<PAGE>
[NORTHERN FUNDS LOGO]
GROWTH OPPORTUNITIES FUND
PROSPECTUS
SEPTEMBER 26, 2000
The Securities and Exchange Commission ("SEC")
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>
NORTHERN FUNDS Prospectus
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NORTHERN FUNDS
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- NORTHERN GROWTH OPPORTUNITIES FUND
PROSPECTUS DATED SEPTEMBER 26, 2000
An investment in the 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 the Fund involves investment risks, including possible
loss of principal.
The Securities and Exchange Commission ("SEC") 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>
TABLE OF CONTENTS
RISK/RETURN SUMMARY
INFORMATION ABOUT THE OBJECTIVE, PRINCIPAL STRATEGIES AND RISK CHARACTERISTICS
OF THE FUND.
GROWTH OPPORTUNITIES FUND ...............................3
Fund Performance ....................................5
Fund Fees and Expenses ..............................6
MANAGEMENT OF THE FUND
DETAILS THAT APPLY TO THE FUND.
INVESTMENT ADVISER ......................................8
ADVISORY FEES ...........................................9
FUND MANAGEMENT ........................................10
OTHER FUND SERVICES ....................................11
ABOUT YOUR ACCOUNT
HOW TO OPEN, MAINTAIN AND CLOSE AN ACCOUNT.
PURCHASING AND SELLING SHARES ..........................12
Purchasing Shares ..................................12
Opening an Account .................................12
Selling Shares .....................................14
ACCOUNT POLICIES AND OTHER INFORMATION .................16
Calculating Share Price ............................16
Timing of Fund Purchase Requests ...................16
Social Security/Tax Identification Number ..........16
In-Kind Purchases and Redemptions ..................16
Miscellaneous Purchase Information .................16
Timing of Redemption and Exchange Requests .........17
Payment of Redemption Proceeds .....................17
Miscellaneous Redemption Information ...............17
Exchange Privileges ................................17
Telephone Transactions .............................18
Making Changes to Your Account Information .........18
Signature Guarantees ...............................18
Business Day .......................................18
Early Closings .....................................18
Authorized Intermediaries ..........................18
Service Organizations ..............................18
Shareholder Communications .........................19
DIVIDENDS AND DISTRIBUTIONS ............................20
TAX CONSIDERATIONS .....................................21
RISKS, SECURITIES AND TECHNIQUES
RISKS, SECURITIES AND TECHNIQUES .......................22
Additional Information on Investment
Objective, Principal Investment Strategies
and Related Risks ..............................22
Additional Description of Securities and
Investment Techniques ..........................26
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT ...............................33
STATEMENT OF ADDITIONAL INFORMATION ....................33
<PAGE>
RISK/RETURN SUMMARY
GROWTH OPPORTUNITIES FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will
invest, under normal market conditions, at least 65% of its total assets in
equity securities of companies which the investment management team believes
exhibit favorable growth characteristics.
Using fundamental research (management interviews, on-site evaluations and
industry studies) and quantitative analysis (evaluation and analysis of
financial data), the investment management team buys securities of companies
that it believes have favorable growth characteristics, such as above average
sales, earnings growth and competitive returns on equity relative to their
peers. Similarly, the investment management team sells securities it believes no
longer have these characteristics. The team may also sell securities in order to
maintain the desired portfolio composition for the Fund, which may change in
response to market conditions. In determining whether to buy or sell a security,
the investment management team considers such factors as a company's:
- Financial condition (such as debt to equity ratio);
- Market share and competitive leadership of the company's products;
- Earnings growth relative to relevant competition; and
- Market valuation in comparison to other growth companies and the stock's own
historical market valuations.
The Fund may invest in companies of any size, but generally expects to invest
primarily in small and mid-size companies. At times the Fund may make
significant investments in initial public offerings ("IPOs"). An IPO is a
company's first offering of stock to the public. The Fund may from time to time
emphasize particular companies or market segments, such as technology, 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 and
pay little or no dividends. Although the Fund primarily invests in the stocks of
U.S. companies, it may invest to a limited extent in the securities of foreign
issuers either directly or indirectly (for example through American Depository
Receipts).
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the Fund.
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT RISKS
--------------------------------------------------------------------------------
All of the Fund's investments carry some degree of risk which will affect the
value of the Fund's portfolio, its investment performance and the price of its
shares. As a result, loss of money is a risk of investing in the Fund.
AN INVESTMENT IN THE 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.
3
<PAGE>
GROWTH OPPORTUNITIES FUND continued
The following summarizes the principal risks that apply to the Fund and may
result in a loss of your investment.
MARKET RISK is the risk that the value of the securities in which the 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 the 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.
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.
DERIVATIVES RISK is the risk that loss may result from the Fund's investments in
options, futures, swaps, structured securities or other derivative instruments,
which may be leveraged. Investments in derivative instruments may result in
losses exceeding the amounts invested.
SMALL CAP/MID CAP STOCK RISK is the risk that stocks of mid-sized and smaller
companies may be subject to more abrupt or erratic market movements than stocks
of larger, more established companies. Mid-sized and small companies may have
limited product lines or financial resources, or may be dependent upon a small
or inexperienced management group. In addition, these stocks typically are
traded in lower volume, and their issuers typically are subject to greater
degrees of changes in their earnings and prospects.
TECHNOLOGY STOCK RISK is the risk that stocks of technology companies may be
subject to greater price volatility than stocks of companies in other sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or become adversely impacted by
government regulation. Technology securities may experience significant price
movements caused by disproportionate investor optimism or pessimism.
IPO RISK is the risk that the market value of IPO shares will fluctuate
considerably due to factors such as the absence of a prior public market,
unseasoned trading, the small number of shares available for trading and limited
information about the issuer. The purchase of IPO shares may involve high
transaction costs. IPO shares are subject to market risk and liquidity risk.
When the Fund's asset base is small, a significant portion of the Fund's
performance could be attributable to investments in IPOs, because such
investments would have a magnified impact on the Fund. As the Fund's assets
grow, the effect of the Fund's investments in IPOs on the Fund's performance
probably will decline, which could reduce the Fund's performance.
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.
Investment of more than 25% of the 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.
FOREIGN REGULATORY RISK is the risk that a foreign security could lose value
because of less stringent foreign securities regulations and accounting and
disclosure standards.
PORTFOLIO TURNOVER RISK is the risk that high portfolio turnover is likely to
result in increased Fund expenses which may result in lower investment returns.
High portfolio turnover is also likely to result in higher short-term capital
gains taxable to shareholders. It is expected that the annual portfolio turnover
rate of the Fund will exceed 100%.
MORE INFORMATION ABOUT THE RISKS OF INVESTING IN THE FUND IS PROVIDED IN ORISKS,
SECURITIES AND TECHNIQUESO BEGINNING ON PAGE 22 OF THIS PROSPECTUS. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DISCUSSED IN THIS SECTION AND ORISKS, SECURITIES
AND TECHNIQUESO BEFORE INVESTING IN THE FUND.
4
<PAGE>
RISK/RETURN SUMMARY
-----------------
FUND PERFORMANCE
-----------------
THE BAR CHART AND PERFORMANCE TABLE HAVE BEEN OMITTED BECAUSE THE FUND HAS BEEN
IN OPERATION FOR LESS THAN ONE CALENDAR YEAR.
5
<PAGE>
----------------------
FUND FEES AND EXPENSES
----------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. 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 16.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment)
-----------------------------------------------------------------------------------
SALES
SALES CHARGE
CHARGE DEFERRED (LOAD)
(LOAD) SALES IMPOSED ON
IMPOSED ON CHARGE REINVESTED REDEMPTION EXCHANGE
FUND PURCHASES (LOAD) DISTRIBUTIONS FEES(1) FEES
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Opportunities None None None None None
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<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
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TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FUND FEES (12B-1) FEES(2) EXPENSES(3) EXPENSES(4)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Opportunities 1.20% 0.00% 0.55% 1.75%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
FOOTNOTES
(1) A fee of $15.00 may be applicable for each wire redemption.
(2)The Fund does not expect to pay any 12b-1 fees during the current fiscal
year. The maximum distribution fee is 0.25% of the Fund's average net assets
under Northern Funds' Distribution and Service Plan.
(3)These expenses include custodian, transfer agency and co-administration
expenses, shareholder servicing fees, proxy costs, if any, as well as other
customary Fund expenses. "Other Expenses" are based on estimates for the
current fiscal year.
(4)As a result of voluntary fee reductions, waivers and reimbursements,
"Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which
are expected to be incurred by the Fund during the current fiscal year are
set forth below. The voluntary fee reductions, waivers and reimbursements may
be modified or terminated at any time at the option of the Investment
Adviser. If this occurs, "Management Fees," "Other Expenses" and "Total Fund
Operating Expenses" may increase without shareholder approval.
<TABLE>
<CAPTION>
TOTAL
ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FUND FEES (12B-1) FEES EXPENSES EXPENSES
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Opportunities 1.00% 0.00% 0.25% 1.25%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
RISK/RETURN SUMMARY
EXAMPLE
The following Example is intended to help you compare the cost of investing in
the 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 the 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 the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
FUND ONE YEAR 3 YEARS
-------------------------------------------------------------------------------
<S> <C> <C>
Growth Opportunities $178 $551
-------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
INVESTMENT ADVISER
The Northern Trust Company ("Northern Trust" or the "Investment Adviser"), an
Illinois state-chartered bank and member of the Federal Reserve System, serves
as investment adviser for the Fund.
The Investment Adviser is located at 50 S. LaSalle Street, Chicago, IL 60675 and
is a wholly-owned subsidiary of Northern Trust Corporation, a bank holding
company. As of June 30, 2000, Northern Trust Corporation and its subsidiaries
had approximately $36.8 billion in assets, $22.3 billion in deposits and
employed over 9,140 persons.
Northern Trust has for more than 100 years managed the assets of individuals,
charitable organizations, foundations and large corporate investors. Northern
Trust and its affiliates administered in various capacities (including as master
trustee, investment manager or custodian) approximately $1.6 trillion of assets
as of June 30, 2000, including approximately $333 billion of assets for which
Northern Trust and its affiliates had investment management responsibility.
Under its Advisory Agreement with Northern Funds, the Investment Adviser,
subject to the general supervision of Northern Funds' Board of Trustees, is
responsible for making investment decisions for the Fund and for placing
purchase and sale orders for portfolio securities.
8
<PAGE>
MANAGEMENT OF THE FUND
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, the Investment Adviser is entitled to an advisory fee, computed daily
and payable monthly, at an annual rate set forth in the table below (expressed
as a percentage of the Fund's respective average daily net assets).
<TABLE>
<CAPTION>
CONTRACTUAL
FUND RATE
--------------------------------------------------------------------------------
<S> <C>
Growth Opportunities 1.20%
--------------------------------------------------------------------------------
</TABLE>
As stated under "Fund Fees and Expenses," the Investment Adviser expects to
waive voluntarily a portion of its advisory fee during the current fiscal year.
The Investment Adviser may discontinue or modify its voluntary limitation in the
future at its discretion.
9
<PAGE>
FUND MANAGEMENT
The Investment Adviser employs a team approach to the investment management of
the Fund. Below is information regarding the management of the Fund.
The management team leader for the Growth Opportunities Fund is David H.
Burshtan, Vice President of Northern Trust. Mr. Burshtan joined Northern Trust
in 1999 and manages various equity portfolios. From 1995 to 1999, Mr. Burshtan
was a portfolio manager for various small cap portfolios with Scudder Kemper
Investments, Inc. From 1993 to 1995, Mr. Burshtan held a variety of analyst and
portfolio management positions with Northern Trust.
10
<PAGE>
MANAGEMENT OF THE FUND
OTHER FUND SERVICES
Northern Trust also serves as transfer agent ("Transfer Agent") and custodian
for the Fund. As Transfer Agent, Northern Trust performs various administrative
servicing functions, and any shareholder inquiries should be directed to it. In
addition, Northern Trust and PFPC Inc. ("PFPC") serve as co-administrators for
Northern Funds. The fees that Northern Trust and PFPC receive for their
services in those capacities are described in the Statement of Additional
Information.
11
<PAGE>
PURCHASING AND SELLING SHARES
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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 (800) 595-9111.
--------------------------------------------------------------------------------
OPENING AN ACCOUNT
--------------------------------------------------------------------------------
DIRECTLY FROM THE FUND. You may open a shareholder account and purchase shares
directly from the Fund 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 Fund reserves the right to waive these minimums.
For your convenience, there are a number of ways to invest directly in the Fund:
BY MAIL
- Read this Prospectus carefully
- Complete and sign the Purchase Application
- Enclose a check or money order payable to Northern Funds
- If you are investing on behalf of a corporation or other entity, your
Purchase Application must be accompanied by a certified corporate resolution
(or other acceptable evidence of authority).
- Mail your check, corporate resolution (if needed) and completed Purchase
Application to:
Northern Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
- 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 (800) 595-9111 for instructions
- Complete a Purchase Application and send it to:
Northern Funds
P.O. Box 75986
Chicago, IL 60675-5986
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)
12
<PAGE>
ABOUT YOUR ACCOUNT
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 60675-5986
- The minimum initial investment is $250; $50 for monthly minimum additions
TO ADD TO AN ACCOUNT:
- Call (800) 595-9111 to obtain an Automatic Investment Plan Application
- The minimum for automatic investment additions is $50
If you discontinue participation in the plan, the Fund reserves the right to
redeem the investor's account involuntarily, upon 30 days written notice, if the
account's net asset value is $1,000 or less. Involuntary redemptions will not be
made if the value of shares in an account falls below the minimum amount solely
because of a decline in the Fund's net asset value.
BY DIRECTED REINVESTMENT
You may elect to have your income dividends and capital gains distributions
automatically invested in another Northern Fund.
