agreements with qualified broker/dealers and other persons with respect to the
offering of Shares to the public, and if it so chooses Distributor will act only
on its own behalf as principal. The Distributor shall not be obligated to sell
any certain number of Shares of any Fund.
2.1(c) All Shares of the Funds offered for sale by Distributor shall be
offered for sale to the public at a price per unit (the "offering price") equal
to their net asset value (determined in the manner set forth in Northern Funds'
then current prospectuses). The offering price, if not an exact multiple of one
cent, shall be adjusted to the nearest cent.
2.2 Distributor shall act as distributor of the Shares in compliance
with all applicable laws, rules and regulations, including, without limitation,
all rules and regulations made or adopted pursuant to the 1940 Act, by the
Securities and Exchange Commission (the "Commission") or any securities
association registered under the 1934 Act. Northern Funds represents that it is
registered as an open-end management investment company under the 1940 Act and
that it shall comply with all applicable laws, rules and regulations including
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder.
2.3 Whenever in their judgment such action is warranted by market,
economic or political conditions, or by circumstances of any kind, Northern
Funds' officers may decline to accept any orders for, or make any sales of, any
Shares until such time as they deem it advisable to accept such orders and to
make such sales and Northern Funds shall advise Distributor promptly of such
determination.
2.4 Northern Funds shall take all necessary action to register and
maintain the registration of the Shares under the 1933 Act for sale as herein
contemplated and shall pay all costs and expenses in connection with the
registration of Shares under the 1933 Act, and be responsible for all expenses
in connection with maintaining facilities for the issue and transfer of Shares
and for supplying information, prices and other data to be furnished by Northern
Funds hereunder.
2.5 Northern Funds shall execute any and all documents and furnish any
and all information and otherwise take all actions which may be reasonably
necessary in the discretion of Northern Funds' officers in connection with the
qualification of the Shares for sale in such states as Distributor and Northern
Funds may approve, and Northern Funds shall pay all expenses which may be
incurred in connection with such qualification. Distributor shall pay all
-2-
<PAGE> 3
expenses connected with its own qualification as a broker under State or
Federal laws and, except as otherwise specifically provided in this Agreement,
all other expenses incurred by Distributor in connection with the sale by
Distributor of Shares as contemplated in this Agreement.
2.6 Northern Funds shall furnish Distributor from time to time, for use
in connection with the sale of Shares, such information with respect to Northern
Funds and the Shares as Distributor may reasonably request, and Northern Funds
warrants that the statements contained in any such information shall be true and
correct. Northern Funds also shall furnish Distributor upon request with: (a)
annual audited reports of Northern Funds' books and accounts with respect to
each of the Funds, made by independent public accountants regularly retained by
Northern Funds, (b) semi-annual reports with respect to each of the Funds
prepared by Northern Funds, and (c) from time to time such additional
information regarding Northern Funds' financial condition as Distributor may
reasonably request.
2.7 Northern Funds represents to Distributor that all registration
statements and prospectuses filed by Northern Funds with the Commission under
the 1933 Act with respect to the Shares have been prepared in conformity with
the requirements of the 1933 Act, the 1940 Act, and the rules and regulations of
the Commission thereunder. As used in this Agreement the terms "registration
statement" and "prospectus" shall mean any registration statement and prospectus
(together with the related statement of additional information) at any time
filed with the Commission with respect to any of the Shares and any amendments
and supplements thereto which at any time shall have been filed with said
Commission. Northern Funds represents and warrants to Distributor that any
registration statement and prospectus, when such registration statement becomes
effective, will contain all statements required to be stated therein in
conformity with the 1933 Act, the 1940 Act and the rules and regulations of the
Commission; that all statements of fact contained in the registration statement
and prospectus will be true and correct in all material respects when such
registration statement becomes effective; and that neither the registration
statement nor any prospectus when such registration statement becomes effective
will include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading to a purchaser of Shares. Northern Funds agrees to file from time
to time such amendments, supplements, reports and other documents as may be
necessary in order to comply with the 1933 Act and the 1940 Act and in order
that there may be no untrue statement of a material fact in a registration
statement or prospectus, or necessary in order that there may be no omission to
state a material fact in the registration statement or prospectus which omission
would make the statements therein misleading. If Northern Funds shall not
propose an amendment or amendments and/or supplement or supplements within
fifteen days after receipt by Northern Funds of a written request from
Distributor to do so, Distributor may, at its option, terminate this Agreement.
Northern Funds shall not file any amendment to the registration statement or
supplement to any prospectus without giving Distributor reasonable notice
thereof in advance; provided, however, that nothing contained in this Agreement
shall in any way limit Northern Funds' right to file at any time such amendments
to any registration statement and/or supplements to any prospectus, of whatever
character, as Northern Funds may deem advisable, such right being in all
respects absolute and unconditional.
-3-
<PAGE> 4
2.8(a) Northern Funds authorizes Distributor to use any prospectus, in
the form furnished to Distributor from time to time, in connection with the sale
of Shares. Northern Funds shall indemnify, defend and hold the Distributor, and
each of its present or former directors, officers, employees, representatives
and any person who controls or previously controlled the Distributor within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all losses, claims, demands, liabilities, damages and expenses (including
the costs of investigating or defending any alleged losses, claims, demands,
liabilities, damages or expenses and any counsel fees incurred in connection
therewith) which Distributor, each of its present and former directors,
officers, employees or representatives or any such controlling person, may incur
under the 1933 Act, the 1934 Act, any other statute (including Blue Sky laws) or
any rule or regulation thereunder, or under common law or otherwise, arising out
of or based upon any untrue statement, or alleged untrue statement, of a
material fact contained in the registration statement or any prospectus, as from
time to time amended or supplemented, or an annual or interim report to
shareholders, or arising out of or based upon any omission, or alleged omission,
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that Northern
Funds' obligation to indemnify Distributor and any of the foregoing indemnitees,
shall not be deemed to cover any losses, claims, demands, liabilities, damages
or expenses arising out of any untrue statement or alleged untrue statement or
omission or alleged omission made in the registration statement, prospectus, or
annual or interim report in reliance upon and in conformity with information
furnished to Northern Funds or its counsel by Distributor for the purpose of,
and used in, the preparation thereof; and provided further that Northern Funds'
agreement to indemnify Distributor and any of the foregoing indemnitees shall
not be deemed to cover any liability to Northern Funds or its shareholders to
which Distributor would otherwise be subject by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations and duties under this
Agreement. Northern Funds' agreement to indemnify the Distributor, and each of
its present or former directors, officers, employees, representatives or any
controlling person, as the case may be, with respect to any action, is expressly
conditioned upon Northern Funds being notified of such action brought against
Distributor, or each of its present or former directors, officers, employees,
representatives or any such controlling person, within a reasonable time after
the summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor, or such person, such
notification to be given by letter or by telegram addressed to Northern Funds'
Chairman, but the failure so to notify Northern Funds of any such action shall
not relieve Northern Funds from any liability which Northern Funds may have to
the person against whom such action is brought by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission, otherwise than on
account of Northern Funds' indemnity agreement contained in this paragraph
2.8(a).
2.8(b) Northern Funds shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such loss, claim, demand, liability, damage or expense,
but if Northern Funds elects to assume the defense, such defense shall be
conducted by counsel chosen by Northern Funds and approved by the Distributor,
which approval shall not be unreasonably withheld. In the event Northern Funds
elects to assume the defense of any such suit and retain such counsel, the
indemnified defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by
-4-
<PAGE> 5
them. If Northern Funds does not elect to assume the defense of any such suit,
or in case the Distributor does not, in the exercise of reasonable judgment,
approve of counsel chosen by Northern Funds, Northern Funds will reimburse the
indemnified person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by Distributor and them. Northern
Funds' indemnification agreement contained in this paragraph 2.8 and Northern
Funds' representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Distributor, and each of its present or former directors,
officers, employees, representatives or any controlling person, and shall
survive the delivery of any Shares and the termination of this Agreement. This
Agreement of indemnity will inure exclusively to the Distributor's benefit, to
the benefit of each of its present or former directors, officers, employees or
representatives or to the benefit of any controlling persons and their
successors. Northern Funds agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against Northern Funds or any of
its officers or directors in connection with the issue and sale of any of the
Shares.