- Complete the Distribution Options section on the Purchase Application
- Reinvestments can only be directed to an existing Northern Funds account
(which must meet the minimum investment requirement)
BY EXCHANGE
You may open a new account or add to an existing account by exchanging shares of
one Fund for shares of any other Fund offered by Northern Funds. See "Selling
Shares - By Exchange."
BY INTERNET
You may initiate transactions between Northern Trust banking and Northern Funds
accounts by using Northern Trust Private Passport. For details and to sign up
for this service, go to www.northerntrust.com/privatepassport or contact your
relationship manager.
THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you have an account with Northern Trust, you may purchase Northern Funds
shares through Northern Trust. You may also purchase shares through other
institutions (together with Northern Trust, "Service Organizations") that have
entered into agreements with Northern Funds. To determine whether you may
purchase shares through your institution, contact your institution directly or
call (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 the 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.
13
<PAGE>
PURCHASING AND SELLING SHARES continued
--------------------------------------------------------------------------------
SELLING SHARES
--------------------------------------------------------------------------------
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUND
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 60675-5986
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 (800) 595-9111 for instructions
- The minimum amount that may be redeemed by this method is $250
BY SYSTEMATIC WITHDRAWAL
If you own shares of the Fund with a minimum value of $10,000, you may elect to
have a fixed sum redeemed at regular intervals and distributed in cash or
reinvested in one or more other Northern Funds.
- Call (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 60675-5986
- 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 (800) 595-9111 for more information
14
<PAGE>
ABOUT YOUR ACCOUNT
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 60675-5986
- The request must be signed by each owner of the account and must be
accompanied by signature guarantees
- Call (800) 595-9111 to use the telephone privilege
- During periods of unusual economic or market activity, telephone redemptions
may be difficult to implement. In such event, shareholders should follow the
procedures outlined above under "Selling Shares -- By Mail."
BY INTERNET
You may initiate transactions between Northern Trust banking and Northern Funds
accounts by using Northern Trust Private Passport. For details and to sign up
for this service, go to www.northerntrust.com/privatepassport or contact your
relationship manager.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchased your Northern Funds shares through an account at Northern Trust
or another Service Organization, you may redeem or exchange your shares
according to the instructions pertaining to that account.
- Although Northern Funds imposes no charges when you redeem, when shares are
purchased through Northern Trust or another Service Organization, a fee may
be charged by those institutions for providing services in connection with
your account
- Contact your account representative at Northern Trust or other Service
Organization for more information about redemptions or exchanges
15
<PAGE>
ACCOUNT POLICIES AND OTHER INFORMATION
CALCULATING SHARE PRICE. Northern Funds issues shares and redeems shares at net
asset value ("NAV"). The NAV for the Fund is calculated by dividing the value of
the Fund's net assets by the number of the Fund's outstanding shares. The NAV is
calculated on each Business Day as of 3:00 p.m., Chicago time, for the 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.
U.S. and foreign securities held by the Fund generally are valued at their
market prices. Shares of an investment company held by the Fund are valued at
their NAV. Any securities, including restricted securities, for which market
prices are not readily available are valued at fair value as determined by the
Investment Adviser. Short-term obligations held by the Fund are valued at their
amortized cost which, according to the Investment Adviser, approximates market
value.
The 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 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 as described under "Purchasing and Selling
Shares" and accompanied by payment of the purchase price;
- The order is placed by Northern Trust or a Service Organization and payment
in Federal or other immediately available funds is to be made on the next
Business Day; or
- The order is accepted by an authorized intermediary and payment is to be made
on the next Business Day in accordance with procedures acceptable to Northern
Funds.
Orders received by the Transfer Agent or other authorized intermediary on a
non-Business Day or after 3:00 p.m. on a Business Day will be executed on the
next Business Day, at that day's closing share price, provided that payment is
made as noted above.
SOCIAL SECURITY/TAX IDENTIFICATION NUMBER. Federal regulations require you to
provide a Social Security or other certified taxpayer identification number when
you open or reopen an account. Purchase Applications without such a number or an
indication that a number has been applied for will not be accepted. If you have
applied for a number, the number must be provided and certified within 60 days
of the date of the Purchase Application.
IN-KIND PURCHASES AND REDEMPTIONS. Northern Funds reserves the right to accept
payment for shares in the form of securities that are permissible investments
for the Fund. Northern Funds also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from the 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 the Fund in the event
of any failure to make payment according to the procedures outlined in this
Prospectus. Northern Trust may redeem shares from any account it maintains to
protect the Fund and Northern Trust against loss. In addition, a $20 charge
will be imposed if a check does not clear.
- You may initiate transactions between Northern Trust banking and Northern
Funds accounts by using Northern Trust Private Passport. For additional
details, please visit our website www.northerntrust.com/privatepassport or
contact your relationship manager.
- Northern Funds reserves the right to reject any purchase order. The Fund also
reserves the right to change or discontinue any of their purchase procedures.
- In certain circumstances, Northern Funds may advance the time by which
purchase orders must be received. See "Early Closings" on page 18.
16
<PAGE>
ABOUT YOUR ACCOUNT
- Northern Funds may reproduce this Prospectus in an electronic format which
may be available on the Internet. If you have received this Prospectus in its
electronic format, you or your representative may contact the Transfer Agent
for a free paper copy of this Prospectus by writing to the Northern Funds
Center at P.O. Box 75986, Chicago, IL 60675-5986, calling (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, will be executed on the same day. The
redemption or exchange will be effected at that day's closing share price.
Good order means that the request must include the following information:
- The account number and Fund name
- The amount of the transaction, in dollar amount or number of shares
- The signature of all account owners exactly as they are registered on the
account (except for online, telephone and wire redemptions)
- Required signature guarantees, if applicable
- Other supporting legal documents that might be required in the case of
estates, corporations, trusts and certain other accounts. Call (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
18.
PAYMENT OF REDEMPTION PROCEEDS. The Fund will make payment for redeemed shares
typically within one or two Business Days, but no later than the seventh day
after a redemption request is received in good order by the Transfer Agent or an
authorized intermediary (or such longer period permitted by the SEC). However,
if any portion of the shares to be redeemed represents an investment made by
check, the Fund may delay the payment of the redemption proceeds until the check
has cleared and collected. This may take up to fifteen days from the purchase
date.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed Purchase Application.
- Northern Funds reserves the right to redeem shares held by any shareholder
who provides incorrect or incomplete account information or when such
involuntary redemptions are necessary to avoid adverse consequences to the
Fund and its shareholders.
- Northern Funds may require any information reasonably necessary to ensure
that a redemption has been duly authorized.
- Northern Funds reserves the right, on 60 days' written notice, to redeem the
shares held in any account if, at the time of redemption, the net asset value
of the remaining shares in the account falls below $1,000. Involuntary
redemptions will not be made if the value of shares in an account falls below
the minimum solely because of a decline in 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.
- Northern Funds reserves the right to defer crediting, sending or wiring
redemption proceeds for up to seven days (or such longer period permitted by
the SEC) after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect the Fund.
EXCHANGE PRIVILEGES. You may exchange shares of one Northern Fund for another
only if the registration of both accounts is identical. An exchange is a
redemption of shares of one Fund and the purchase of shares of another Fund. It
is considered a taxable event and may result in a
17
<PAGE>
ACCOUNT POLICIES AND OTHER INFORMATION continued
gain or loss. Northern Funds reserves the right, at any time without prior
notice to suspend, limit or terminate the exchange privilege of any shareholder
who makes more than eight exchanges of shares in a year and/or two exchanges of
shares in a calendar quarter. Northern Funds may also modify or terminate the
exchange privilege with respect to any or all shareholders, and may reject any
exchange request.
Exchanges are only available in states where an exchange can legally be made.
Before making an exchange you should read the Prospectus for the shares you are
acquiring.
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable safeguards against fraudulent
telephone transactions. If reasonable measures are taken to verify that
telephone instructions are genuine, Northern Funds and its service providers
will not be responsible for any loss resulting from fraudulent or unauthorized
instructions received over the telephone. In these circumstances, shareholders
will bear the risk of loss. During periods of unusual market activity, you may
have trouble placing a request by telephone. In this event, consider sending
your request in writing.
The proceeds of redemption orders received by telephone will be sent by check,
wire or transfer according to proper instructions. All checks will be made
payable to the shareholder of record and mailed only to the shareholder's
address of record.
Northern Funds reserves the right to refuse a telephone redemption.
MAKING CHANGES TO YOUR ACCOUNT INFORMATION. You may make changes to wiring
instructions, address of record or other account information only in writing.
These instructions must be accompanied by a signature guarantee from an
institution participating in the Stock Transfer Agency Medallion Program
("STAMP"), or other acceptable evidence of authority. Additional requirements
may be imposed. In accordance with SEC regulations, the Fund and Transfer Agent
may charge a shareholder reasonable costs in locating a shareholder's current
address.
SIGNATURE GUARANTEES. If a signature guarantee is required, it must be from an
institution participating in STAMP, or other acceptable evidence of authority
must be provided. Additional requirements may be imposed by Northern Funds. In
addition to the situations described in this Prospectus, Northern Funds may
require signature guarantees in other circumstances based on the amount of a
redemption request or other factors.
BUSINESS DAY. A "Business Day" is each Monday through Friday when the New York
Stock Exchange (the "Exchange") is open for business. In 2000 and 2001, the Fund
will be closed on the following holidays: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
EARLY CLOSINGS. Northern Funds reserves the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern Trust or the Exchange closes early as a result of
unusual weather or other conditions. Northern Funds also reserves 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 Fund. These financial intermediaries may also designate other
intermediaries to accept such orders, if approved by the Fund. Authorized
intermediaries are responsible for transmitting orders and delivering funds on a
timely basis. The 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
18
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ABOUT YOUR ACCOUNT
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 Fund;
- providing information to customers showing their positions in the Fund; and
- providing subaccounting with respect to Fund shares beneficially owned by
customers or the information necessary for subaccounting.
In addition, Service Organizations may provide assistance, such as the
forwarding of sales literature and advertising to their customers, in connection
with the distribution of Fund shares.
For their services, Service Organizations may receive fees from the Fund at
annual rates of up to 0.25% of the average daily net asset value of the shares
covered by their agreements. Because these fees are paid out of the Fund's
assets on an on-going basis, they will increase the cost of your investment in
the Fund. In addition, Northern Trust may provide compensation to certain
dealers and other financial intermediaries who provide services to their
customers who invest in Northern Funds or whose customers purchase significant
amounts of the Fund's shares. The amount of such compensation may be made on a
one-time and/or periodic basis, and may represent all or a portion of the annual
fees earned by Northern Trust as Investment Adviser (after adjustments). This
additional compensation will be paid by Northern Trust or its affiliates and
will not represent an additional expense to Northern Funds or its shareholders.
Service Organizations may also charge their customers fees for providing
administrative services in connection with investments in the Fund. Investors
should contact their Service Organizations with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Northern Funds in connection with the investment of fiduciary funds in Fund
shares. Institutions, including banks regulated by the Comptroller of the
Currency, Federal Reserve Board and state banking commissions, and investment
advisers and other money 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 Fund 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 COMMUNICATIONS. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of September 30 and, after the close of the Fund's fiscal year on March 31, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of the shareholder reports, prospectuses or (if
and when permitted by law) proxy or information statements to all shareholders
who share the same mailing address with your account, you may revoke your
consent at any time by contacting the Northern Funds Center by phone at (800)
595-9111 or by mail at Northern Funds, P.O. Box 75986, Chicago, IL 60675-5986.
You may also send an e-mail to [email protected]. The Fund will begin
sending individual copies to you within 30 days after receipt of your
revocation.
19
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS OF THE FUND ARE AUTOMATICALLY
REINVESTED IN ADDITIONAL SHARES OF THE 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 its net
asset value per share. If you would like to receive dividends or
distributions in cash or have them reinvested in another Northern Fund, you
must notify the Transfer Agent in writing. This election will become
effective for distributions paid two days after its receipt by the Transfer
Agent. Dividends and distributions may only be reinvested in a Northern Fund
in which you maintain an account.
The Fund's net investment income will be declared as a dividend and paid
annually. Net realized capital gains may be distributed from time to time during
Northern Funds' fiscal year (but not less frequently than annually).
20
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ABOUT YOUR ACCOUNT
TAX CONSIDERATIONS
The 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 the 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.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
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 Fund must meet in order to avoid
Federal taxation. In an effort to adhere to these requirements, the Fund may
have to limit its investment activity in some types of instruments.
Shareholders may also be subject to state and local taxes on distributions and
redemptions.
CONSULT YOUR TAX PROFESSIONAL. Your investment in the Fund could have additional
tax consequences. You should consult your tax professional for information
regarding all tax consequences applicable to your investments in the Fund. More
tax information is provided in the Statement of Additional Information. This
short summary is not intended as a substitute for careful tax planning.
21
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RISKS, SECURITIES AND TECHNIQUES
Additional Information on Fund Strategies, Risks, Securities and Techniques
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE FUND'S PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS. IT ALSO EXPLORES THE VARIOUS INVESTMENT SECURITIES
AND TECHNIQUES THAT THE INVESTMENT MANAGEMENT TEAM MAY USE. THE FUND MAY INVEST
IN OTHER SECURITIES AND IS SUBJECT TO FURTHER RESTRICTIONS AND RISKS WHICH ARE
DESCRIBED IN THE STATEMENT OF ADDITIONAL INFORMATION. ADDITIONALLY, THE FUND MAY
PURCHASE OTHER TYPES OF SECURITIES OF INSTRUMENTS SIMILAR TO THOSE DESCRIBED IN
THIS SECTION IF OTHERWISE CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND
POLICIES.
ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
INVESTMENT OBJECTIVE. THE FUND'S INVESTMENT OBJECTIVE MAY BE CHANGED BY NORTHERN
FUNDS' BOARD OF TRUSTEES WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL,
HOWEVER, BE NOTIFIED OF ANY CHANGES. ANY SUCH CHANGE MAY RESULT IN THE FUND
HAVING AN INVESTMENT OBJECTIVE DIFFERENT FROM THE OBJECTIVE WHICH THE
SHAREHOLDER CONSIDERED APPROPRIATE AT THE TIME OF INVESTMENT IN THE FUND.
DERIVATIVES. The Fund may purchase certain "derivative" instruments for hedging
or speculative purposes. A derivative is a financial instrument whose value is
derived from--or based upon--the performance of underlying assets, interest or
currency exchange rates or indices. Derivatives include futures contracts,
options, interest rate and currency swaps, equity swaps, structured securities,
forward currency contracts and structured debt obligations.
INVESTMENT STRATEGY. Under normal market conditions, the Fund may to a moderate
extent invest in derivative securities, including structured securities,
options, futures, swaps and interest rate caps and floors, if the potential
risks and rewards are consistent with the Fund's objective, strategies and
overall risk profile. In unusual circumstances, including times of increased
market volatility, the Fund may make more significant investments in
derivatives. The Fund may use derivatives for hedging purposes to offset a
potential loss in one position by establishing an interest in an opposite
position. The Fund may also use derivatives for speculative purposes to invest
for potential income or capital gain.
SPECIAL RISKS. Engaging in derivative transactions involves special risks,
including (a) market risk that the Fund's derivatives position will lose value;
(b) credit risk that the counterparty to the transaction will default; (c)
leveraging risk that the value of the derivative instrument will decline more
than the value of the assets on which it is based; (d) illiquidity risk that the
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
22
<PAGE>
RISKS, SECURITIES AND TECHNIQUES
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, the Fund may suffer a loss whether or
not the analysis of the investment management team is accurate.
FOREIGN INVESTMENTS. Foreign securities include direct investments in non-U.S.
dollar-denominated securities traded outside of the United States and
dollar-denominated securities of foreign issuers. Foreign securities also
include indirect investments such as American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs").
ADRs are U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are issued by U.S. banks or trust companies, and entitle the
holder to all dividends and capital gains that are paid out on the underlying
foreign shares. EDRs and GDRs are receipts issued by non-U.S. financial
institutions that often trade on foreign exchanges. They represent ownership in
an underlying foreign or U.S. security and are generally denominated in a
foreign currency.
INVESTMENT STRATEGY. The Fund may invest up to 25% of its total assets in
foreign securities including ADRs, EDRs and GDRs. The Fund may also invest in
foreign time deposits and other short-term instruments.
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 generally located in the
Asia/Pacific region, the Middle East, Eastern Europe, Central and South America
and Africa. In general, the securities markets of these countries are less
liquid, are subject to greater price volatility, have smaller market
capitalizations and have problems with securities registration and custody. In
addition, because the securities settlement procedures are less developed in
these countries, the Fund may be required to deliver securities before receiving
payment and may also be unable to complete transactions during market
disruptions. As a result of these and other risks, investments in these
countries generally present a greater risk of loss to the Fund.
While the Fund's investments may, if permitted, be denominated in foreign
currencies, the portfolio securities and other assets held by the Fund are
valued in U.S. dollars. Currency exchange rates may fluctuate significantly over
short periods of time causing the Fund's net asset value to fluctuate as well.
Currency exchange rates can be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the extent
that the Fund is invested in foreign securities while also maintaining currency
positions, it may be exposed to greater combined risk. The Fund's respective net
currency positions may expose it to risks independent of its securities
positions.
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RISKS, SECURITIES AND TECHNIQUES continued
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the euro; the establishment and maintenance of exchange rates for
currencies being converted into the euro; the 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 Fund.
Some institutions issuing ADRs may not be sponsored by the issuer. A
non-sponsored depository may not provide the same shareholder information that a
sponsored depository is required to provide under its contractual arrangement
with the issuer.
INITIAL PUBLIC OFFERING: An IPO is a company's first offering of stock to the
public.
INVESTMENT STRATEGY. At times, the Fund may make significant investments in
IPOs.
SPECIAL RISKS. IPO risk is the risk that the market value of IPO shares will
fluctuate considerably due to factors such as the absence of a prior public
market, unseasoned trading, the small number of shares available for trading and
limited information about the issuer. The purchase of IPO shares may involve
high transaction costs. IPO shares are subject to market risk and liquidity
risk. When the Fund's asset base is small, a significant portion of the
Fund's performance could be attributable to investments in IPOs, because such
investments would have a magnified impact on the Fund. As the Fund's assets
grow, the effect of the Fund's investments in IPOs on the Fund's performance
probably will decline, which could reduce the Fund's performance. Because of
the price volatility of IPO shares, the Fund may choose to hold IPO shares
for a very short period of time. This may increase the turnover of the Fund's
portfolio and may lead to increased expenses to the Fund, such as commissions
and transaction costs. By selling IPO shares, the Fund may realize taxable
gains it will subsequently distribute to shareholders. In addition, the
market for IPO shares can be speculative and/or inactive for extended periods
of time. There is no assurance that the Fund will be able to obtain allocable
portions of IPO shares. The limited number of shares available for trading in
some IPOs may make it more difficult for the Fund to buy or sell significant
amounts of shares without an unfavorable impact on prevailing prices.
Investors in IPO shares can be affected by substantial dilution in the value
of their shares, by sales of additional shares and by concentration of
control in existing management and principal shareholders. The Fund's
investments in IPO shares may include the securities of "unseasoned"
companies (companies with less than three years of continuous operations),
which presents risks considerably greater than common stocks of more
established companies. These companies may have limited operating histories
and their prospects for profitability may be uncertain. These companies may
be involved in new and evolving businesses and may be vulnerable to
competition and changes in technology, markets and economic conditions. They
may be more dependent on key managers and third parties and may have limited
product lines.
INVESTMENT GRADE SECURITIES. A security is considered investment grade if, at
the time of purchase, it is rated:
- BBB or higher by Standard and Poor's Ratings Services ("S&P");
- Baa or higher by Moody's Investors Service, Inc. ("Moody's");
- BBB or higher by Duff & Phelps Credit Rating Co. ("Duff"); or
- BBB or higher by Fitch IBCA Inc. ("Fitch").
A security will be considered investment grade if it receives one of the above
ratings, even if it receives a lower rating from other rating organizations.
INVESTMENT STRATEGY. The Fund may invest in fixed income and convertible
securities to the extent consistent with its respective investment policies.
Except as stated in the next section, fixed income and convertible securities
purchased
24
<PAGE>
RISKS, SECURITIES AND TECHNIQUES
by the Fund will generally be rated investment grade. The Fund 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 the Fund,
a rated security may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. The Investment Adviser will
consider such an event in determining whether the Fund should continue to
hold the security.
NON-INVESTMENT GRADE SECURITIES. Non-investment grade fixed income and
convertible securities (sometimes referred to as "junk bonds") are generally
rated BB or below by S&P, Duff or Fitch, or Ba by Moody's.
INVESTMENT STRATEGY. The Fund may invest up to 15% of its total assets in
non-investment grade securities, including convertible securities, when the
investment management team determines that such securities are desirable in
light of the Fund's investment objectives and portfolio mix.
SPECIAL RISKS. Non-investment grade securities are considered predominantly
speculative by traditional investment standards. The market value of these
low-rated securities tends to be more sensitive to individual corporate
developments and changes in interest rates and economic conditions than
higher-rated securities. In addition, they generally present a higher degree of
credit risk. Issuers of low-rated securities are often highly leveraged, so
their ability to repay their debt during an economic downturn or periods of
rising interest rates may be impaired. The risk of loss due to default by these
issuers is also greater because low-rated securities generally are unsecured and
are often subordinated to the rights of other creditors of the issuers of such
securities. Investment by the Fund in defaulted securities poses additional risk
of loss should nonpayment of principal and interest continue in respect of such
securities. Even if such securities are held to maturity, recovery by the Fund
of its initial investment and any anticipated income or appreciation will be
uncertain. The Fund may also incur additional expenses in seeking recovery on
defaulted securities.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors.
Accordingly, the secondary market for such securities is not as liquid as,
and is more volatile than, the secondary market for higher quality
securities. In addition, market trading volume for these securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific
adverse changes in the condition of a particular issuer. These factors may
have an adverse effect on the market price and the Fund's ability to dispose
of particular portfolio investments. A less developed secondary market may
also make it more difficult for the Fund to obtain precise valuations of the
high yield securities in its portfolio. Investments in lower quality
securities, whether rated or unrated, will be more dependent on Northern
Trust's credit analysis than would be the case with investments in higher
quality securities.
SMALL CAP INVESTMENTS. Investments in small capitalization companies involve
greater risk and portfolio price volatility than investments in larger
capitalization stocks. Among the reasons for the greater price volatility of
these investments are the less certain growth prospects of smaller firms and the
lower degree of liquidity in the markets for such securities. Small
capitalization companies may be thinly traded and may have to be sold at a
discount from current market prices or in small lots over an extended period of
time. Because of the lack of sufficient market liquidity, the Fund may incur
losses because it will be required to effect sales at a disadvantageous time and
only then at a substantial drop in price. Small capitalization companies include
"unseasoned" issuers that do not have an established financial history; often
have limited product lines, markets or financial resources; may depend on or use
a few key personnel for management; and may be susceptible to losses and risks
of bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitalization
companies may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
TEMPORARY INVESTMENTS. Short-term obligations refer to U.S. government
securities, high-quality money market instruments (including commercial paper
and obligations of foreign and domestic banks such as certificates of deposit,
bank and deposit notes, bankers' acceptances and fixed time deposits) and
repurchase agreements with matu-
25
<PAGE>
RISKS, SECURITIES AND TECHNIQUES continued
-rities of 13 months or less. Generally, these obligations are purchased to
provide stability and liquidity to the Fund.
INVESTMENT STRATEGY. The Fund may invest all or any portion of its assets in
short-term obligations pending investment, to meet anticipated redemption
requests or as a temporary defensive measure in response to adverse market or
economic conditions.
SPECIAL RISKS. The Fund may not achieve its investment objective when its assets
are invested in short-term obligations.
PORTFOLIO TURNOVER. The investment management team will not consider the Fund
turnover rate a limiting factor in making investment decisions for the Fund. A
high portfolio turnover rate (100% or more) is likely to involve higher
brokerage commissions and other transactions costs, which could reduce the
Fund's return. It may also result in higher short-term capital gains that are
taxable to shareholders. Northern Funds expects that the annual portfolio
turnover rate of the Fund will generally not exceed 200%.
ADDITIONAL DESCRIPTION OF SECURITIES AND
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 Fund may 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. It may also invest in unrated mortgage-backed
securities which the Investment Adviser believes are of comparable quality.
SPECIAL RISKS. In addition to credit and market risk, asset-backed securities
involve prepayment risk because the underlying assets (loans) may be prepaid at
any time. The value of these securities may also change because of actual or
perceived changes in the creditworthiness of the originator, the servicing
agent, the financial institution providing the credit support or the
counterparty. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline. However, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities. In addition,
non-mortgage asset-backed securities involve certain risks not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws. Automobile
receivables are subject to the risk that the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing the receivables.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Fund can borrow money and
enter into reverse repurchase agreements. Reverse repurchase agreements involve
the sale of securities held by the Fund subject to the Fund's agreement to
repurchase them at a mutually agreed upon date and price (including interest).
INVESTMENT STRATEGY. The Fund may borrow and enter into reverse repurchase
agreements in amounts not exceeding one-third of the value of its total assets.
The Fund may also borrow up to an additional 5% of its total assets for
temporary purposes. The Fund may enter into 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.
SPECIAL RISKS. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Fund decline in value while these transactions are
outstanding, the net asset value of the Fund's outstanding shares will decline
in value by proportionately more than the decline in value of the securities. In
addition, reverse repurchase agreements involve the risks that the interest
income earned by the 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 the Fund
26
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RISKS, SECURITIES AND TECHNIQUES
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 Fund a
way to participate in the capital appreciation of the common stock into which
the securities are convertible, while earning higher current income than is
available from the common stock.
INVESTMENT STRATEGY. The Fund may acquire convertible securities. These
securities are subject to the same rating requirements as fixed income
securities held by the Fund.
SPECIAL RISKS. The price of a convertible security will normally vary in some
proportion to changes in the price of the underlying common stock because of
either a conversion or exercise feature. However, the value of a convertible
security may not increase or decrease as rapidly as the value of the underlying
common stock. Additionally, a convertible security will normally provide income
and therefore is subject to interest rate risks. While convertible securities
generally offer lower interest or dividend yields than non-convertible fixed
income securities of similar quality, their value tends to increase as the
market value of the underlying stock increases and to decrease when the value of
the underlying stock decreases. Also, the Fund may be forced to convert a
security before it would otherwise choose, which may have an adverse effect on
the Fund's ability to achieve its investment objective.
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 its investment objective, the
Fund may invest a portion of its total assets in custodial receipts.
SPECIAL RISKS. Like other stripped obligations, custodial receipts may be
subject to greater price volatility than ordinary debt obligations because of
the way in which their principal and interest are returned to investors.
EQUITY SWAPS. Equity swaps allow the parties to the swap agreement to exchange
components of return on one equity investment (e.g., a basket of equity
securities or an index) for a component of return on another non-equity or
equity investment, including an exchange of differential rates of return.
INVESTMENT STRATEGY. The Fund may invest in equity swaps. Equity swaps may be
used to invest in a market without owning or taking physical custody of
securities in circumstances where direct investment may be restricted for legal
reasons or is otherwise impractical. Equity swaps may also be used for other
purposes, such as hedging or seeking to increase total return.
SPECIAL RISKS. Equity swaps are derivative instruments and their values can be
very volatile. To the extent that the investment management team does not
accurately analyze and predict the potential relative fluctuation on the
components swapped with the other party, the Fund may suffer a loss which is
potentially unlimited. The value of some components of an equity swap (such as
the dividends on a common stock) may also be sensitive to changes in interest
rates. Furthermore, during the period a swap is outstanding, the Fund may suffer
a loss if the counterparty defaults. Equity swaps are normally illiquid,
and the Fund may not be able to terminate its obligations when desired.