2.9 Distributor shall indemnify, defend and hold Northern Funds, and
each of its present or former directors, officers, employees, representatives,
and any person who controls or previously controlled Northern Funds within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all losses, claims, demands, liabilities, damages and expenses (including
the costs of investigating or defending any alleged losses, claims, demands,
liabilities, damages or expenses, and any counsel fees incurred in connection
therewith) which Northern Funds, and each of its present or former directors,
officers, employees, representatives, or any such controlling person, may incur
under the 1933 Act, the 1934 Act, any other statute (including Blue Sky laws) or
any rule or regulation thereunder, or under common law or otherwise, arising out
of or based upon any untrue, or alleged untrue, statement of a material fact
contained in Northern Funds' registration statement or any prospectus, as from
time to time amended or supplemented, or annual or interim report to
shareholders or the omission, or alleged omission, to state therein a material
fact required to be stated therein or necessary to make the statement not
misleading, but only if such statement or omission was made in reliance upon,
and in conformity with, information furnished to Northern Funds or its counsel
by the Distributor for the purpose of, and used in, the preparation thereof.
Distributor's agreement to indemnify Northern Funds and any of the foregoing
indemnitees shall not be deemed to cover any liability to Distributor to which
Northern Funds would otherwise be subject by reason of its willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations and duties, under this Agreement. The
Distributor's Agreement to indemnify Northern Funds, its present or former
directors, officers, employees, representatives, and any such controlling
person, as aforesaid, is expressly conditioned upon the Distributor's being
notified of any action brought against Northern Funds, its present or former
directors, officers, employees, representatives, or any such controlling person,
such notification to be given by letter or telegram addressed to Distributor's
President, within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon Northern Funds or such person, but the failure so to notify Distributor of
any such action shall not relieve Distributor from any liability which
Distributor may have to the person against whom such action is brought by reason
of any such untrue, or alleged untrue, statement or omission, otherwise than on
account of Distributor's indemnity agreement contained in this paragraph 2.9(a).
In case any action shall be brought against Northern Funds, and each of its
present or
-5-
<PAGE> 6
former directors, officers, employees, representatives, or controlling persons,
in respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to Northern Funds, and
Northern Funds and each person so indemnified shall have the rights and duties
given to the Distributor by the provisions of paragraph 2.8(b).
2.10 No Shares shall be offered by either Distributor or Northern Funds
under any of the provisions of this Agreement and no orders for the purchase or
sale of such Shares hereunder shall be accepted by Northern Funds if and so long
as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the 1933 Act, or if and so long as current prospectuses as required by Section
10 of the 1933 Act, as amended, are not on file with the Commission; provided,
however, that nothing contained in this paragraph 2.10 shall in any way restrict
or have an application to or bearing upon Northern Funds' obligation to
repurchase Shares from any shareholder in accordance with the provisions of the
prospectus or Declaration of Trust.
2.11 Northern Funds agrees to advise Distributor promptly in writing:
(a) of any request by the Commission for amendments to the
registration statement or prospectuses then in effect;
(b) in the event of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or
prospectuses then in effect or the initiation of any proceeding
for that purpose;
(c) of the happening of any event which makes untrue any statement of
a material fact made in the registration statement or
prospectuses then in effect or which requires the making of a
change in such registration statement or prospectuses in order to
make the statements therein not misleading; and
(d) of all actions of the Commission with respect to any amendments
to any registration statement or prospectus which may from time
to time be filed with the Commission.
3. Term.
3.1(a) This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date hereof and, with respect to each Fund
not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed. Unless sooner terminated as
provided herein, this Agreement shall continue in effect with respect to each
Fund until March 31, 2000. Thereafter, if not terminated, this Agreement shall
continue automatically in effect as to each Fund for successive annual periods,
provided such continuance is specifically approved at least annually by (i)
Northern Funds' Board of Trustees or (ii) the vote of a majority (as defined in
the 1940 Act) of the outstanding voting securities of a Fund, and provided that
in either event the continuance is also approved by a majority of Northern
Funds' Trustees who are not "interested persons" (as defined in the 1940
-6-
<PAGE> 7
Act) of any party to this Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval.
3.1(b) This Agreement may be terminated without penalty with respect to
a particular Fund (1) through a failure to renew this Agreement at the end of a
term, (2) upon mutual consent of the parties, or (3) on not less than sixty (60)
days' written notice, by Northern Funds' Trustees, by vote of a majority (as
defined with respect to voting securities in the 1940 Act) of the outstanding
voting securities of the Fund, or by Distributor. The terms of this Agreement
shall not be waived, altered, modified, amended or supplemented in any manner
whatsoever except by a written instrument signed by the Distributor and Northern
Funds. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
4. Miscellaneous.
4.1 The services of the Distributor rendered to the Funds are not
deemed to be exclusive. The Distributor may render such services and any other
services to others, including other investment companies. Northern Funds
recognizes that from time to time directors, officers, and employees of the
Distributor may serve as directors, trustees, officers and employees of other
corporations or trusts (including other investment companies), that such other
entities may include the name of the Distributor as part of their name and that
the Distributor or its affiliates may enter into distribution, administration,
fund accounting or other agreements with such other corporations or trusts.
4.2 Distributor agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of Northern Funds all records and
other information relative to the Funds and prior, present or potential
shareholders of the Funds (and clients of said shareholders), and not to use
such records and information for any purpose other than performance of
Distributor's responsibilities and duties hereunder, except after prior
notification to and approval in writing by Northern Funds, which approval shall
not be unreasonably withheld and may not be withheld where Distributor may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by Northern Funds.
4.3 This Agreement shall be governed by Wisconsin law (except as to
paragraph 4.5 hereof which shall be construed in accordance with the laws of the
State of Massachusetts). To the extent that the applicable laws of the State of
Wisconsin, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control, and nothing herein shall
be construed in a manner inconsistent with the 1940 Act or any rule or order of
the Commission thereunder. Any provision of this Agreement which may be
determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
-7-
<PAGE> 8
4.4 Any notice required or to be permitted to be given by either party
to the other shall be in writing and shall be deemed to have been given when
hand delivered or sent by registered or certified mail, postage prepaid, return
receipt requested, as follows: Notice to the Distributor shall be sent to
Northern Funds Distributors, LLC, 207 East Buffalo Street, Suite 400, Milwaukee,
Wisconsin, 53202, Attention: Miriam M. Allison, and notice to Northern Funds
shall be sent to Silas Cathcart, President, c/o Lloyd Wennlund, 50 South LaSalle
Street, Chicago, Illinois, 60675, with a copy to Jeffrey Dalke, Secretary, c/o
Drinker Biddle & Reath LLP, 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania, 19107.
4.5 This Agreement is executed by or on behalf of Northern Funds with
respect to each of the Funds and the obligations hereunder are not binding upon
any of the Trustees, officers or shareholders of Northern Funds individually but
are binding only upon the Funds to which such obligations pertain and the assets
and property of such Funds. Northern Funds' Declaration of Trust is on file with
the Secretary of State of Massachusetts.
4.6 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original agreement but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
NORTHERN FUNDS
("Northern Funds")
By: /s/ Silas S. Cathcart
-------------------------------
Silas S. Cathcart
President
NORTHERN FUNDS DISTRIBUTORS, LLC
("Distributor")
By: /s/ Miriam M. Allison
-------------------------------
Miriam M. Allison
President
-8-
<PAGE> 9
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
NORTHERN FUNDS DISTRIBUTORS, LLC
<TABLE>
<S> <C>
Money Market Fund International Fixed Income Fund
U.S. Government Money Market Fund High Yield Municipal Fund
U.S. Government Select Money Market Fund High Yield Fixed Income Fund
Municipal Money Market Fund Income Equity Fund
California Municipal Money Market Fund Stock Index Fund
U.S. Government Fund Growth Equity Fund
Short-Intermediate U.S. Government Fund Select Equity Fund
Intermediate Tax-Exempt Fund Mid Cap Growth Fund
California Intermediate Tax-Exempt Fund Small Cap Index Fund
Florida Intermediate Tax-Exempt Fund Small Cap Fund
Fixed Income Fund International Growth Equity Fund
Tax-Exempt Fund International Select Equity Fund
Arizona Tax-Exempt Fund Technology Fund
California Tax-Exempt Fund
</TABLE>
-9-
<PAGE> 1
EXHIBIT (e)(5)
NORTHERN FUNDS
TERMINATION OF DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 31st day of March, 1999, by and between
Northern Funds, a Massachusetts business trust (the "Trust") and Sunstone
Distribution Services, LLC, a Wisconsin limited liability company (the
"Distributor").
WHEREAS, the Trust and the Distributor have entered into a Distribution
Agreement dated as of January 1, 1997 (the "Agreement"); and
WHEREAS, the Trust and the Distributor have mutually agreed to terminate the
Agreement effective as of the date hereof.
NOW, THEREFORE, the parties hereto, intending to be legally bound, do hereby
mutually consent to the following:
1. The Agreement shall be, and hereby is, terminated as of the date hereof.
No further notice shall be required by either party to the Agreement.