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 Fund may enter into forward currency exchange contracts
for hedging purposes and to help reduce the risks and volatility caused by
changes in foreign currency exchange rates. Foreign currency exchange contracts
will be used at the discretion of the investment management team, and the Fund
is not required to hedge its foreign currency positions.
SPECIAL RISKS. Forward foreign currency contracts are privately negotiated
transactions, and can have substantial price volatility. As a result, they offer
less protection against default by the other party than is available for
instruments traded on an exchange. When used for hedging purposes, they tend to
limit any potential gain that may be realized if the value of the Fund's foreign
holdings in-
27
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RISKS, SECURITIES AND TECHNIQUES continued
creases 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 the
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 the 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 the Fund
sells an option on a futures contract, it becomes obligated to purchase or sell
a futures contract if the option is exercised.
INVESTMENT STRATEGY. To the extent consistent with its investment objective, the
Fund may invest in futures contracts and options on futures contracts on
domestic or foreign exchanges or boards of trade. They may be used for hedging
purposes, to increase total return or to maintain liquidity to meet potential
shareholder redemptions, invest cash balances or dividends or minimize trading
costs.
The value of the Fund's futures contacts may equal up to 100% of its total
assets. However, the Fund will not purchase or sell a futures contract unless,
after the transaction, the sum of the aggregate amount of margin deposits on its
existing futures positions and the amount of premiums paid for related options
used for non-hedging purposes is 5% or less of its total assets.
SPECIAL RISKS. Futures contracts and options present the following risks:
imperfect correlation between the change in market value of the 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, certain unlisted
over-the-counter options and other securities that are traded in the U.S. but
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
INVESTMENT STRATEGY. The Fund may invest up to 15% of its net assets in
securities that are illiquid. If otherwise consistent with its investment
objectives and policies, the Fund may purchase commercial paper issued pursuant
to Section 4(2) of the 1933 Act and domestically traded securities that are not
registered under the 1933 Act but can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act ("Rule 144A
Securities"). These securities will not be considered illiquid so long as the
Investment Adviser determines, under guidelines approved by the Northern Funds'
Board of Trustees, that an adequate trading market exists.
SPECIAL RISKS. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to the Fund. The practice of investing in Rule 144A Securities
could increase the level of the Fund's illiquidity during any period that
qualified institutional buyers become uninterested in purchasing these
securities.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS, TOTAL RATE OF RETURN
SWAPS, CREDIT SWAPS, AND INTEREST RATE FLOORS, CAPS AND COLLARS. Interest rate
and currency swaps are contracts that obligate the 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. An interest rate collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates. Total rate of return swaps are contracts
that obligate a party to pay or receive interest in exchange for the payment by
the other party of the total return generated by a security, a basket of
securities, an index or an index component. Credit swaps are contracts involving
the receipt of floating or fixed rate payments in
28
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RISKS, SECURITIES AND TECHNIQUES
exchange for assuming potential credit losses of an underlying security. Credit
swaps give one party to a transaction the right to dispose of or acquire an
asset (or group of assets), or the right to receive a payment from or make a
payment or to the other party, upon the occurrence of specific credit events.
INVESTMENT STRATEGY. The Fund may enter into swap transactions and transactions
involving interest rate floors, caps and collars for hedging purposes or to seek
to increase total return.
SPECIAL RISKS. The use of swaps and interest rate floors, caps and collars is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Like other derivative securities, these instruments can be highly volatile. If
the Investment Adviser is incorrect in its forecasts of market values, interest
rates and currency exchange rates, the investment performance of the Fund would
be less favorable than it would have been if these instruments were not used.
These instruments are normally illiquid, the Fund may not be able to terminate
its obligations when desired. In addition, if the Fund is obligated to pay the
return under the terms of a total rate of return swap, Fund losses due to
unanticipated market movements are potentially unlimited. The Fund may also
suffer a loss if the other party to a transaction defaults.
INVESTMENT COMPANIES. To the extent consistent with its investment objective,
the Fund 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 the Fund in other investment companies will
be subject to the limitations of the 1940 Act. Although the Fund does not expect
to do so in the foreseeable future, the Fund is authorized to invest
substantially all of its assets in a single open-end investment company or
series thereof that has substantially the same investment objective, policies
and fundamental restrictions as the Fund.
SPECIAL RISKS. As a shareholder of another investment company, the 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.
MORTGAGE DOLLAR ROLLS. A mortgage dollar roll involves the sale by the Fund of
securities for delivery in the future (generally within 30 days). The Fund
simultaneously contracts with the same counterparty to repurchase substantially
similar (same type, coupon and maturity) but not identical securities on a
specified future date. During the roll period, the Fund loses the right to
receive principal and interest paid on the securities sold. However, the Fund
benefits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase and/or
fee income plus the interest earned on the cash proceeds of the securities sold.
INVESTMENT STRATEGY. The Fund may enter into mortgage dollar rolls in an effort
to enhance investment performance. For financial reporting and tax purposes, the
Fund treats mortgage dollar rolls as two separate transactions: one involving
the purchase of a security and a separate transaction involving a sale. The Fund
does not currently intend to enter into mortgage dollar rolls that are accounted
for as a financing and do not treat them as borrowings.
SPECIAL RISKS. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's ability to predict correctly interest rates and mortgage
prepayments. If the Investment Adviser is incorrect in its prediction, the Fund
may experience a loss. Unless the benefits of a mortgage dollar roll exceed the
income, capital appreciation and gain or loss due to mortgage prepayments that
would have been realized on the securities sold as part of the roll, the use of
this technique will diminish the Fund's performance.
OPTIONS. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
INVESTMENT STRATEGY. To the extent consistent with its investment objective, the
Fund may write (sell) covered call options, buy put options, buy call options
and write secured put options for hedging purposes or to earn additional income.
Options may relate to particular securities, foreign or domestic securities
indices, financial instruments, foreign currencies or the yield differential
between two securities. The Fund will not purchase put and call options in an
29
<PAGE>
RISKS, SECURITIES AND TECHNIQUES continued
amount that exceeds 5% of its net assets at the time of purchase. The total
value of the Fund's assets subject to options written by the Fund will not be
greater than 25% of its net assets at the time the option is written. The Fund
may "cover" a call option by owning the security underlying the option or
through other means. Put options written by the Fund are "secured" if the Fund
maintains liquid assets in a segregated account in an amount at least equal to
the exercise price of the option up until the expiration date.
SPECIAL RISKS. Options trading is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
Fund securities transactions. The value of options can be highly volatile, and
their use can result in loss if the investment management team is incorrect in
its expectation of price fluctuations. The successful use of options for hedging
purposes also depends in part on the ability of the investment management team
to predict future price fluctuations and the degree of correlation between the
options and securities markets.
The Fund will invest and trade in unlisted over-the-counter options only with
firms deemed creditworthy by the Investment Adviser. However, unlisted options
are not subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation, which performs the obligations of its members
which fail to perform them in connection with the purchase or sale of options.
PREFERRED STOCK. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock owners but after bond owners.
INVESTMENT STRATEGY. To the extent consistent with its investment objective and
policies, the Fund may invest in preferred stocks.
SPECIAL RISKS. Unlike most debt securities, the obligations of an issuer of
preferred stock, including dividend and other payment obligations, may not
typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default or other non-compliance by the issuer of
the preferred stock.
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 Fund may invest in REITs.
SPECIAL RISKS. The value of a REIT is affected by changes in the value of the
properties owned by the REIT or securing mortgage loans held by the REIT. REITs
are dependent upon cash flow from their investments to repay financing costs and
the ability of a REIT's manager. REITs are also subject to risks generally
associated with investments in real estate. The Fund will indirectly bear its
proportionate share of any expenses, including management fees, paid by a REIT
in which it invests.
REPURCHASE AGREEMENTS. Repurchase agreements involve the purchase of securities
by the Fund subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price.
INVESTMENT STRATEGY. The Fund may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement will never occur more than one year after the Fund acquires the
securities.
SPECIAL RISKS. In the event of a default, the 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, the Fund could suffer additional losses if a court
determines that the Fund's interest in the collateral is unenforceable.
SECURITIES LENDING. In order to generate additional income, the Fund may lend
securities on a short-term basis to banks, broker-dealers or other qualified
institutions. In exchange, the Fund 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 the Fund's total assets (including the loan collateral). Any cash
collateral received by the 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, the Fund could experience delays in recovering its
securities and may incur a capital loss. In addition, the Fund may in-
30
<PAGE>
RISKS, SECURITIES AND TECHNIQUES
cur 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 its investment objective, the
Fund may purchase stripped securities.
SPECIAL RISKS. Stripped securities are very sensitive to changes in interest
rates and to the rate of principal prepayments. A rapid or unexpected change in
prepayments could depress the price of certain stripped securities and adversely
affect the Fund's total return.
STRUCTURED SECURITIES. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference.
INVESTMENT STRATEGY. The 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, the 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, the
Fund may invest in a variety of U.S. Treasury obligations and also may invest in
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities.
SPECIAL RISKS. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the United States
Treasury. Other obligations, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the United States Treasury;
and others, such as those issued by the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations. Still others are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. government would
provide financial support to its agencies or instrumentalities if it is not
obligated to do so by law. In addition, the secondary market for certain
participations in loans made to foreign governments or their agencies may be
limited.
VARIABLE AND FLOATING RATE INSTRUMENTS. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that float at a margin above a generally recognized index rate. These
instruments include variable amount master demand notes, long-term variable and
floating rate bonds (sometimes referred to as "Put Bonds") where the Fund
obtains at the time of purchase the right to put the bond back to the issuer or
a third party at par at a specified date and 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. Some variable and floating rate
instruments have interest rates that are periodically adjusted as a result of
changes in inflation rates.
31
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RISKS, SECURITIES AND TECHNIQUES continued
INVESTMENT STRATEGY. The 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 the Fund if they are
determined by the Investment Adviser to be of comparable quality to rated
instruments eligible for purchase by the Fund.
SPECIAL RISKS. 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 Fund
is not entitled to exercise their demand rights. As a result, the Fund could
suffer a loss with respect to these instruments.
WARRANTS. A warrant represents the right to purchase a security at a
predetermined price for a specified period of time.
INVESTMENT STRATEGY. The Fund may invest in warrants and similar rights. The
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. The Fund may purchase or sell securities on a when-issued,
delayed delivery or forward commitment basis. Although the Fund would generally
purchase securities in these transactions with the intention of acquiring the
securities, the Fund 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 a
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. The 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. The 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.
MISCELLANEOUS
Northern Trust is sometimes referred to as "The Northern Trust
Bank" in advertisements and other sales literature.
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FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the Fund's annual reports, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its prior fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Fund and its policies will be available in the
Fund's Statement of Additional Information ("SAI"). The SAI is incorporated by
reference into this Prospectus (is legally considered part of this Prospectus).
The Fund's annual and semiannual reports (when they are prepared), and the SAI,
are available free upon request by calling The Northern Funds Center at (800)
595-9111.
TO OBTAIN OTHER INFORMATION AND
FOR SHAREHOLDER INQUIRIES:
BY TELEPHONE Call (800) 595-9111
BY MAIL Northern Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Fund's documents are available online and may be
downloaded from:
- The SEC's website at http://www.sec.gov.
- 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, after paying a duplicating fee, by writing the SEC's
Public Reference Section, Washington, D.C. 20549-0102, or by electronic request
to: [email protected]. Information on the operation of the public reference
room may be obtained by calling the SEC at (202) 942-8090.
[LOGO]
811-8236
33
<PAGE>
[NORTHERN FUNDS LOGO]
P.O. Box 75986
Chicago, IL 60675-5986
(800) 595-9111
Northern Fund Distributors, LLC,
an independent third party. NF GOP PRO 900
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GROWTH OPPORTUNITIES FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated September 26, 2000 (the
"Additional Statement") is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated September 26, 2000 (the
"Prospectus"). Copies of the Prospectus may be obtained without charge from the
The Northern Trust Company (the "Transfer Agent") by writing to the Northern
Funds Center, P.O. Box 75986, Chicago, Illinois 60675-5986 or by calling (800)
595-9111. Capitalized terms not otherwise defined have the same meaning as in
the Prospectus.
----------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
An investment in the 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 the Fund involves investment risks,
including possible loss of principal.
<PAGE>
INDEX
PAGE
ADDITIONAL INVESTMENT INFORMATION.....................................1
CLASSIFICATION AND HISTORY............................................1
INVESTMENT OBJECTIVE AND POLICIES.....................................1
INVESTMENT RESTRICTIONS..............................................16
ADDITIONAL TRUST INFORMATION.........................................18
TRUSTEES AND OFFICERS................................................18
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN.....................27
CO-ADMINISTRATORS AND DISTRIBUTOR....................................29
SERVICE ORGANIZATIONS................................................31
COUNSEL AND AUDITORS.................................................31
IN-KIND PURCHASES AND REDEMPTIONS....................................31
AUTOMATIC INVESTING PLAN.............................................32
DIRECTED REINVESTMENTS...............................................32
REDEMPTIONS AND EXCHANGES............................................32
RETIREMENT PLANS.....................................................33
EXPENSES............................................................ 33
General Information..................................................35
NET ASSET VALUE......................................................36
TAXES................................................................37
FEDERAL - GENERAL INFORMATION........................................37
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS............................38
DESCRIPTION OF SHARES................................................38
OTHER INFORMATION....................................................43
APPENDIX A..........................................................A-1
APPENDIX B..........................................................B-1
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ADDITIONAL INVESTMENT INFORMATION
CLASSIFICATION AND HISTORY
The Trust is an open-end, management investment company. The Fund is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund is a series of the Trust that was formed as a
Delaware business trust on February 7, 2000 under an Agreement and Declaration
of Trust (the "Trust Agreement").
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective, strategies and
risks of the Fund as set forth in the Prospectus. The investment objective of
the Fund may be changed without the vote of the majority of the Fund's
outstanding shares. Except as expressly noted below, the Fund's investment
policies may be changed without shareholder approval. In addition to the
instruments discussed below and in the Prospectus, the Fund may purchase other
types of financial instruments, however designated, whose investment and credit
quality characteristics are determined by The Northern Trust Company ("Northern"
or the "Investment Adviser") to be substantially similar to those of any other
investment otherwise permitted by the Fund's investment policies.
GROWTH OPPORTUNITIES FUND seeks long term capital appreciation by
investing primarily in equity securities of companies which the
management team believes exhibit favorable growth characteristics.
Any income received is incidental to this goal.
AMERICAN DEPOSITORY RECEIPTS. The Fund may invest in ADRs. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying foreign securities and are denominated in U.S.
dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangement with the issuer.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Fund may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other financial
assets. Asset-backed securities represent interests in "pools" of assets in
which payments of both interest and principal on the securities are made
periodically, thus in effect "passing through" such payments made by the
individual borrowers on the assets that underlie the securities, net of any fees
paid to the issuer or guarantor of the securities. The average life of
asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
If an asset-backed security is purchased at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if an asset-backed security is
purchased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity.
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 Fund 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
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various CMO classes may be structured in a variety of ways. The Fund will not
purchase "residual" CMO interests, which normally exhibit greater price
volatility.
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 the Government National Mortgage Association ("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 the Federal National Mortgage Association ("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 by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
BANK AND DEPOSIT NOTES. Bank notes 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.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Fund is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by, 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 Fund to receive favorable tax treatment. The Fund
had not commenced operations during the fiscal year ended March 31, 2000.
The Fund is not restricted by policy with regard to portfolio turnover
and will make changes in its investment portfolio from time to time as business
and economic conditions as well as market prices may dictate.
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COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT AND
TIME DEPOSITS. Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies. 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.
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. 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.
The Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations 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.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
In selecting convertible securities, the Investment Adviser will
consider, among other factors: an evaluation of the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Fund's portfolio as to issuers; and whether
the securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in 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
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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. The Fund will generally reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on the Fund of any single investment, it does not reduce the
overall risk of investing in lower quality securities.
EQUITY SWAPS. The Fund may enter into equity swap contracts to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Fund may agree to pay to the
counterparty the amount, if any, by which that notional amount would have
decreased in value had it been invested in the stocks. Therefore, the return to
the Fund on any equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
The Fund will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Payments may be
made at the conclusion of an equity swap contract or periodically during its
term. Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that the Fund is contractually obligated to make. If
the other party to an equity swap defaults, the Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Fund's potential
exposure, the Trust and its Investment Adviser believe that transactions do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to the Fund's borrowing restrictions.
The Fund will not enter into any equity swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either A, or A-1 or better by S&P or Fitch, or A or P-1 or better
by Moody's. If there is a default by the other party to such a transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Adviser is incorrect in
their forecasts of market values, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
EUROPEAN DEPOSITORY RECEIPTS ("EDRS"). The Fund may also invest in EDRs
and Global Depository Receipts ("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 Fund is authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather may allow the Fund to establish a rate of
exchange for a future point in time.
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When entering into a contract for the purchase or sale of a security,
the Fund may enter into a forward foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
In addition, when the Investment Adviser anticipates that a particular
foreign currency may decline substantially relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the securities held by the Fund create a
short position in a foreign currency, the Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. The Fund's net long and short foreign currency exposure will not
exceed its total asset value. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
The Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
Liquid assets equal to the amount of the 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 the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price that is (i) no higher than the Fund's price to sell the
currency or (ii) greater than the Fund's price to sell the currency provided the
Fund segregates liquid assets in the amount of the difference. A forward
contract to buy a foreign currency is "covered" if the Fund holds a forward
contract (or put option) permitting the Fund to sell the same currency at a
price that is (i) as high as or higher than the Fund's price to buy the currency
or (ii) lower than the Fund's price to buy the currency provided the Fund
segregates liquid assets in the amount of the difference.
FOREIGN SECURITIES. The Fund may invest a portion of its assets in such
securities, including eurodollar convertible securities, which are fixed income
securities that are issued in U.S. dollars outside the United States and are
convertible into or exchangeable for equity securities of the same or a
different issuer.
Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded outside
the United States and in investments denominated in foreign currencies. Market
risk involves the possibility that stock prices will decline over short or even
extended periods. The stock markets tend to be cyclical, with periods of
generally rising prices and periods of generally declining prices. These cycles
will affect the value of the Fund that invests in foreign stocks. The holdings
of the Fund that invests in fixed income securities will be sensitive to changes
in interest rates and the interest rate environment. Generally, the prices of
bonds and debt securities fluctuate inversely with interest rate changes. In
addition, the performance of investments in securities denominated in a foreign
currency will depend on the strength of the foreign currency against the U.S.
dollar and the interest rate environment in the country issuing the currency.
Absent other events which could otherwise affect the value of a foreign security
(such as a change in the political climate or an issuer's credit quality),
appreciation in the value of the foreign currency generally can be expected to
increase the value of a foreign currency-denominated security in terms of U.S.
dollars. A rise in foreign interest rates or decline in the value of the foreign
currency relative to the U.S. dollar generally can be expected to depress the
value of a foreign currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the
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<PAGE>
possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
The Fund may invest in foreign debt, including the securities of
foreign governments. Several risks exist concerning such investments, including
the risk that foreign governments may default on their obligations, may not
respect the integrity of such debt, may attempt to renegotiate the debt at a
lower rate, and may not honor investments by United States entities or citizens.
In addition, the Fund may invest its assets in countries with emerging
economies or securities markets. These countries are located in the Asia-Pacific
region, the Middle East, Eastern Europe, Latin America 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. In general, the securities markets of these countries are
less liquid, subject to greater price volatility, have smaller market
capitalizations and have problems with securities registration and custody. As a
result, the risks presented by investments in these countries are heightened.
Additionally, settlement procedures in emerging countries are frequently less
developed and reliable than those in the United States and may involve the
Fund's delivery of securities before receipt of payment for their sale.
Settlement or registration problems may make it more difficult for the 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.
Unanticipated political, economic or social developments may affect the
value of the Fund's investment in emerging market countries and the availability
to the Fund of additional investments in these 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.
The small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries illiquid and more volatile than
investments in Japan or most Western European countries, and the Fund may be
required to establish special custodial or other arrangements before making
certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers.
Although the Fund may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, the Fund's net asset value to
fluctuate as well. Currency exchange rates can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. To the extent that the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, are
denominated in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries. The Fund is also subject to the possible imposition of exchange
control regulations or freezes on the convertibility or currency.
Dividends and interest payable on the Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may reduce the net return to the shareholders. See "Taxes."
To the extent consistent with its investment objective, the Fund may
also invest in obligations of 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.
Countries in which the Fund may invest (to the extent permitted by its
investment policies) include, but are not limited to: Argentina, Australia,
Austria, Belgium, Brazil, Canada, Chile, Colombia, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia, Ireland,
Israel, Italy, Japan, Luxembourg,
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Malaysia, Mexico, the Netherlands, New Zealand, Norway, Peru, the Philippines,
Poland, Portugal, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela.
The end of the Cold War, the reunification of Germany, the accession of
new Western European members to the European Economic and Monetary Union and the
aspirations of Eastern European states to join and other political and social
events in Europe have caused considerable economic, social and political
dislocation. In addition, events in the Japanese economy, as well as social and
political developments there have affected Japanese securities and currency
markets, and the relationship of the Japanese yen with other currencies and with
the U.S. dollar. Future political, economic and social developments in Japan and
in the Asia/Pacific regional context can be expected to produce continuing
effects on securities and currency markets.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. The Fund may realize a capital
gain or loss in connection with these transactions.
When the Fund purchases securities on a when-issued, delayed-delivery
or forward commitment basis, the Fund will segregate liquid assets having a
value (determined daily) at least equal to the amount of the Fund's purchase
commitments until three days prior to the settlement date, or will otherwise
cover its position. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining the Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
futures contracts and may purchase and sell call and put options on futures
contracts for hedging purposes, for speculative purposes (to seek to increase
total return), or for liquidity management purposes. When used as a hedge, the
Fund may sell a futures contract in order to offset a decrease in the market
value of its portfolio securities that might otherwise result from a market
decline or currency exchange fluctuations. The Fund may do so either to hedge
the value of its portfolio of securities as whole, or to protect against
declines, occurring prior to sales of securities, in the value of the securities
to be sold. Conversely, the Fund may purchase a futures contract as a hedge in
anticipation of purchases of securities. In addition, the Fund may utilize
futures contracts in anticipation of changes in the composition of its portfolio
holdings.
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, persons who trade foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC")
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided them by the National Futures Association or any
domestic futures exchange. In particular, the Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
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in the foreign exchange rate between the time an order is placed and the time it
is liquidated, offset or exercised. For a detailed description of futures
contracts and related options, see Appendix B to this Additional Statement.
In connection with the Fund's position in a futures contract or related
option, the Fund will segregate liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
The Trust intends to comply with the regulations of the CFTC exempting
the Fund from registration as a "commodity pool operator."
INTEREST RATE SWAPS, CURRENCY SWAPS, TOTAL RATE OF RETURN SWAPS, CREDIT
SWAPS, INTEREST RATE FLOORS AND CAPS AND CURRENCY SWAPS. The Fund may enter into
swap transactions and transactions involving interest rate floors, caps and
collars for hedging purposes or to seek to increase total return. These
instruments are privately negotiated over-the-counter derivative products. A
great deal of flexibility is possible in the way these instruments are
structured. Interest rate swaps involve the exchange by the 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. An interest rate collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of interest rates. Total
rate of return swaps are contracts that obligate a party to pay or receive
interest in exchange for the payment by the other party of the total return
generated by a security, a basket of securities, an index or an index component.
Credit swaps are contracts involving the receipt of floating or fixed rate
payments in exchange for assuming potential credit losses of an underlying
security. Credit swaps give one party to a transaction the right to dispose of
or acquire an asset (or group of assets), or the right to receive or make a
payment from the other party, upon the occurrence of specific credit events. The
Fund may also enter into currency swaps, which involve the exchange of the
rights of the Fund and another party to make or receive payments in specific
currencies.
Some transactions, such as interest rate swaps and total rate of return
swaps are entered into on a net basis; i.e., 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. If the other party to such a transaction defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive, if any. In contrast, other transactions
involve the payment of the gross amount owed. For example, currency swaps
usually involve the delivery of the entire principal amount of one designated
currency in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations. To the extent
that the amount payable by the Fund under a swap or an interest rate floor, cap
or collar is covered by segregated cash or liquid assets, the Fund and its
Investment Adviser believe that transactions do not constitute senior securities
under the 1940 Act and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions.
The Fund will not enter into a currency, total rate of return, credit
or interest rate swap or interest rate floor, cap or collar transaction unless
the unsecured commercial paper, senior debt or the claims-paying ability of the
other party thereto is rated either A or A-l or better by Standard & Poor's
Ratings Group, Inc. ("S&P") or Fitch IBCA ("Fitch"), or A or P-1 or better by
Moody's Investors Service, Inc. ("Moody's") or, if unrated by such rating
organization, is determined to be of comparable quality by the Investment
Adviser. If there is a default by the other party to such transaction, the 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.
The use of interest rate, total rate of return, credit and currency
swaps, as well as interest rate caps, floors and collars, is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Adviser is incorrect in its forecasts of market values, interest
rates and currency exchange rates, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
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INVESTMENT COMPANIES. With respect to the investments of the Fund 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 the
Fund, the Trust 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 the 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
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 Fund
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.
If required by the 1940 Act, the Fund expects to vote the shares of
other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
The Fund may invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policy and restrictions as the Fund. However, the Fund
currently intends to limit its investments in securities issued by other
investment companies to the extent described above. The Fund may adhere to more
restrictive limitations with respect to its investments in securities issued by
other investment companies if required by the Securities and Exchange Commission
(the "SEC") or deemed to be in the best interests of the Trust.
As noted in the Prospectus, the Fund may invest in World Equity
Benchmark Shares ("WEBS"), Standard & Poor's Depository Receipts ("SPDRs") and
similar securities of other investment companies, subject to the restrictions
set forth above.
WEBS are shares of an investment company that invests substantially all
of its assets in securities included in the Morgan Stanley Capital International
Index ("MSCI") indices for specified countries. WEBS are listed on the American
Stock Exchange (the "AMEX"), and were initially offered to the public in 1996.
The market prices of WEBS are expected to fluctuate in accordance with both
changes in the net asset values of their underlying indices and supply and
demand of WEBS on the AMEX. To date WEBS have traded at relatively modest
discounts and premiums to their net asset values. However, WEBS have a limited
operating history, and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the AMEX
necessary to maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting WEBS
should occur in the future, the liquidity and value of the Fund's shares could
also be substantially and adversely affected, and the Fund's ability to provide
investment results approximating the performance of securities in the Morgan
Stanley Capital International Europe, Australia and Far East Index ("MSCI EAFE")
index could be impaired. If such disruptions were to occur, the Fund could be
required to reconsider the use of WEBS as part of its investment strategy.
SPDRs are interests in a unit investment trust ("UIT") that may be
obtained from the UIT or purchased in the secondary market (SPDRs are listed on
the AMEX). The UIT will issue SPDRs in aggregations know as "Creation Units" in
exchange for a "Fund Deposit" consisting of (i) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
S&P 500 Index, (ii) a cash payment equal to a pro rata portion of the dividends
accrued on the UIT's portfolio securities since the last dividend payment by the
UIT, net of expenses and liabilities, and (iii) a cash payment or credit
("Balancing Amount") designed to equalize the net asset value of the S&P 500
Index and the net asset value of a Fund Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Fund Deposit required of
an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in
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the markets for the securities underlying SPDRs purchased or sold by the Fund
could result in losses on SPDRs. Trading in SPDRs involves risks similar to
those risks involved in the writing of options on securities.