NORTHERN FUNDS
By: /s/ SILAS S. CATHCART
---------------------------------
Silas S. Cathcart
President
SUNSTONE DISTRIBUTION SERVICES, LLC
By: /s/ MIRIAM M. ALLISON
---------------------------------
Miriam M. Allison
President
<PAGE> 1
EXHIBIT (g)(12)
NORTHERN FUNDS
ADDENDUM NO. 8 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the 21st day of December, 1998, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern").
WHEREAS, the Trust and Northern have entered into a Custodian
Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November
29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August
7, 1996, by Addendum No. 4 dated August 6, 1996, by Addendum No. 5 dated March
24, 1997, by Addendum No. 6 dated February 12, 1997 and by Addendum No. 7 dated
November 18, 1997 (the "Custodian Agreement") pursuant to which the Trust has
appointed Northern to act as custodian to the Trust for the Money Market Fund,
U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap
Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund,
Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt
Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Small Cap Index Fund
and the Mid Cap Growth Fund;
WHEREAS, the Trust is establishing the High Yield Municipal and the
High Yield Fixed Income Funds (the "Funds"), and the Trust desires to retain
Northern under the terms of the Custodian Agreement to act as the custodian for
the Funds, and Northern is willing to so act; and
WHEREAS, the Trust and Northern desire to enter into this Addendum
No. 8 to provide compensation for each Fund for uninvested cash balances
maintained with Northern under the Custodian Agreement;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints Northern custodian to
the Trust for the Funds in accordance with the terms set forth
in the Custodian Agreement. Northern hereby accepts such
appointment and agrees to render the services set forth in the
Custodian Agreement for the compensation therein provided.
<PAGE> 2
2. Capitalized Terms. From and after the date hereof, the term
"Funds" as used in the Custodian Agreement shall be deemed to
include the Funds. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to them in
the Custodian Agreement.
3. Cash Balance Compensation. Northern shall compensate each
Fund for uninvested cash balances maintained with Northern
at the end of each day ("Cash Balance Compensation") in
accordance with this paragraph. Cash Balance Compensation
with respect to each Fund's uninvested cash balance shall
be determined at the end of each day based on an annual
rate equal to 96% of the previous calendar month's average
90-day Treasury bill interest rate. The amount of each
Fund's accumulated Cash Balance Compensation shall be paid
monthly in the form of reductions to the custody fees
otherwise allocable to the Fund under the Custodian
Agreement for such month. In the event that a Fund's Cash
Balance Compensation for any month exceeds the custody fees
payable by the Fund under the Custodian Agreement for such
month, the Fund's excess Cash Balance Compensation may be
carried forward and credited against future custody fees,
provided that no excess Cash Balance Compensation may be
carried forward beyond the end of any fiscal year.
4. Miscellaneous. The initial term of the Custodian Agreement
with respect to the Funds shall continue, unless sooner
terminated in accordance with the Custodian Agreement, until
March 31, 1999. Except to the extent supplemented hereby, the
Custodian Agreement shall remain unchanged and in full force
and effect, and is hereby ratified and confirmed in all
respects as supplemented hereby.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Addendum as
of the date and year first above written.
All signatures need not appear on the same copy of this Addendum.
NORTHERN FUNDS
Attest: /s/ Illegible By: /s/ Miriam M. Allison
------------------- ---------------------------
Title: Vice President
------------------------
THE NORTHERN TRUST COMPANY
Attest: By: /s/ Lloyd A. Wennlund
------------------- --------------------------
Title: Senior Vice President
-----------------------
<PAGE> 1
EXHIBIT (h)(11)
NORTHERN FUNDS
ADDENDUM NO. 7 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the 21st day of December, 1998, is entered into
between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE
NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent").
WHEREAS, the Trust and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated
November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3
dated August 7, 1996, by Addendum No. 4 dated March 24, 1997, by Addendum No. 5
dated February 12, 1997 and by Addendum No. 6 dated November 18, 1997 (the
"Transfer Agency Agreement") pursuant to which the Trust has appointed the
Transfer Agent to act as transfer agent to the Trust for the Money Market Fund,
U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund,
Select Equity Fund, Small Cap Fund, International Growth Equity Fund,
International Select Equity Fund, Technology Fund, Stock Index Fund, Florida
Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund,
California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California
Tax-Exempt Fund, the Small Cap Index Fund and the Mid Cap Growth Fund; and
WHEREAS, the Trust is establishing the High Yield Municipal and the High
Yield Fixed Income Funds (the "Funds"), and the Trust desires to retain the
Transfer Agent under the terms of the Transfer Agency Agreement to render
transfer agency and other services with respect to the Funds and the record
and/or beneficial owners of the Funds, and the Transfer Agent is willing to
render such services.
NOW THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Appointment. The Trust hereby appoints the Transfer Agent as
transfer agent with respect to the Funds in accordance with the
terms set forth in the Transfer Agency Agreement. The Transfer Agent
hereby accepts such appointment and agrees to render the services
and perform the duties set forth in the Transfer Agency Agreement
for the compensation therein provided.
<PAGE> 2
2. Capitalized Terms. From and after the date hereof, the term "Current
Funds" as used in the Transfer Agency Agreement shall be deemed to
include the Funds. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Transfer
Agency Agreement.
3. Miscellaneous. The initial term of the Transfer Agency Agreement
with respect to the Funds shall continue, unless sooner terminated
in accordance with the Transfer Agency Agreement, until March 31,
1999. Except to the extent supplemented hereby, the Transfer Agency
Agreement shall remain unchanged and in full force and effect, and
is hereby ratified and confirmed in all respects as supplemented
hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the
date and year first above written.
All signatures need not appear on the same copy of this Addendum.
NORTHERN FUNDS
Attest:/s/ Illegible By: /s/ Miriam M. Allison
-------------------- -------------------------------
Title: Vice President
----------------------
THE NORTHERN TRUST COMPANY
Attest:/s/ Illegible By: /s/ Lloyd A. Wennlund
-------------------- -------------------------------
Title: Senior Vice President
----------------------
<PAGE> 1
EXHIBIT (h) (12)
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED DECEMBER 21, 1998
Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund
Income Equity Fund U.S. Government Money Market Fund
Small Cap Fund International Fixed Income Fund
Select Equity Fund California Municipal Money Market Fund
International Growth Equity Fund Stock Index Fund
International Select Equity Fund Florida Intermediate Tax-Exempt Fund
Technology Fund Arizona Tax-Exempt Fund
Municipal Money Market Fund California Intermediate Tax-Exempt Fund
U.S. Government Select Money Market Fund California Tax-Exempt Fund
Fixed Income Fund Short-Intermediate U.S. Government Fund
U.S. Government Fund Small Cap Index Fund
Intermediate Tax-Exempt Fund Mid Cap Growth Fund
Tax-Exempt Fund High Yield Municipal Fund
Money Market Fund High Yield Fixed Income Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By: /s/ Silas S. Cathcart
----------------------------
Title: President
-------------------------
Date: December 21, 1998
--------------------------
SUNSTONE FINANCIAL GROUP, INC.
By: /s/ Miriam M. Allison
----------------------------
Title: President
-------------------------
Date: December 21, 1998
--------------------------
<PAGE> 1
EXHIBIT (j) (1)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Additional Trust Information - Counsel and Auditors" in the
Statement of Additional Information that is included in Post-Effective Amendment
No. 22 to the Registration Statement (1933 Act No. 33-73404; 1940 Act No.
811-8236) on Form N-1A under the Securities Act of 1933, of Northern Funds. This
consent does not constitute a consent under section 7 of the Securities Act of
1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ DRINKER BIDDLE & REATH LLP
------------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
May 28, 1999
<PAGE> 1
EXHIBIT (j)(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated May 14, 1999, and to all references to our Firm included in or made a
part of this amendment to the registration statement on Form N-1A of Northern
Funds (a Massachusetts business trust consisting of the Money Market Fund, U.S.
Government Money Market Fund, U.S. Government Select Money Market Fund,
Municipal Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt
Fund, Fixed Income Fund, Tax-Exempt Fund, California Tax-Exempt Fund,
International Fixed Income Fund, High Yield Municipal Fund, High Yield Fixed
Income Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select
Equity Fund, Mid Cap Growth Fund, Small Cap Fund, International Growth Equity
Fund, International Select Equity Fund and Technology Fund).
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 24, 1999
<PAGE> 1
EXHIBIT (l)(3)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Miriam
M. Allison hereby agree as follows:
1. The Trust hereby offers Miriam M. Allison and Miriam M. Allison hereby
purchases fifty shares of the Trust's Mid Cap Growth Fund (the "Shares") at $10
per Share. The Trust hereby acknowledges receipt from Miriam M. Allison of funds
in full payment for the foregoing Shares.
2. Miriam M. Allison represents and warrants to the Trust that the
foregoing Shares are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of March 31, 1998.