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 Fund will not engage in selling securities short. The
Fund may, however, make short sales against the box although the Fund has no
current intention to do so in the coming year. "Selling short against the box"
involves selling a security that the Fund owns for delivery at a specified date
in the future.
MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage "dollar rolls"
in which the Fund sells securities for delivery in the future (generally within
30 days) and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, the Fund loses the right to
receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of the Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the Fund. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid assets, as permitted by applicable law, in an
amount equal to its forward purchase price.
For financial reporting and tax purposes, the Fund treats mortgage
dollar rolls as two separate transaction: one involving the purchase of a
security and a separate transaction involving a sale. The Fund does not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
Mortgage dollar rolls involve certain risks including the following. If
the broker-dealer to whom the Fund sells the security becomes insolvent, the
Fund's right to purchase or repurchase the mortgage-related securities subject
to the mortgage dollar roll may be restricted and the instrument which the Fund
is required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Investment Adviser's ability to manage the Fund's interest rate and mortgage
prepayments exposure. For these reasons, there is no assurance that mortgage
dollar rolls can be successfully employed.
OPTIONS. The Fund may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, foreign and domestic securities indices, financial instruments,
foreign currencies or the yield differential between two securities ("yield
curve options"), and may or may not be listed on a domestic or foreign
securities exchange and may or may not be issued by the Options Clearing
Corporation. A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price prior to the expiration of the option,
regardless of the market price of the security or currency. 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 or currency. In
contrast to an option on a particular security, options on an index provide the
holder with the right to make or receive a cash settlement upon exercise of the
option. The amount of this settlement will be equal to 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.
Options trading is a highly specialized activity which entails greater
than ordinary investment risk. Options may be more volatile than the underlying
instruments and, therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves.
The Fund will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if the
Fund owns the security or currency 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
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call option on an index, the option is covered if the Fund maintains with its
custodian securities comprising the index or liquid assets equal to the contract
value. A call option is also covered if the Fund holds a call on the same
instrument or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the Fund
segregates liquid assets in the amount of the difference. The Fund will write
put options only if they are "secured" by segregated liquid assets in an amount
not less than the exercise price of the option at all times during the option
period.
With respect to yield curve options, a call (or put) option is covered
if the 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.
The Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase a security or currency 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 security or currency, 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 security.
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 security or currency (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 security or currency is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline or appreciation in the instrument during such period.
When the Fund purchases an option, the premium paid by it is recorded
as an asset of the Fund. When the Fund writes an option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If the Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange (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
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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.
REAL ESTATE INVESTMENT TRUSTS. The 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.
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the 1940
Act. Although the securities subject to a repurchase agreement may bear
maturities exceeding one year, settlement for the repurchase agreement will
never be more than one year after the Fund's acquisition of the securities and
normally will be within a shorter period of time. Securities subject to
repurchase agreements are held either by the Trust's custodian or subcustodian
(if any), or in the Federal Reserve/Treasury Book-Entry System. The seller under
a repurchase agreement will be required to maintain the value of the securities
subject to the agreement in an amount exceeding the repurchase price (including
accrued interest). Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Fund may use the proceeds of reverse repurchase
agreements to purchase other securities either maturing, or under an agreement
to resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
repurchase price. The Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will segregate liquid assets in an amount at least equal
to the market value of the securities, plus accrued interest, subject to the
agreement.
RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Adviser
believes that smaller companies can provide greater growth potential than
larger, more mature firms, investing in the securities of such companies also
involves greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks and stocks of recently organized companies have been more
volatile in price than the larger capitalization stocks included in the S&P 500
Index. Among the reasons for this greater price volatility are the lower degree
of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions. For example,
these companies are associated with higher investment risk due to the greater
business risks of small size and limited product lines, markets, distribution
channels and financial and managerial resources.
The values of small company stocks will frequently fluctuate
independently of the values of larger company stocks. Small company stocks may
decline in price as large company stock prices rise, or rise in price as large
company stock prices decline. You should, therefore, expect that the net asset
value of the Fund's shares will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.
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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 the Fund's net asset value per share.
There remains some uncertainty about the performance level of the
market for lower quality securities under adverse market and economic
environments. An economic downturn or increase in interest rates could have a
negative impact on both the markets for lower quality securities (resulting in a
greater number of bond defaults) and the value of lower quality securities held
in a portfolio of investments.
The economy and interest rates can affect lower quality securities
differently than other securities. For example, the prices of lower quality
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher quality investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
The market value of lower quality securities tends to reflect
individual corporate developments to a greater extent than that of higher
quality securities which react primarily to fluctuations in the general level of
interest rates. Lower quality securities are often issued in connection with a
corporate reorganization or restructuring or as a part of a merger, acquisition,
takeover or similar event. They are also issued by less established companies
seeking to expand. Such issuers are often highly leveraged, may not have
available to them more traditional methods of financing and are generally less
able than more established or less leveraged entities to make scheduled payments
of principal and interest in the event of adverse economic developments or
business conditions.
A holder's risk of loss from default is significantly greater for lower
quality securities than is the case for holders of other debt securities because
such securities are generally unsecured and are often subordinated to the rights
of other creditors of the issuers of such securities. Investment by the Fund in
defaulted securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the Fund of its initial investment
and any anticipated income or appreciation will be uncertain. The Fund may also
incur additional expenses in seeking recovery on defaulted securities. If an
issuer of a security defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty would likely result in
increased volatility for the market prices of lower quality securities as well
as the 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 the Fund's ability to dispose of
particular portfolio investments. A less developed secondary market may also
make it more difficult for the Fund to obtain precise valuations of the high
yield securities in its portfolio.
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 the Fund, especially in a thinly traded market.
Illiquid or restricted securities held by the Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
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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 the Fund holds. Because of this, the
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.
SECURITIES LENDING. Collateral for loans of portfolio securities made
by the Fund may consist of cash, cash equivalents, securities issued or
guaranteed by the U.S. Government or its agencies or irrevocable bank letters of
credit (or any combination thereof). The borrower of securities will be required
to maintain the market value of the collateral at not less than the market value
of the loaned securities, and such value will be monitored on a daily basis.
When the Fund lends its securities, it continues to receive dividends and
interest on the securities loaned and may simultaneously earn interest on the
investment of the cash collateral. Although voting rights, or rights to consent,
attendant to securities on loan pass to the borrower, such loans will be called
so that the securities may be voted by the Fund if a material event affecting
the investment is to occur.
STRIPPED SECURITIES. The Treasury Department has facilitated transfers
of ownership of zero coupon securities by accounting separately for the
beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." The Fund may purchase securities registered in the STRIPS program.
Under the STRIPS program, the Fund is able to have 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 Fund may acquire U.S. Government obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
purposes. The Trust 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 Fund, 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, the 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.
SUPRANATIONAL BANK OBLIGATIONS. The Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
-14-
<PAGE>
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development (the "World Bank")). 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.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations that may be acquired by the Fund include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, FNMA, GNMA, General Services
Administration, Central Bank for Cooperatives, FHLMC, Federal Intermediate
Credit Banks and Maritime Administration.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities are also deemed to include (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any agency or
instrumentality thereof, and (ii) participations in loans made to foreign
government; or their agencies that are so guaranteed.
To the extent consistent with its respective investment objective, the
Fund may invest in a variety of U.S. Treasury obligations and obligations issued
by or guaranteed by the U.S. Government or its agencies and instrumentalities.
Not all U.S. Government obligations carry the same credit support. 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 in relation to a generally recognized index
rate. These instruments include long-term variable and floating rate bonds
(sometimes referred to as "Put Bonds") where the Fund obtains at the time of
purchase the right to put the bond back to the issuer or a third party at par at
a specified date and leveraged inverse floating rate instruments ("inverse
floaters").
With respect to the variable and floating rate instruments that may be
acquired by the Fund, the Investment Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
instruments and, if the instruments are subject to demand features, will monitor
their financial status and ability to meet payment on demand. In determining
weighted average portfolio maturity, an instrument may, subject to applicable
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 the Fund can recover payment of principal as specified in the instrument.
Where necessary to ensure that a variable or floating rate instrument meets the
Fund's quality requirements, 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
Fund 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 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 Fund may deem the maturity of variable and
floating rate instruments to be less than their stated maturities based on their
variable and floating rate features and/or their put features. Unrated variable
and floating rate instruments will be determined by the Investment Adviser to be
of comparable quality at the time of purchase to rated instruments which may be
purchased by the Fund.
Variable and floating rate instruments including inverse floaters held
by the Fund will be subject to the Fund's limitation on illiquid investments,
absent a reliable trading market, when the Fund may not demand payment of the
principal amount within seven days. 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 Fund is not entitled to exercise its demand rights. As a result, the Fund
could suffer a loss with respect to these instruments.
-15-
<PAGE>
WARRANTS. The Fund may invest in 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 the Fund could lose the purchase value of a warrant if
the right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which the Fund invests, are dependent on a variety
of factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, Fitch and Thomson BankWatch, Inc. ("TBW") represent their
respective opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. For a more complete discussion of ratings, see
Appendix A to this Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held
by the Fund undergoes a rating revision, the Fund may continue to hold the
security if the Investment Adviser determines such retention is warranted.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with its investment objective, the Fund may invest in zero coupon
bonds, capital appreciation bonds and pay-in-kind ("PIK") securities. Zero
coupon and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The original
issue discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. These securities also may take the form
of debt securities that have been stripped of their unmatured interest coupons,
the coupons themselves or receipts or certificates representing interests in
such stripped debt obligations or coupons. The market prices of zero coupon
bonds, capital appreciation bonds and PIK securities generally are more volatile
than the market prices of interest bearing securities and are likely to respond
to a greater degree to changes in interest rates than interest bearing
securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide
the issuer with the option of paying interest or dividends on such obligations
in cash or in the form of additional securities rather than cash. Similar to
zero coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, the 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, the 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 Fund nonetheless is 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, the Fund may be required to liquidate other portfolio securities to
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to the Fund only by a vote of
the holders of a majority of the Fund's outstanding shares.
-16-
<PAGE>
The Fund may not:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of
the Fund to the extent permitted by law.
(2) Purchase or sell real estate or real estate limited partnerships, but
this restriction shall not prevent the Fund from investing directly or
indirectly in portfolio instruments secured by real estate or
interests therein or acquiring securities of real estate investment
trusts or other issuers that deal in real estate.
(3) Invest in commodities or commodity contracts, except that the Fund may
invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control.
(5) Act as underwriter of securities, except as the Fund may be deemed to
be an underwriter under the Securities Act of 1933 (the "1933 Act") in
connection with the purchase and sale of portfolio instruments in
accordance with its investment objective and portfolio management
policies.
(6) Purchase securities (other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations) if such purchase would
cause 25% or more in the aggregate of the market value of the total
assets of the Fund to be invested in the securities of one or more
issuers having their principal business activities in the same
industry. For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal
credit finance companies and business credit finance companies are
deemed to be separate industries; and wholly-owned finance companies
are considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents.
(7) Borrow money, except that to the extent permitted by applicable law
(a) the Fund may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts
up to 33 1/3% of its total assets (including the amount borrowed) or
such other percentage permitted by law, (b) the Fund may borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, and (d) the
Fund may purchase securities on margin. If due to market fluctuations
or other reasons the Fund's borrowings exceed the limitations stated
above, the Trust will promptly reduce the borrowings of the Fund in
accordance with the 1940 Act. In addition, as a matter of fundamental
policy, the Fund will not issue senior securities to the extent such
issuance would violate applicable law.
(8) Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.
(9) Notwithstanding any of the Fund's other fundamental investment
restrictions (including, without limitation, those restrictions
relating to issuer diversification, industry concentration and
control), the Fund may: (a) purchase securities of other investment
companies to the full extent permitted under Section 12 or any other
provision of the 1940 Act (or any successor provision thereto) or
under any regulation or order of the SEC; and (b) invest all or
substantially all of its assets in a single open-end investment
company or series thereof with substantially the same investment
objective, policies and fundamental restrictions as the Fund.
-17-
<PAGE>
For the purposes of Investment Restrictions (1) and (7) above, the Fund
expects that it would be required to file an exemptive application with the SEC
and receive the SEC's approval of that application prior to entering into
lending or borrowing arrangements with affiliates. As of the date of this
Additional Statement, the Fund had not filed such an application.
Except as otherwise provided in Investment Restriction (6), for the
purpose of such restriction in determining industry classification with respect
to the Fund, the Trust intends to use the industry classification titles in the
Bloomberg Industry Group Classification. Securities held in escrow or separate
accounts in connection with the Fund's investment practices described in this
Additional Statement and in the Prospectus are not deemed to be mortgaged,
pledged or hypothecated for purposes of the foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the Fund's total assets.
Each Investment Restriction which involves a maximum percentage (other
than the restriction set forth above in Investment Restriction (7)) 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 (7), the
Fund will, within three days thereafter (not including Sundays and holidays),
reduce the amount of its borrowings to an extent that the net asset coverage of
such borrowings shall conform to such limits.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
The business and affairs of the Trust and the Fund are managed under
the direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a management
4200 Commerce Court advisory services and private investment company)
Suite 300 since January 1996; Chairman, Hussman International,
Lisle, IL 60532 Inc. (a refrigeration company) since 1998; Chairman
and CEO of NICOR Inc. (a diversified public utility
holding company) from 1986 to 1995, and President,
1992 to 1993; Chairman, Federal Reserve Bank of
Chicago from 1992 to 1995; and Deputy Chairman from
1995 to 1996. Director: Whitman Corporation (a
diversified holding company); Kmart Corporation (a
retailing company); Ryerson Tull, Inc. (a metals
distribution company) and University of Illinois
Foundation. Trustee: Northern Institutional Funds.