NORTHERN FUNDS
By: /s/ Mary M. Tennwinkle
-----------------------------
MIRIAM M. ALLISON
/s/ Miriam M. Allison
---------------------------------
<PAGE> 1
EXHIBIT (l)(4)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Miriam
M. Allison hereby agree as follows:
1. The Trust hereby offers Miriam M. Allison, and Miriam M. Allison hereby
purchases, five shares of the Trust's High Yield Fixed Income Fund (the
"Shares") at $10 per Share. The Trust hereby acknowledges receipt from Miriam M.
Allison of funds in full payment for the foregoing Shares.
2. Miriam M. Allison represents and warrants to the Trust that the
foregoing Shares are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of December 31, 1998.
NORTHERN FUNDS
By: /s/ Silas S. Cathcart
---------------------------
MIRIAM M. ALLISON
/s/ Miriam M. Allison
-------------------------------
<PAGE> 1
EXHIBIT (l)(5)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and Miriam
M. Allison hereby agree as follows:
1. The Trust hereby offers Miriam M. Allison, and Miriam M. Allison hereby
purchases, five shares of the Trust's High Yield Municipal Fund (the "Shares")
at $10 per Share. The Trust hereby acknowledges receipt from Miriam M. Allison
of funds in full payment for the foregoing Shares.
2. Miriam M. Allison represents and warrants to the Trust that the
foregoing Shares are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of December 31, 1998.
NORTHERN FUNDS
By: /s/ Silas S. Cathcart
-------------------------------
MIRIAM M. ALLISON
/s/ Miriam M. Allison
-----------------------------------
<PAGE> 1
EXHIBIT (m)
NORTHERN FUNDS
AMENDED AND RESTATED DISTRIBUTION AND SERVICE PLAN
This Distribution and Service Plan (the "Plan") has been adopted by
the Board of Trustees of Northern Funds in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Act").
Section 1. Upon the recommendation of Northern Funds Distributors,
LLC, the distributor of Northern Funds, any officer of Northern Funds is
authorized to execute and deliver, in the name and on behalf of Northern Funds,
written agreements based on the form attached hereto as Appendix A or any other
form duly approved by the Board of Trustees ("Agreements") with securities
dealers, financial institutions and other industry professionals that are
shareholders or dealers of record or which have a servicing relationship with
the beneficial owners of Shares of Northern Funds ("Shareholder Organizations").
Pursuant to such Agreements, Shareholder Organizations shall provide
distribution and support services as set forth therein to their clients who
acquire and beneficially own Shares of any Fund offered by Northern Funds in
consideration of a fee, computed monthly in the manner set forth in the
Agreements, at an annual rate of up to .25% of the average daily net asset value
of the Shares beneficially owned by such clients. The Northern Trust Company and
its affiliates are eligible to become Shareholder Organizations and to receive
fees under this Plan.
Section 2. Sunstone Financial Group, Inc. ("Sunstone") shall monitor
the arrangements pertaining to Northern Funds' Agreements with Shareholder
Organizations in accordance with the terms of Sunstone's administration
agreement with Northern Funds. Northern Funds Distributors, LLC and Sunstone
shall not, however, be obliged by this Plan to recommend, and Northern Funds
shall not be obliged to execute, any Agreement with any qualifying Shareholder
Organization.
Section 3. So long as this Plan is in effect, Sunstone shall provide
to Northern Funds' Board of Trustees, and the Trustees shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately with respect
to each particular Fund upon the approval of the Plan (and the form of Agreement
attached hereto) by (a) a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons," as defined in the
Act, of Northern Funds and have no direct or indirect financial interest in the
operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees"), pursuant to a vote cast in person at a meeting called
for the purpose of voting on the
<PAGE> 2
approval of this Plan (and form of Agreement), and (b) a majority (as defined in
the Act) of the outstanding Shares of such Fund.
Section 5. Unless sooner terminated, this Plan shall continue until
March 31, 1999 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4(a).
Section 6. This Plan may be amended at any time with respect to any
Fund by the Board of Trustees, provided that (a) any amendment to increase
materially the costs (whether for distribution or any other purpose) which such
Fund may bear pursuant to this Plan shall be effective only upon the favorable
vote of a majority (as defined in the Act) of the outstanding Shares of such
Fund, and (b) any material amendment of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4(a).
Section 7. This Plan is terminable at any time with respect to any
Fund by (a) vote of a majority of the Disinterested Trustees, or (b) vote of a
majority (as defined in the Act) of the Shares of such Fund.
Section 8. While this Plan is in effect, the selection and
nomination of those Trustees who are not "interested persons" (as defined in the
Act) of Northern Funds shall be committed to the discretion of such
non-interested Trustees.
Section 9. All expenses incurred by Northern Funds with respect to
the Shares of a particular Fund in connection with Agreements and the
implementation of this Plan shall be borne entirely by such Fund.
Section 10. This Plan was originally adopted by Northern Funds as of
April 1, 1994 and revised as of May 20, 1999.
-2-
<PAGE> 3
Appendix A
DISTRIBUTION AND SERVICING AGREEMENT
Gentlemen:
We wish to enter into this Distribution and Servicing Agreement
("Agreement") with you concerning the provision of distribution services (and,
to the extent provided below, support services) to your clients ("Clients") who
may from time to time acquire and beneficially own shares of any Fund ("Shares")
offered by Northern Funds.
The terms and conditions of this Agreement are as follows:
A-1
<PAGE> 4
Section 1. You will provide reasonable assistance in connection with
the distribution of Shares to Clients as requested from time to time by our
distributor, which assistance may include forwarding sales literature and
advertising provided by our distributor for Clients. In addition, you agree to
provide the following support services to Clients who may from time to time
acquire and beneficially own Shares:(1) (i) processing dividend and distribution
payments from us on behalf of Clients; (ii) providing information periodically
to Clients showing their positions in Shares; (iii) arranging for bank wires;
(iv) responding to Client inquiries relating to the services performed by you;
(v) providing subaccounting with respect to Shares beneficially owned by Clients
or the information to us necessary for subaccounting; (vi) if required by law,
forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to Clients; (vii) assisting in processing purchase, exchange
and redemption requests from Clients and in placing such orders with our service
contractors; (viii) assisting Clients in changing dividend options, account
designations and addresses; and (ix) providing such other similar services as we
may reasonably request to the extent you are permitted to do so under applicable
statutes, rules and regulations.
Section 2. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned assistance and services to Clients.
- ----------
(1). Services may be modified or omitted in the particular case and items
renumbered.
<PAGE> 5
Section 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in our then current prospectuses and statements of additional
information for Shares, copies of which will be supplied by us to you, or in
such supplemental literature or advertising as may be authorized by us in
writing.
Section 4. For all purposes of this Agreement you will be deemed to
be an independent contractor, and will have no authority to act as agent for us
in any matter or in any respect. By your written acceptance of this Agreement,
you agree to and do release, indemnify and hold us harmless from and against any
and all direct or indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of Shares (or orders relating to the same) by or on
behalf of Clients. You and your employees will, upon request, be available
during normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided
by you hereunder, we will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of _______% of the average daily net asset
value of the Shares beneficially owned by your Clients for whom you are the
dealer of record or holder of record or with whom you have a servicing
relationship (the "Clients' Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this Section
5, the average daily net asset value of the Clients' Shares will be computed in
the manner specified in our Registration Statement (as the same is in effect
from time to time) in connection with the computation of the net asset value of
Shares for purposes of purchases and redemptions. The fee rate stated above may
be prospectively increased or decreased by us, in our sole discretion, at any
time upon notice to you. Further, we may, in our discretion and without notice,
suspend or withdraw the sale of Shares, including the sale of Shares to you for
the account of any Client or Clients. All fees payable by Northern Funds under
this Agreement with respect to the Shares of a particular Fund shall be borne
by, and be payable entirely out of the assets allocable to, said Shares; and no
other class of Shares of any other Fund offered by Northern Funds shall be
responsible for such fees.
Section 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to our Board of
Trustees, and our Trustees will review, at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures were made.
In addition, you will furnish us or our designees with such information as we or
they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Trustees concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
-2-
<PAGE> 6
Section 7. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you
represent, warrant and agree that: (i) the compensation payable to you
hereunder, together with any other compensation you receive from Clients for
services contemplated by this Agreement, will not be excessive or unreasonable
under the laws and instruments governing your relationships with Clients; and
(ii) you will provide to Clients a schedule of any fees that you may charge to
them relating to the investment of their assets in Shares. In addition, you
understand that this Agreement has been entered into pursuant to Rule 12b-l
under the Investment Company Act of 1940 (the "Act"), and is subject to the
provisions of said Rule, as well as any other applicable rules or regulations
promulgated by the Securities and Exchange Commission.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until March 31, 1999, and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by us in the manner
described in Section 12. This Agreement is terminable with respect to the Shares
of any Fund, without penalty, at any time by us (which termination may be by a
vote of a majority of the Disinterested Trustees as defined in Section 12 or by
vote of the holders of a majority of the outstanding Shares of such Fund) or by
you upon notice to the other party hereto. This Agreement will also terminate
automatically in the event of its assignment (as defined in the Act).