-18-
<PAGE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Edward J. Condon, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a financial
Sears Tower, Suite 9650 advisor) since July 1993; Vice President and
233 S. Wacker Drive Treasurer of Sears, Roebuck and Co. (a retail
Chicago, IL 60606 corporation) from February 1989 to July 1993; Member
of Advisory Board of Real-Time USA, Inc. (a software
development company); Member of the Board of Managers
of The Liberty Hampshire Company, LLC (a receivable
securitization company); Vice Chairman and Director
of Energenics L.L.C. (a waste to energy recycling
company). Director: University Eldercare, Inc. (an
Alzheimer's disease research and treatment company);
Financial Pacific Company (a small business leasing
company). Trustee: Dominican University. Trustee:
Northern Institutional Funds.
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a financial
400 Skokie Blvd., Suite 300 services company) from 1985 to 1996; Vice Chairman
Northbrook, IL 60062 and Director of G.D. Searle & Co. (manufacture and
sale of food products and pharmaceuticals) from 1977
to 1985 and President of G.D. Searle & Co. prior
thereto. Trustee: Northern Institutional Funds.
Mr. William J. Dolan, Jr. 68 Trustee Partner of Arthur Andersen & Co. S.C. (an accounting
1534 Basswood Circle firm) from 1966 to 1989. Financial Consultant, Ernst
Glenview, IL 60025 & Young LLP (an accounting firm) from 1992 to 1993
and 1997. Trustee: Northern Institutional Funds.
Mr. John W. English 67 Trustee Private Investor; Vice President and Chief Investment
50-H New England Ave. Officer of The Ford Foundation (a charitable trust)
P.O. Box 640 from 1981 to 1993. Director: the University of Iowa
Summit, NJ 07902-0640 Foundation, the Blanton-Peale Institutes of Religion
and Health, and the Community Foundation of Sarasota
County. Former Director: the Duke Management Company
(manager of the Duke University endowment fund) and
the John Ringling Centre Foundation (a non-profit
historical preservation organization). Trustee: The
China Fund, Inc., Select Sector SPDR Trust; WM Funds;
American Red Cross in Greater New York; Mote Marine
Laboratory (a non-profit marine research facility);
and United Board for Christian Higher Education in
Asia. Trustee: Northern Institutional Funds.
-19-
<PAGE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Raymond E. George, Jr. * 70 Trustee Senior Vice President and Senior Fiduciary Officer of
703 Prospect Avenue The Northern Trust Company from 1990 to 1993.
Winnetka, IL 60093 Trustee: Northern Institutional Funds.
Ms. Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an
420 N. Wabash Avenue Illinois not-for-profit corporation) from 1993 to
Suite 204 present; Director of Business Transformation from
Chicago, IL 60611 1992 to 1993, and Midwestern Director of Marketing
from 1988 to 1992, IBM (a technology company);
Director: MBIA Insurance Corporation of Illinois (a
municipal bond insurance company). Trustee: Northern
Institutional Funds.
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation (philanthropic
Suite 2222 organization) since November 1997; Vice Chairman and
20 South Clark Street Chief Administrative Officer of Sara Lee Corporation
Chicago, IL 60603 (a consumer product company) from November 1994 to
October 1997; Vice Chairman and Chief Financial and
Administrative Officer of Sara Lee Corporation (a
consumer product company) from July 1993 to November
1994. Director: Payless Shoe Source, Inc., (a retail
shoe store business); True North Communications, Inc.
(a global advertising and communications holding
company); American General Corporation (a diversified
financial services company); GATX Corporation (a
railroad holding company); Bassett Furniture
Industries, Inc. (a furniture manufacturer) Trustee:
Northern Institutional Funds.
Mary Jacobs Skinner, Esq.*** 43 Trustee Partner in the law firm of Sidley & Austin. Trustee:
One First National Plaza Northern Institutional Funds.
Chicago, IL 60603
Mr. William H. Springer 71 Chairman and Vice Chairman of Ameritech (a telecommunications
701 Morningside Drive Trustee holding company) from February 1987 to August 1992;
Lake Forest, IL 60045 Vice Chairman, Chief Financial and Administrative
Officer of Ameritech prior to 1987. Director:
Walgreen Co. (a retail drug store business); Baker,
Fentress & Co. (a closed-end, non-diversified
management investment company). Trustee: Goldman
Sachs Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Institutional Funds.
-20-
<PAGE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Richard P. Strubel 61 Trustee President and Chief Operating Officer, UNext.com (a
Unext.com provider of educational services via the internet)
500 Lake Cook Road since 1999; Managing Director of Tandem Partners,
Suite 150 Inc. (a privately held management services firm) from
Deerfield, IL 60015-5609 1990 to 1999; President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing firm)
from 1984 to 1994. Director: Gildan Activewear, Inc.
(an athletic clothing marketing and manufacturing
company); Children's Memorial Medical Center.
Trustee: University of Chicago; Goldman Sachs Trust;
Goldman Sachs Variable Insurance Trust. Trustee:
Northern Institutional Funds.
Mr. Stephen Timbers**** 56 Trustee President of Northern Trust Global Investments, a
50 South LaSalle Street, B-3 division of Northern Trust Corporation and Executive
Chicago, IL 60675 Vice President, The Northern Trust Company since
1998; President, Chief Executive Officer and Director
of Zurich Kemper Investments (a financial services
company) from 1996 to 1998; President, Chief Operating
Officer and Director of Kemper Corporation (a
financial services company) from 1992 to 1996;
President and Director of Kemper Funds (a registered
investment company) from 1990 to 1998. Director: LTV
Corporation (a steel producer) and Northern Trust
Investments, Inc. ("NTI") (previously known as
Northern Trust Quantitative Advisors, Inc.) Trustee:
Northern Institutional Funds.
Mr. Archibald E. King 42 Vice President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company (since 1979).
Chicago, IL 60675
Mr. Lloyd A. Wennlund 42 President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company, President of Northern Trust
Chicago, IL 60675 Securities, Inc., and Managing Executive, Mutual
Funds for Northern Trust Global Investments (since
1989).
Mr. Brian R. Curran 33 Vice Director of Fund Administration at PFPC (formerly
4400 Computer Drive President and FDISG) (since 1997); Director of Fund Administration
Westborough, MA 01581 Treasurer at State Street Bank & Trust Company (February 1997
to October 1997); Senior Auditor at Price Waterhouse
LLP (an accounting firm) (February 1994 to February
1997).
-21-
<PAGE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Stephen C. Harris 30 Assistant Client Treasury Manager of Mutual Fund A dministration
4400 Computer Drive Treasurer at PFPC (formerly FDISG) (since 1998); Fund
Westborough, MA 01581 Administrator at Chase Global Fund Services Company
("Chase") (1996 through 1998); Senior Mutual Fund
Accountant at Chase (1994 through 1996).
Ms. Suzanne E. Anderson 28 Assistant Client Treasury Manager of Mutual Fund Administration
4400 Computer Drive Treasurer at PFPC (since August 1998); Manager of Fund
Westborough, MA 01581 Administration at State Street Bank & Trust Company
(October 1996 to August 1998); Fund Administrator at
State Street Bank & Trust Company (October 1995 to
October 1996); Mutual Fund Accountant at The Boston
Company (prior thereto).
Jeffrey A. Dalke, Esq. 50 Secretary Partner in the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard, Esq. 52 Assistant Vice President at PFPC (formerly FDISG) (since 1998);
101 Federal Street Secretary Attorney Consultant for Fidelity Management &
Boston, MA 02110 Research Co. (a financial service company), Investors
Bank & Trust Company (a financial service provider) and
FDISG (September 1994 to June 1998).
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law
firm provides legal services to Northern Trust Corporation.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust
Corporation and/or Northern and Northern Trust Investments, Inc.
(previously known as Northern Trust Quantitative Advisers, Inc. and
referred to as NTI).
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 the Investment Adviser, PFPC, Northern Funds Distributors, LLC
("NFD") and their respective affiliates. The Trust has been advised by such
Trustees and officers that all such transactions have been and are expected to
be in the ordinary course of business and the terms of such transactions,
including all loans and loan commitments by such persons, have been and are
expected to be substantially the same as the prevailing terms for comparable
transactions for other customers. As a result of the responsibilities assumed by
the Trust's service providers under the Trust's Advisory Agreement, Transfer
Agency Agreement, Custodian Agreement, Foreign Custodian Agreement,
Co-Administration Agreement and Distribution Agreement, the Trust itself
requires no employees.
Each officer holds comparable positions with Northern Institutional
Funds, and certain officers hold comparable positions with certain other
investment companies for which NFD, PFPC or an affiliate thereof is the
administrator and/or distributor.
-22-
<PAGE>
Each Trustee, except Mr. Timbers, earns an annual retainer of $30,000
and the Chairman of the Board earns an annual retainer of $40,000. Each Trustee
earns an additional fee of $1,500 for each meeting attended, plus reimbursement
of expenses incurred as a Trustee.
In addition, the Trustees established an Audit Committee consisting of
three members, including a Chairman of the Committee. The Audit Committee
members are Messrs. Condon, Jr. (chairman), Dolan, Jr. and Strubel. Each member
earns an annual fee of $1,500 and the Chairman earns an annual fee of $3,500.
The Trustees have also established a Nominating Committee consisting of
three members, including a Chairman of the Committee. The Nominating Committee
members are Messrs. Dixon (chairman) and Cline and Ms. Guthman. Each member
earns an annual fee of $1,500 and the Chairman earns an annual fee of $3,500.
The Trustees have also established a Valuation Committee consisting of
four members, including a Chairman of the Committee. The Valuation Committee
members are Messrs. George (chairman), English and Murphy and Ms. Skinner. Each
member earns an annual fee of $1,500 and the Chairman earns an annual fee of
$3,500.
Each Trustee will hold office for an indefinite term until the earliest
of (i) the next meeting of shareholders if any, called for the purpose of
considering the election or re-election of such Trustee and until the election
and qualification of his or her successor, if any, elected at such meeting; (ii)
the date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or shareholders, in accordance with the Trust's Agreement and
Declaration of Trust; or (iii) effective December 31, 2001, in accordance with
the current by-laws of the Trust (which may be changed without shareholder
vote), on the last day of the calendar year of the Trust in which he or she
attains the age of 72 years.
The Trust's officers do not receive fees from the Trust for services in
such capacities. All of the Trust's officers (except Mr. Dalke, Mr. King and Mr.
Wennlund) are employees of PFPC, which receives fees from the Trust for
administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives
fees from the Trust for legal services.
The Northern Trust Company, of which Mr. King and Mr. Wennlund are
officers, receives fees from the Trust as investment adviser, custodian,
transfer agent and co-administrator.
The following tables set forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended March 31,
2000. The following tables do not include the following amounts paid during the
fiscal year ended March 31, 2000: $32,750 to a former Trustee who retired from
the Board in October 1999, $17,500 paid to a former Chairman of the Board who
retired in August 1999 and $35,000 paid to another former Chairman of the Board
who retired in March 2000. Additionally, the tables do not include information
for the Blue Chip 20 Fund, Tax-Exempt Money Market Fund, Large Cap Value Fund,
Growth Opportunities Fund and Global Communications Fund, which did not commence
operations during the fiscal year ended March 31, 2000:
<TABLE>
<CAPTION>
U.S.