Section 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein.
Section 11. This Agreement will be construed in accordance with the
laws of the State of Illinois.
Section 12. This Agreement has been approved by vote of a majority
of (i) our Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of us and have no
direct or indirect financial interest in the operation of the Distribution and
Service Plan adopted by us or in any agreement related thereto cast in person at
a meeting called for the purpose of voting on such approval ("Disinterested
Trustees"). This Agreement is executed by or on behalf of the Trust and the
obligations hereunder are not binding upon any of the Trustees, Officers or
Shareholders of the Trust individually but are binding only upon the Trust and
its assets and property. All obligations of the Trust under this Agreement shall
apply only on a Fund by Fund basis, and the assets of one Fund shall not be
liable for the obligations of another Fund. The Trust's Agreement and
Declaration of Trust is on file with the Secretary of the Commonwealth of
Massachusetts.
-3-
<PAGE> 7
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and promptly
return it to us, c/o Northern Funds Distributors, LLC, 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202.
Very truly yours,
NORTHERN FUNDS
Date: By: /s/
-------------------------------
(Authorized Officer)
Accepted and Agreed to:
Date: By: /s/
-------------------------------
(Authorized Officer)
-4-
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 1
[NAME] MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 4,862,339
[INVESTMENTS-AT-VALUE] 4,862,339
[RECEIVABLES] 93,990
[ASSETS-OTHER] 669
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,956,998
[PAYABLE-FOR-SECURITIES] 32,480
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 38,420
[TOTAL-LIABILITIES] 70,900
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,885,938
[SHARES-COMMON-STOCK] 4,886,058
[SHARES-COMMON-PRIOR] 3,296,023
[ACCUMULATED-NII-CURRENT] 124
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 36
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 4,886,098
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 209,486
[OTHER-INCOME] 0
[EXPENSES-NET] (21,106)
[NET-INVESTMENT-INCOME] 188,380
[REALIZED-GAINS-CURRENT] 33
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 188,413
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (188,380)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 14,249,027
[NUMBER-OF-SHARES-REDEEMED] 12,690,762
[SHARES-REINVESTED] 31,770
[NET-CHANGE-IN-ASSETS] 1,590,068
[ACCUMULATED-NII-PRIOR] 101
[ACCUMULATED-GAINS-PRIOR] 3
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 23,024
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 34,284
[AVERAGE-NET-ASSETS] 3,837,392
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.05)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 2
[NAME] U.S. GOVERNMENT MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 508,658
[INVESTMENTS-AT-VALUE] 508,658
[RECEIVABLES] 5,332
[ASSETS-OTHER] 28
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 514,018
[PAYABLE-FOR-SECURITIES] 38,089
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 6,063
[TOTAL-LIABILITIES] 44,152
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 469,826
[SHARES-COMMON-STOCK] 469,858
[SHARES-COMMON-PRIOR] 417,038
[ACCUMULATED-NII-CURRENT] 33
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 7
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 469,866
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 23,237
[OTHER-INCOME] 0
[EXPENSES-NET] (2,379)
[NET-INVESTMENT-INCOME] 20,858
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 20,861
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (20,858)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,260,589
[NUMBER-OF-SHARES-REDEEMED] 2,212,649
[SHARES-REINVESTED] 4,881
[NET-CHANGE-IN-ASSETS] 52,824
[ACCUMULATED-NII-PRIOR] 27
[ACCUMULATED-GAINS-PRIOR] 4
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,596
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,952
[AVERAGE-NET-ASSETS] 432,611
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.05)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 3
[NAME] MUNICIPAL MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 2,321,774
[INVESTMENTS-AT-VALUE] 2,321,774
[RECEIVABLES] 51,650
[ASSETS-OTHER] 20,568
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,393,992
[PAYABLE-FOR-SECURITIES] 4,600
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,362
[TOTAL-LIABILITIES] 9,962
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,383,595
[SHARES-COMMON-STOCK] 2,383,732
[SHARES-COMMON-PRIOR] 1,814,127
[ACCUMULATED-NII-CURRENT] 207
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 228
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 2,384,030
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 70,479
[OTHER-INCOME] 0
[EXPENSES-NET] (11,224)
[NET-INVESTMENT-INCOME] 59,255
[REALIZED-GAINS-CURRENT] 228
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 59,483
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (59,255)
[DISTRIBUTIONS-OF-GAINS] (146)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 9,069,717
[NUMBER-OF-SHARES-REDEEMED] 8,509,555
[SHARES-REINVESTED] 9,443
[NET-CHANGE-IN-ASSETS] 569,687
[ACCUMULATED-NII-PRIOR] 180
[ACCUMULATED-GAINS-PRIOR] 146
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 12,244
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 18,207
[AVERAGE-NET-ASSETS] 2,040,734
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.03)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 4
[NAME] U.S. GOVERNMENT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 267,088
[INVESTMENTS-AT-VALUE] 266,047
[RECEIVABLES] 2,582
[ASSETS-OTHER] 24
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 268,653
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 411
[TOTAL-LIABILITIES] 411
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 268,480
[SHARES-COMMON-STOCK] 26,697
[SHARES-COMMON-PRIOR] 22,489
[ACCUMULATED-NII-CURRENT] 364
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 439
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (1,041)
[NET-ASSETS] 268,242
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 14,232
[OTHER-INCOME] 0
[EXPENSES-NET] (2,275)
[NET-INVESTMENT-INCOME] 11,957
[REALIZED-GAINS-CURRENT] 6,337
[APPREC-INCREASE-CURRENT] (3,841)
[NET-CHANGE-FROM-OPS] 14,453
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (11,957)
[DISTRIBUTIONS-OF-GAINS] (6,576)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 8,963
[NUMBER-OF-SHARES-REDEEMED] 5,473
[SHARES-REINVESTED] 718
[NET-CHANGE-IN-ASSETS] 38,890
[ACCUMULATED-NII-PRIOR] 79
[ACCUMULATED-GAINS-PRIOR] 950
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,896
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,699
[AVERAGE-NET-ASSETS] 252,779
[PER-SHARE-NAV-BEGIN] 10.20
[PER-SHARE-NII] 0.50
[PER-SHARE-GAIN-APPREC] 0.10
[PER-SHARE-DIVIDEND] (0.49)
[PER-SHARE-DISTRIBUTIONS] (0.26)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.05
[EXPENSE-RATIO] 0.90
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 5
[NAME] FIXED INCOME FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 278,225
[INVESTMENTS-AT-VALUE] 274,191
[RECEIVABLES] 3,252
[ASSETS-OTHER] 74
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 277,517
[PAYABLE-FOR-SECURITIES] 1,698
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 711
[TOTAL-LIABILITIES] 2,409
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 277,437
[SHARES-COMMON-STOCK] 27,117
[SHARES-COMMON-PRIOR] 17,455
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (112)
[ACCUMULATED-NET-GAINS] 1,817
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (4,034)
[NET-ASSETS] 275,108
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 14,137
[OTHER-INCOME] 0
[EXPENSES-NET] (2,103)
[NET-INVESTMENT-INCOME] 12,034
[REALIZED-GAINS-CURRENT] 7,776
[APPREC-INCREASE-CURRENT] (8,977)
[NET-CHANGE-FROM-OPS] 10,833
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (11,986)
[DISTRIBUTIONS-OF-GAINS] (6,312)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 21,526
[NUMBER-OF-SHARES-REDEEMED] 12,591
[SHARES-REINVESTED] 727
[NET-CHANGE-IN-ASSETS] 93,191
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 275
[OVERDISTRIB-NII-PRIOR] (90)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,753
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,516
[AVERAGE-NET-ASSETS] 233,710
[PER-SHARE-NAV-BEGIN] 10.42
[PER-SHARE-NII] 0.54
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.54)
[PER-SHARE-DISTRIBUTIONS] (0.27)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 10.15
[EXPENSE-RATIO] 0.90
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 6
[NAME] INTERMEDIATE TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 327,809
[INVESTMENTS-AT-VALUE] 335,456
[RECEIVABLES] 15,017
[ASSETS-OTHER] 21
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 350,494
[PAYABLE-FOR-SECURITIES] 5,271
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 434
[TOTAL-LIABILITIES] 5,705
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 336,455
[SHARES-COMMON-STOCK] 33,288
[SHARES-COMMON-PRIOR] 28,805
[ACCUMULATED-NII-CURRENT] 77
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 610
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 7,647
[NET-ASSETS] 344,789
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 14,773
[OTHER-INCOME] 0
[EXPENSES-NET] (2,723)
[NET-INVESTMENT-INCOME] 12,050
[REALIZED-GAINS-CURRENT] 2,609
[APPREC-INCREASE-CURRENT] 370
[NET-CHANGE-FROM-OPS] 15,029
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (12,050)
[DISTRIBUTIONS-OF-GAINS] (3,436)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,757
[NUMBER-OF-SHARES-REDEEMED] 2,665
[SHARES-REINVESTED] 391
[NET-CHANGE-IN-ASSETS] 46,260
[ACCUMULATED-NII-PRIOR] 58
[ACCUMULATED-GAINS-PRIOR] 1,437
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,403
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,404
[AVERAGE-NET-ASSETS] 320,341
[PER-SHARE-NAV-BEGIN] 10.36
[PER-SHARE-NII] 0.39
[PER-SHARE-GAIN-APPREC] 0.11
[PER-SHARE-DIVIDEND] (0.39)
[PER-SHARE-DISTRIBUTIONS] (0.11)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.36
[EXPENSE-RATIO] 0.85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 7
[NAME] TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 231,893
[INVESTMENTS-AT-VALUE] 237,742
[RECEIVABLES] 7,784
[ASSETS-OTHER] 17
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 245,543
[PAYABLE-FOR-SECURITIES] 15,499
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,221
[TOTAL-LIABILITIES] 17,720
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 221,158
[SHARES-COMMON-STOCK] 21,442
[SHARES-COMMON-PRIOR] 15,581
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (66)
[ACCUMULATED-NET-GAINS] 882
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 5,849
[NET-ASSETS] 227,823
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 9,715
[OTHER-INCOME] 0
[EXPENSES-NET] (1,657)
[NET-INVESTMENT-INCOME] 8,058
[REALIZED-GAINS-CURRENT] 3,000
[APPREC-INCREASE-CURRENT] (1,001)
[NET-CHANGE-FROM-OPS] 10,057
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (8,058)
[DISTRIBUTIONS-OF-GAINS] (4,271)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10,243
[NUMBER-OF-SHARES-REDEEMED] 4,815
[SHARES-REINVESTED] 433
[NET-CHANGE-IN-ASSETS] 60,603
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 2,154
[OVERDISTRIB-NII-PRIOR] (77)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,463
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,112
[AVERAGE-NET-ASSETS] 195,015
[PER-SHARE-NAV-BEGIN] 10.73
[PER-SHARE-NII] 0.45
[PER-SHARE-GAIN-APPREC] 0.13
[PER-SHARE-DIVIDEND] (0.45)
[PER-SHARE-DISTRIBUTIONS] (0.23)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.63
[EXPENSE-RATIO] 0.85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 8
[NAME] INTERNATIONAL FIXED INCOME FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 13,595
[INVESTMENTS-AT-VALUE] 13,998
[RECEIVABLES] 267
[ASSETS-OTHER] 65
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 14,330
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 45
[TOTAL-LIABILITIES] 45
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 13,900
[SHARES-COMMON-STOCK] 1,376
[SHARES-COMMON-PRIOR] 1,388
[ACCUMULATED-NII-CURRENT] 14
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (22)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 393
[NET-ASSETS] 14,285
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 867
[OTHER-INCOME] 0
[EXPENSES-NET] (171)
[NET-INVESTMENT-INCOME] 696
[REALIZED-GAINS-CURRENT] (129)
[APPREC-INCREASE-CURRENT] 787
[NET-CHANGE-FROM-OPS] 1,354
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (452)
[DISTRIBUTIONS-OF-GAINS] (154)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 219
[NUMBER-OF-SHARES-REDEEMED] 248
[SHARES-REINVESTED] 17
[NET-CHANGE-IN-ASSETS] 610
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 93
[OVERDISTRIB-NII-PRIOR] (66)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 134
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 291
[AVERAGE-NET-ASSETS] 14,885
[PER-SHARE-NAV-BEGIN] 9.85
[PER-SHARE-NII] 0.38
[PER-SHARE-GAIN-APPREC] 0.58
[PER-SHARE-DIVIDEND] (0.32)
[PER-SHARE-DISTRIBUTIONS] (0.11)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.38
[EXPENSE-RATIO] 1.15
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 9
[NAME] INCOME EQUITY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 102,003
[INVESTMENTS-AT-VALUE] 114,988
[RECEIVABLES] 3,555
[ASSETS-OTHER] 16
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 118,559
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 145
[TOTAL-LIABILITIES] 145
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 104,914
[SHARES-COMMON-STOCK] 9,299
[SHARES-COMMON-PRIOR] 8,516
[ACCUMULATED-NII-CURRENT] 2
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 513
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 12,985
[NET-ASSETS] 118,414
[DIVIDEND-INCOME] 3,267
[INTEREST-INCOME] 1,961
[OTHER-INCOME] 0
[EXPENSES-NET] (1,151)
[NET-INVESTMENT-INCOME] 4,077
[REALIZED-GAINS-CURRENT] 1,489
[APPREC-INCREASE-CURRENT] (4,690)
[NET-CHANGE-FROM-OPS] 876
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (4,232)
[DISTRIBUTIONS-OF-GAINS] (5,832)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,957
[NUMBER-OF-SHARES-REDEEMED] 1,648
[SHARES-REINVESTED] 474
[NET-CHANGE-IN-ASSETS] 852
[ACCUMULATED-NII-PRIOR] 152
[ACCUMULATED-GAINS-PRIOR] 4,856
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,151
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,560
[AVERAGE-NET-ASSETS] 115,072
[PER-SHARE-NAV-BEGIN] 13.81
[PER-SHARE-NII] 0.46
[PER-SHARE-GAIN-APPREC] (0.41)
[PER-SHARE-DIVIDEND] (0.48)
[PER-SHARE-DISTRIBUTIONS] (0.65)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.73
[EXPENSE-RATIO] 1.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 10
[NAME] GROWTH EQUITY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 417,480
[INVESTMENTS-AT-VALUE] 638,768
[RECEIVABLES] 9,430
[ASSETS-OTHER] 42
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 648,240
[PAYABLE-FOR-SECURITIES] 6,743
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 549
[TOTAL-LIABILITIES] 7,292
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 386,725
[SHARES-COMMON-STOCK] 29,219
[SHARES-COMMON-PRIOR] 25,766
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 33,041
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 221,182
[NET-ASSETS] 640,948
[DIVIDEND-INCOME] 4,877
[INTEREST-INCOME] 883
[OTHER-INCOME] 0
[EXPENSES-NET] (5,328)
[NET-INVESTMENT-INCOME] 432
[REALIZED-GAINS-CURRENT] 50,510
[APPREC-INCREASE-CURRENT] 72,564
[NET-CHANGE-FROM-OPS] 123,506
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (635)
[DISTRIBUTIONS-OF-GAINS] (32,048)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5,911
[NUMBER-OF-SHARES-REDEEMED] 3,895
[SHARES-REINVESTED] 1,437
[NET-CHANGE-IN-ASSETS] 161,166
[ACCUMULATED-NII-PRIOR] 92
[ACCUMULATED-GAINS-PRIOR] 14,682
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 5,328
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 6,905
[AVERAGE-NET-ASSETS] 532,855
[PER-SHARE-NAV-BEGIN] 18.62
[PER-SHARE-NII] 0.02
[PER-SHARE-GAIN-APPREC] 4.51
[PER-SHARE-DIVIDEND] (0.02)
[PER-SHARE-DISTRIBUTIONS] (1.19)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 21.94
[EXPENSE-RATIO] 1.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 11
[NAME] SELECT EQUITY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 135,778
[INVESTMENTS-AT-VALUE] 198,365
[RECEIVABLES] 254
[ASSETS-OTHER] 16
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 198,635
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 105
[TOTAL-LIABILITIES] 105
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 134,587
[SHARES-COMMON-STOCK] 8,510
[SHARES-COMMON-PRIOR] 6,605
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 1,356
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 62,587
[NET-ASSETS] 198,530
[DIVIDEND-INCOME] 1,144
[INTEREST-INCOME] 108
[OTHER-INCOME] 0
[EXPENSES-NET] (1,470)
[NET-INVESTMENT-INCOME] (218)
[REALIZED-GAINS-CURRENT] 1,356
[APPREC-INCREASE-CURRENT] 38,865
[NET-CHANGE-FROM-OPS] 40,003
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (93)
[DISTRIBUTIONS-OF-GAINS] (8,694)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3,384
[NUMBER-OF-SHARES-REDEEMED] 1,806
[SHARES-REINVESTED] 327
[NET-CHANGE-IN-ASSETS] 71,994
[ACCUMULATED-NII-PRIOR] 93
[ACCUMULATED-GAINS-PRIOR] 8,694
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,764
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,265
[AVERAGE-NET-ASSETS] 146,984
[PER-SHARE-NAV-BEGIN] 19.16
[PER-SHARE-NII] 0.00
[PER-SHARE-GAIN-APPREC] 5.40
[PER-SHARE-DIVIDEND] (0.01)
[PER-SHARE-DISTRIBUTIONS] (1.22)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 23.33
[EXPENSE-RATIO] 1.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 12
[NAME] SMALL CAP FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 271,243
[INVESTMENTS-AT-VALUE] 263,802
[RECEIVABLES] 1,305
[ASSETS-OTHER] 25
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 265,132
[PAYABLE-FOR-SECURITIES] 38
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 660
[TOTAL-LIABILITIES] 698
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 257,757
[SHARES-COMMON-STOCK] 21,470
[SHARES-COMMON-PRIOR] 21,996
[ACCUMULATED-NII-CURRENT] 796
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 13,332
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (7,451)
[NET-ASSETS] 264,434
[DIVIDEND-INCOME] 3,688
[INTEREST-INCOME] 252
[OTHER-INCOME] 0
[EXPENSES-NET] (3,141)
[NET-INVESTMENT-INCOME] 799
[REALIZED-GAINS-CURRENT] 16,817
[APPREC-INCREASE-CURRENT] (103,773)
[NET-CHANGE-FROM-OPS] (86,157)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (226)
[DISTRIBUTIONS-OF-GAINS] (11,668)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7,288
[NUMBER-OF-SHARES-REDEEMED] 8,617
[SHARES-REINVESTED] 803
[NET-CHANGE-IN-ASSETS] (104,145)
[ACCUMULATED-NII-PRIOR] 245
[ACCUMULATED-GAINS-PRIOR] 8,159
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,769
[INTEREST-EXPENSE] 2
[GROSS-EXPENSE] 4,778
[AVERAGE-NET-ASSETS] 314,081
[PER-SHARE-NAV-BEGIN] 16.76
[PER-SHARE-NII] 0.04
[PER-SHARE-GAIN-APPREC] (3.93)
[PER-SHARE-DIVIDEND] (0.01)
[PER-SHARE-DISTRIBUTIONS] (0.54)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.32
[EXPENSE-RATIO] 1.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 13
[NAME] INTERNATIONAL GROWTH EQUITY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 193,187
[INVESTMENTS-AT-VALUE] 212,643
[RECEIVABLES] 9,529
[ASSETS-OTHER] 17
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 222,189
[PAYABLE-FOR-SECURITIES] 4,257
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,276
[TOTAL-LIABILITIES] 6,533
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 174,002
[SHARES-COMMON-STOCK] 17,160
[SHARES-COMMON-PRIOR] 15,286
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (1,270)
[ACCUMULATED-NET-GAINS] 23,471
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 19,453
[NET-ASSETS] 215,656
[DIVIDEND-INCOME] 2,892
[INTEREST-INCOME] 558
[OTHER-INCOME] 0
[EXPENSES-NET] (2,433)
[NET-INVESTMENT-INCOME] 1,017
[REALIZED-GAINS-CURRENT] 30,825
[APPREC-INCREASE-CURRENT] (7,256)
[NET-CHANGE-FROM-OPS] 24,586
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (2,000)
[DISTRIBUTIONS-OF-GAINS] (7,589)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 8,329
[NUMBER-OF-SHARES-REDEEMED] 7,068
[SHARES-REINVESTED] 613
[NET-CHANGE-IN-ASSETS] 37,446
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 1,590
[OVERDISTRIB-NII-PRIOR] (1,648)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,336
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,147
[AVERAGE-NET-ASSETS] 194,606
[PER-SHARE-NAV-BEGIN] 11.66
[PER-SHARE-NII] 0.13
[PER-SHARE-GAIN-APPREC] 1.36
[PER-SHARE-DIVIDEND] (0.12)
[PER-SHARE-DISTRIBUTIONS] (0.46)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.57
[EXPENSE-RATIO] 1.25
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 14
[NAME] INTERNATIONAL SELECT EQUITY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 116,346
[INVESTMENTS-AT-VALUE] 126,856
[RECEIVABLES] 3,401
[ASSETS-OTHER] 14
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 130,271
[PAYABLE-FOR-SECURITIES] 444
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,314
[TOTAL-LIABILITIES] 5,758
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 98,563
[SHARES-COMMON-STOCK] 9,590
[SHARES-COMMON-PRIOR] 9,394
[ACCUMULATED-NII-CURRENT] 513
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 14,933
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 10,504
[NET-ASSETS] 124,513
[DIVIDEND-INCOME] 1,630
[INTEREST-INCOME] 313
[OTHER-INCOME] 0
[EXPENSES-NET] (1,494)
[NET-INVESTMENT-INCOME] 449
[REALIZED-GAINS-CURRENT] 26,885
[APPREC-INCREASE-CURRENT] (16,602)
[NET-CHANGE-FROM-OPS] 10,732
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (44)
[DISTRIBUTIONS-OF-GAINS] (6,110)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,499
[NUMBER-OF-SHARES-REDEEMED] 4,684
[SHARES-REINVESTED] 381
[NET-CHANGE-IN-ASSETS] 6,895
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (4,900)
[OVERDISTRIB-NII-PRIOR] (840)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,434
[INTEREST-EXPENSE] 4
[GROSS-EXPENSE] 1,979
[AVERAGE-NET-ASSETS] 119,531
[PER-SHARE-NAV-BEGIN] 12.52
[PER-SHARE-NII] 0.04
[PER-SHARE-GAIN-APPREC] 1.08
[PER-SHARE-DIVIDEND] (0.01)
[PER-SHARE-DISTRIBUTIONS] (0.65)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 12.98
[EXPENSE-RATIO] 1.25
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 15
[NAME] U.S. GOVERNMENT SELECT MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 420,117
[INVESTMENTS-AT-VALUE] 420,117
[RECEIVABLES] 1,759
[ASSETS-OTHER] 39
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 421,915
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,388
[TOTAL-LIABILITIES] 5,388
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 416,503
[SHARES-COMMON-STOCK] 416,523
[SHARES-COMMON-PRIOR] 306,425
[ACCUMULATED-NII-CURRENT] 21
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 3
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 416,527
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 19,138
[OTHER-INCOME] 0
[EXPENSES-NET] (1,994)
[NET-INVESTMENT-INCOME] 17,144
[REALIZED-GAINS-CURRENT] 3
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 17,147
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (17,144)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,670,254
[NUMBER-OF-SHARES-REDEEMED] 1,565,244
[SHARES-REINVESTED] 5,089
[NET-CHANGE-IN-ASSETS] 110,102
[ACCUMULATED-NII-PRIOR] 14
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,176
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,305
[AVERAGE-NET-ASSETS] 362,660
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.05)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 16
[NAME] CALIFORNIA MUNICIPAL MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 357,366
[INVESTMENTS-AT-VALUE] 357,366
[RECEIVABLES] 20,590
[ASSETS-OTHER] 23
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 377,979
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 14,929
[TOTAL-LIABILITIES] 14,929
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 362,999
[SHARES-COMMON-STOCK] 363,018
[SHARES-COMMON-PRIOR] 224,844
[ACCUMULATED-NII-CURRENT] 20
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 31
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 363,050
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8,826
[OTHER-INCOME] 0
[EXPENSES-NET] (1,501)
[NET-INVESTMENT-INCOME] 7,325
[REALIZED-GAINS-CURRENT] 32
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 7,357
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (7,325)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,609,467
[NUMBER-OF-SHARES-REDEEMED] 1,473,237
[SHARES-REINVESTED] 1,945
[NET-CHANGE-IN-ASSETS] 138,207
[ACCUMULATED-NII-PRIOR] 13
[ACCUMULATED-GAINS-PRIOR] (1)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,637
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,482
[AVERAGE-NET-ASSETS] 272,842
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] 0.03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.03)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 17
[NAME] TECHNOLOGY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 260,045
[INVESTMENTS-AT-VALUE] 350,842
[RECEIVABLES] 2,237
[ASSETS-OTHER] 19
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 353,098
[PAYABLE-FOR-SECURITIES] 9,182
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 207
[TOTAL-LIABILITIES] 9,389
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,587
[SHARES-COMMON-STOCK] 11,462
[SHARES-COMMON-PRIOR] 6,101
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 43,325
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 90,797
[NET-ASSETS] 343,709
[DIVIDEND-INCOME] 299
[INTEREST-INCOME] 334
[OTHER-INCOME] 0
[EXPENSES-NET] (2,168)
[NET-INVESTMENT-INCOME] (1,535)
[REALIZED-GAINS-CURRENT] 47,533
[APPREC-INCREASE-CURRENT] 71,473
[NET-CHANGE-FROM-OPS] 117,471
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] (5,721)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7,041
[NUMBER-OF-SHARES-REDEEMED] 1,873
[SHARES-REINVESTED] 193
[NET-CHANGE-IN-ASSETS] 239,320
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 3,048
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,109
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,696
[AVERAGE-NET-ASSETS] 175,794
[PER-SHARE-NAV-BEGIN] 17.11
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 13.55
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] (0.67)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 29.99
[EXPENSE-RATIO] 1.25
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 18
[NAME] FLORIDA INTERMEDIATE TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 35,881
[INVESTMENTS-AT-VALUE] 36,283
[RECEIVABLES] 863
[ASSETS-OTHER] 6
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 37,152
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 31
[TOTAL-LIABILITIES] 31
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 36,585
[SHARES-COMMON-STOCK] 3,544
[SHARES-COMMON-PRIOR] 2,420
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 134
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 402
[NET-ASSETS] 37,121
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1,323
[OTHER-INCOME] 0
[EXPENSES-NET] (249)
[NET-INVESTMENT-INCOME] 1,074
[REALIZED-GAINS-CURRENT] 380
[APPREC-INCREASE-CURRENT] (52)
[NET-CHANGE-FROM-OPS] 1,402
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1,074)
[DISTRIBUTIONS-OF-GAINS] (480)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,769
[NUMBER-OF-SHARES-REDEEMED] 700
[SHARES-REINVESTED] 55
[NET-CHANGE-IN-ASSETS] 11,792
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 234
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 212
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 367
[AVERAGE-NET-ASSETS] 29,284
[PER-SHARE-NAV-BEGIN] 10.47
[PER-SHARE-NII] 0.39
[PER-SHARE-GAIN-APPREC] 0.16
[PER-SHARE-DIVIDEND] (0.39)
[PER-SHARE-DISTRIBUTIONS] (0.16)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.47
[EXPENSE-RATIO] 0.85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 19
[NAME] STOCK INDEX FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 133,952
[INVESTMENTS-AT-VALUE] 170,119
[RECEIVABLES] 389
[ASSETS-OTHER] 10
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 170,518
[PAYABLE-FOR-SECURITIES] 1,096
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 360
[TOTAL-LIABILITIES] 1,456
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 131,690
[SHARES-COMMON-STOCK] 9,750
[SHARES-COMMON-PRIOR] 6,248
[ACCUMULATED-NII-CURRENT] 7
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 1,262
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 36,103
[NET-ASSETS] 169,062
[DIVIDEND-INCOME] 1,658
[INTEREST-INCOME] 360
[OTHER-INCOME] 0
[EXPENSES-NET] (674)
[NET-INVESTMENT-INCOME] 1,344
[REALIZED-GAINS-CURRENT] 1,369
[APPREC-INCREASE-CURRENT] 19,161
[NET-CHANGE-FROM-OPS] 21,874
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1,359)
[DISTRIBUTIONS-OF-GAINS] (1,378)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,696
[NUMBER-OF-SHARES-REDEEMED] 3,298
[SHARES-REINVESTED] 104
[NET-CHANGE-IN-ASSETS] 75,155
[ACCUMULATED-NII-PRIOR] 22
[ACCUMULATED-GAINS-PRIOR] 1,271
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 736
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,225
[AVERAGE-NET-ASSETS] 122,614
[PER-SHARE-NAV-BEGIN] 15.03
[PER-SHARE-NII] 0.16
[PER-SHARE-GAIN-APPREC] 2.49
[PER-SHARE-DIVIDEND] (0.17)
[PER-SHARE-DISTRIBUTIONS] (0.17)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 17.34
[EXPENSE-RATIO] 0.55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 20
[NAME] SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 0
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 0
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 0
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 0
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 21
[NAME] CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 0
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 0
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 0
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 0
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 22
[NAME] ARIZONA TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 0
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 0
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 0
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 0
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 23
[NAME] CALIFORNIA TAX-EXEMPT FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 74,940
[INVESTMENTS-AT-VALUE] 76,124
[RECEIVABLES] 1,220
[ASSETS-OTHER] 7
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 77,351
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 102
[TOTAL-LIABILITIES] 102
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 75,898
[SHARES-COMMON-STOCK] 7,095
[SHARES-COMMON-PRIOR] 3,711
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 167
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1,184
[NET-ASSETS] 77,249
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 2,731
[OTHER-INCOME] 0
[EXPENSES-NET] (492)
[NET-INVESTMENT-INCOME] 2,239
[REALIZED-GAINS-CURRENT] 772
[APPREC-INCREASE-CURRENT] 365
[NET-CHANGE-FROM-OPS] 3,376
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (2,239)
[DISTRIBUTIONS-OF-GAINS] (620)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,589
[NUMBER-OF-SHARES-REDEEMED] 1,303
[SHARES-REINVESTED] 98
[NET-CHANGE-IN-ASSETS] 37,306
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 15
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 434
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 677
[AVERAGE-NET-ASSETS] 57,846
[PER-SHARE-NAV-BEGIN] 10.76
[PER-SHARE-NII] 0.43
[PER-SHARE-GAIN-APPREC] 0.23
[PER-SHARE-DIVIDEND] (0.43)
[PER-SHARE-DISTRIBUTIONS] (0.10)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.89
[EXPENSE-RATIO] 0.85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 24
[NAME] SMALL CAP INDEX FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 0
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 0
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 0
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 0
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 0
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 0
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 0
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 25
[NAME] MID CAP GROWTH FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 62,986
[INVESTMENTS-AT-VALUE] 78,148
[RECEIVABLES] 2,107
[ASSETS-OTHER] 11
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 80,266
[PAYABLE-FOR-SECURITIES] 2,847
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 41
[TOTAL-LIABILITIES] 2,888
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 66,529
[SHARES-COMMON-STOCK] 6,600
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4,313)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 15,162
[NET-ASSETS] 77,378
[DIVIDEND-INCOME] 40
[INTEREST-INCOME] 113
[OTHER-INCOME] 0
[EXPENSES-NET] (310)
[NET-INVESTMENT-INCOME] (157)
[REALIZED-GAINS-CURRENT] (4,313)
[APPREC-INCREASE-CURRENT] 15,162
[NET-CHANGE-FROM-OPS] 10,692
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,928
[NUMBER-OF-SHARES-REDEEMED] 328
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 77,378
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 310
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 510
[AVERAGE-NET-ASSETS] 30,967
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 1.72
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.72
[EXPENSE-RATIO] 1.00
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 26
[NAME] HIGH YIELD MUNICIPAL FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 10,879
[INVESTMENTS-AT-VALUE] 10,868
[RECEIVABLES] 95
[ASSETS-OTHER] 10
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10,973
[PAYABLE-FOR-SECURITIES] 900
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 40
[TOTAL-LIABILITIES] 940
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 10,037
[SHARES-COMMON-STOCK] 1,002
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 7
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (11)
[NET-ASSETS] 10,033
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 53
[OTHER-INCOME] 0
[EXPENSES-NET] (12)
[NET-INVESTMENT-INCOME] 41
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] (11)
[NET-CHANGE-FROM-OPS] 30
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (34)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,024
[NUMBER-OF-SHARES-REDEEMED] 22
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 10,033
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 11
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 79
[AVERAGE-NET-ASSETS] 5,977
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0.05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.04)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.01
[EXPENSE-RATIO] 0.85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000916620
[NAME] NORTHERN FUNDS
[SERIES]
[NUMBER] 27
[NAME] HIGH YIELD FIXED INCOME FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] MAR-31-1999
[INVESTMENTS-AT-COST] 41,908
[INVESTMENTS-AT-VALUE] 42,176
[RECEIVABLES] 1,084
[ASSETS-OTHER] 10
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 43,270
[PAYABLE-FOR-SECURITIES] 2,360
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 46
[TOTAL-LIABILITIES] 2,406
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 40,537
[SHARES-COMMON-STOCK] 4,044
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] (112)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 268
[NET-ASSETS] 40,864
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 426
[OTHER-INCOME] 0
[EXPENSES-NET] (50)
[NET-INVESTMENT-INCOME] 376
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 268
[NET-CHANGE-FROM-OPS] 644
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (317)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,057
[NUMBER-OF-SHARES-REDEEMED] 19
[SHARES-REINVESTED] 6
[NET-CHANGE-IN-ASSETS] 40,864
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 42
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 122
[AVERAGE-NET-ASSETS] 23,553
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0.11
[PER-SHARE-GAIN-APPREC] 0.08
[PER-SHARE-DIVIDEND] (0.09)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.10
[EXPENSE-RATIO] 0.90
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