Money Government U.S. Government Tax-Exempt Municipal
Market Money Market Select Money Money Money Market
Fund Fund Market Fund MarkeT Fund Fund
------ ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0 $ 0 N/A $ 0
William H. Springer** 420 36 29 N/A 189
Richard G. Cline** 420 37 29 N/A 189
Edward J. Condon, Jr.** 420 37 29 N/A 189
John W. English** 420 37 29 N/A 189
Sandra Polk Guthman** 420 37 29 N/A 189
Richard P. Strubel** 420 37 29 N/A 189
-23-
<PAGE>
Wesley M. Dixon, Jr. 9,798 1,090 936 N/A 4,692
William J. Dolan, Jr. 10,218 1,127 966 N/A 4,881
Raymond E. George, Jr. 9,730 1,072 918 N/A 4,621
Michael E. Murphy 9,798 1,090 936 N/A 4,692
Mary Jacobs Skinner 10,218 1,127 965 N/A 4,881
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
California California
Municipal Intermediate
Money U.S. Short-Intermediate Intermediate Tax-Exempt
Market Fund Government Fund Government Fund Tax-Exempt Fund Fund
----------- --------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 36 29 5 55 6
Richard G. Cline** 36 29 5 55 6
Edward J. Condon, Jr.** 36 29 5 55 6
John W. English** 36 29 5 55 6
Sandra Polk Guthman** 36 29 5 55 6
Richard P. Strubel** 36 29 5 55 6
Wesley M. Dixon, Jr. 972 821 65 1,237 81
William J. Dolan, Jr. 1,008 849 70 1,292 88
Raymond E. George, Jr. 973 817 70 1,251 88
Michael E. Murphy 972 821 65 1,237 81
Mary Jacobs Skinner 1,008 849 70 1,292 88
</TABLE>
<TABLE>
<CAPTION>
Florida
Intermediate Fixed Arizona Global
Tax-Exempt Income Tax-Exempt Tax-Exempt California Fixed
Fund Fund Fund Fund Tax-Exempt Fund Income Fund
------------ ------ ---------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 3 48 43 10 1 1
Richard G. Cline** 3 48 43 10 1 1
Edward J. Condon, Jr.** 3 48 43 10 1 1
John W. English** 3 48 43 10 1 1
Sandra Polk Guthman** 3 48 43 10 1 1
Richard P. Strubel** 3 48 43 10 1 1
Wesley M. Dixon, Jr. 264 1,067 955 65 393 230
William J. Dolan, Jr. 267 1,114 997 70 403 232
Raymond E. George, Jr. 263 1,084 972 70 395 230
Michael E. Murphy 264 1,066 955 65 393 230
Mary Jacobs Skinner 267 1,114 997 70 403 232
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
High Yield Income Stock
High Yield Fixed Income Equity Equity Growth Equity
Municipal Fund Fund Fund Fund Fund
-------------- ------------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 1 8 18 35 81
Richard G. Cline** 1 8 18 35 81
Edward J. Condon, Jr.** 1 8 18 35 81
John W. English** 1 8 18 35 81
Sandra Polk Guthman** 1 8 18 35 81
Richard P. Strubel** 1 8 18 35 81
Wesley M. Dixon, Jr. 224 333 541 802 1,826
William J. Dolan, Jr. 225 340 558 837 1,907
Raymond E. George, Jr. 225 338 544 821 1,840
Michael E. Murphy 224 333 541 802 1,826
Mary Jacobs Skinner 225 340 558 837 1,907
</TABLE>
<TABLE>
<CAPTION>
Small
Select Equity Mid Cap Small Cap Index Small Cap Cap Growth
Fund Growth Fund Fund Value Fund Fund
------------- ----------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 19 20 10 20 3
Richard G. Cline** 19 20 10 20 3
Edward J. Condon, Jr.** 19 20 10 20 3
John W. English** 19 20 10 20 3
Sandra Polk Guthman** 19 20 10 20 3
Richard P. Strubel** 19 20 10 20 3
Wesley M. Dixon, Jr. 617 535 130 753 33
William J. Dolan, Jr. 636 555 140 773 35
Raymond E. George, Jr. 617 551 140 733 35
Michael E. Murphy 617 535 130 753 33
Mary Jacobs Skinner 636 555 140 773 35
</TABLE>
<TABLE>
<CAPTION>
Total
International International Compensation
Growth Equity Select Equity from Fund
Fund Fund Technology Fund Complex*
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Stephen Timbers $ 0 $ 0
William H. Springer** 38 13 73 1,250
Richard G. Cline** 38 13 73 1,250
Edward J. Condon, **Jr. 38 13 73 1,250
John W. English** 38 13 73 1,250
Sandra Polk Guthman** 38 13 73 1,250
Richard P. Strubel** 38 13 73 1,250
Wesley M. Dixon, Jr. 893 483 1,415 31,250
William J. Dolan, Jr. 931 496 1,488 32,500
Raymond E. George, Jr. 906 481 1,465 31,250
Michael E. Murphy 893 483 1,415 31,250
Mary Jacobs Skinner 931 496 1,488 32,500
</TABLE>
* Fund complex includes thirty-three investment portfolios of the Trust
and twenty portfolios of Northern
-26-
<PAGE>
Institutional Funds, a separately registered investment company.
** Became a Trustee of the Trust on March 28, 2000 and only received fees
during the fiscal year ended March 31, 2000 for the March 28, 2000
Special Meeting of the Board of Trustees.
The Trust does not provide pension or retirement benefits to its
Trustees.
The Trust, its Investment Adviser and principal underwriter have
adopted codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940
Act. The Codes of Ethics permit personnel, subject to the Codes of Ethics and
their provisions, to invest in securities, including securities that may be
purchased or held by the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern, a wholly-owned subsidiary of Northern Trust Corporation, a
bank holding company, is one of the nation's leading providers of trust and
investment management services. Northern is one of the strongest banking
organizations in the United States. Northern 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. With respect
to such clients, the Trust is designed to assist (i) defined contribution plan
sponsors and their employees by offering a range of diverse investment options
to help comply with 404(c) regulation and may also provide educational material
to their employees, (ii) employers who provide post-retirement Employees'
Beneficiary Associations ("VEBA") and require investments that respond to the
impact of federal regulations, (iii) insurance companies with the day-to-day
management of univested cash balances as well as with longer-term investment
needs, and (iv) charitable and not-for-profit organizations, such as endowments
and foundations, demanding investment management solutions that balance the
requirement for sufficient current income to meet operating expenses and the
need for capital appreciation to meet future investment objectives. NTI, 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 June
30, 2000, Northern Trust Corporation and its subsidiaries had approximately
$36.8 billion in assets, $22.3 billion in deposits and employed over 9,140
persons. Northern and its affiliates administered in various capacities
(including master trustee, investment manager or custodian) approximately $1.6
trillion of assets as of June 30, 2000, including approximately $333 billion of
assets for which Northern and its affiliates had investment management
responsibilities.
Under the Advisory Agreement with the Trust, the Investment Adviser
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Fund, and also provides certain ancillary services.
The Investment Adviser is also responsible for monitoring and preserving the
records required to be maintained under the regulations of the SEC (with certain
exceptions unrelated to its activities for Northern Funds). In making investment
recommendations for the Fund, investment advisory personnel may not inquire or
take into consideration whether issuers of securities proposed for purchase or
sale for the Fund's accounts are customers of Northern's commercial banking
department. These requirements are designed to prevent investment advisory
personnel for the Fund from knowing which companies have commercial business
with Northern and from purchasing securities where they know the proceeds will
be used to repay loans to the bank.
The Trust's Investment Advisory and Ancillary Services Agreement with
the Investment Adviser (the "Advisory Agreement") has been approved by the Board
of Trustees, including the "non-interested" Trustees, and the initial
shareholder of the Trust. The Advisory Agreement provides that in executing
portfolio transactions and in selecting brokers or dealers (i) with respect to
common and preferred stocks, the Investment Adviser shall use its best judgment
to obtain the best overall terms available, and (ii) with respect to other
securities, the Investment Adviser shall attempt to obtain best net price and
execution. Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
In assessing the best overall terms available for any transaction, the
Investment Adviser is to consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available and in
selecting the broker or dealer to execute a particular transaction, the
Investment Adviser may consider the brokerage and research services provided to
the Fund and/or other accounts over which the Investment Adviser or an affiliate
of the Investment
-27-
<PAGE>
Adviser exercises investment discretion. A broker or dealer providing brokerage
and/or research services may receive a higher commission than another broker or
dealer would receive for the same transaction. These brokerage and research
services may include industry and company analyses, portfolio services,
quantitative data, market information systems and economic and political
consulting and analytical services.
Supplemental research information so received is in addition to, and
not in lieu of, services required to be performed by the Investment Adviser and
does not reduce the advisory fees payable to the Investment Adviser by the Fund.
The Trustees will periodically review the commissions paid by the Fund to
consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits inuring to the Fund. It is possible
that certain of the 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, the Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
Transactions on foreign stock exchanges involve payment for brokerage
commissions which are generally fixed. Over-the-counter issues, including
corporate debt and government securities, are normally traded on a "net" basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. With respect to over-the-counter
transactions, the Investment Adviser will normally deal directly with dealers
who make a market in the instruments involved except in those circumstances
where more favorable prices and execution are available elsewhere. The cost of
foreign and domestic securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Fund 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 Fund will engage in this practice, however, only when the Investment Adviser
believes such practice to be in the Fund's interests.
Northern's investment advisory duties for the Trust 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 the 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 the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect to
other securities. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Investment Adviser in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Fund and other accounts
involved. In some instances, this procedure may adversely affect the size of the
position obtainable for the Fund or the amount of the securities that are able
to be sold for the Fund. To the extent that the execution and price available
from more than one broker or dealer are believed to be comparable, the Agreement
permits the Investment Adviser, at its discretion but subject to applicable law,
to select the executing broker or dealer on the basis of the Investment
Adviser's opinion of the reliability and quality of the broker or dealer.
The Advisory Agreement provides that the Investment Adviser may render
similar services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that the Trust will
indemnify the Investment Adviser 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 Adviser may voluntarily waive a
portion or all of its fees otherwise payable to it with respect to the Fund.
Under its Transfer Agency Agreement with the Trust, Northern has
undertaken, among other things, to perform the following services: (i) answer
shareholder inquiries and respond to requests for information regarding the
Trust; (ii) process purchase and redemption transactions; (iii) establish and
maintain shareholder accounts and subaccounts; (iv) furnish confirmations in
accordance with applicable law, and provide periodic account statements to
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<PAGE>
each shareholder; (v) furnish proxy statements and proxies, annual and
semi-annual financial statements, and dividend, distribution and tax notices to
shareholders; (vi) act as income disbursing agent; and (vii) maintain
appropriate records relating to its services. The Trust may appoint one or more
sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern under the
Transfer Agency Agreement and the assumption by Northern of related expenses,
Northern is entitled to a fee from the Trust, payable monthly, at an annual rate
of .10% of the average daily net asset value of the Fund.
Northern maintains custody of the assets of the Fund pursuant to the
terms of its Custodian Agreement with the Trust. Under this agreement, Northern
(i) holds the Fund's cash and securities, (ii) maintains such cash and
securities in separate accounts in the name of the Fund, (iii) makes receipts
and disbursements of funds on behalf of the Fund, (iv) receives, delivers and
releases securities on behalf of the Fund, (v) collects and receives all income,
principal and other payments in respect of the Fund's investments held by
Northern under the agreement, and (vi) maintains the accounting records of
Northern Funds. Northern may employ one or more subcustodians under the Custody
Agreement, provided that Northern shall, subject to certain monitoring
responsibilities, have no more responsibility or liability to the Trust on
account of any action or omission of any subcustodian so employed than such
subcustodian has to Northern and that the responsibility or liability of the
subcustodian to Northern shall conform to the resolution of the Trustees of the
Trust authorizing the appointment of the particular subcustodian. Northern may
also appoint an agent to carry out such of the provisions of the Custody
Agreement as Northern may from time to time direct.
As compensation for the services rendered to the Fund under the
Custodian Agreement, and the assumption by Northern of certain related expenses,
Northern is entitled to payment from the Fund as follows: (a) a basic custodial
fee of (i) $18,000 annually for the Fund, plus (ii) 1/100th of 1% annually of
the Fund's average daily net assets to the extent they exceed $100 million, plus
(b) a basic accounting fee of (i) $25,000 annually for the Fund, plus (ii)
1/100th of 1% annually of the Fund's average daily net assets to the extent they
exceed $50 million, plus (c) a fixed dollar fee for each trade in portfolio
securities, plus (d) a fixed dollar fee for each time that Northern as Custodian
receives or transmits funds via wire, plus (e) reimbursement of expenses
incurred by Northern 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 may permanently or
temporarily waive all or any portion of any upward adjustment.
Northern's fees under the Custodian Agreement are subject to reduction
based on the Fund's daily uninvested cash balances (if any).
Unless sooner terminated, the Trust's Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement will continue in effect with respect to
the Fund until March 31, 2001, and thereafter for successive 12-month periods,
provided that the continuance is approved at least annually (i) 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 (ii)
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 the Trust (by specified Trustee or shareholder
action) on 60 days' written notice to Northern and by Northern on 60 days'
written notice to the Trust.
In the Advisory Agreement, Northern agrees that the name "Northern" may
be used in connection with the Trust's business on a royalty-free basis.
Northern 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, the Trust will cease
using the name "Northern."
CO-ADMINISTRATORS AND DISTRIBUTOR
Northern and PFPC, 4400 Computer Drive, Westborough, Massachusetts
01581, act as co-administrators for the Fund under a Co-Administration Agreement
with the Trust. Subject to the general supervision of the Trust's Board of
Trustees, Northern and PFPC (the "Co-Administrators") provide supervision of all
aspects of the Trust's non-investment advisory operations and perform various
corporate secretarial, treasury and blue sky services, including but not limited
to: (i) maintaining office facilities and furnishing corporate officers for the
Trust; (ii) furnishing data processing services, clerical services, and
executive and administrative services and standard
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<PAGE>
stationery and office supplies; (iii) performing all functions ordinarily
performed by the office of a corporate treasurer, and furnishing the services
and facilities ordinarily incident thereto, such as expense accrual monitoring
and payment of the Trust's bills, preparing monthly reconciliation of the
Trust's expense records, updating projections of annual expenses, preparing
materials for review by the Board of Trustees and compliance testing; (iv)
preparing and submitting reports to the Trust's shareholders and the SEC; (v)
preparing and printing financial statements; (vi) preparing monthly Fund profile
reports; (vii) preparing and filing the Trust's federal and state tax returns
(other than those required to be filed by the Trust's Custodian and Transfer
Agent) and providing shareholder tax information to the Trust's Transfer Agent;
(viii) assisting in marketing strategy and product development; (ix) performing
oversight/management responsibilities, such as the supervision and coordination
of certain of the Trust's service providers; (x) effecting and maintaining, as
the case may be, the registration of shares of the Trust for sale under the
securities laws of various jurisdictions; (xi) assisting in maintaining
corporate records and good standing status of the Trust in its state of
organization; and (xii) monitoring the Trust's arrangements with respect to
services provided by Service Organizations to their customers who are the
beneficial owners of shares.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the
Co-Administrators are entitled to a fee from the Fund, computed daily and
payable monthly, at an annual rate of 0.15% of the average daily net assets of
the Fund.
Unless sooner terminated, the Co-Administration Agreement will continue
in effect until September 30, 2001, and thereafter for successive one-year terms
with respect to the Fund, provided that the Agreement is approved annually (i)
by the Board of Trustees or (ii) by the vote of a majority of the outstanding
shares of such Fund (as defined below under "Description of Shares"), provided
that in either event the continuance is also approved by a majority of the
Trustees who are not parties to the Agreement and who are not interested persons
(as defined in the 1940 Act) of any party thereto, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Co-Administration
Agreement is terminable at any time after September 30, 2001 without penalty by
the Trust on at least 60 days written notice to the Co-Administrators. Each
Co-Administrator may terminate the Co-Administration Agreement with respect to
itself at any time after September 30, 2001 without penalty on at least 60 days
written notice to the Trust and the other Co-Administrator.
The Trust may terminate the Co-Administration Agreement prior to
September 30, 2001 in the event that the Trust or its shareholders incur damages
in excess of $100,000 as a result of the willful misfeasance, bad faith or
negligence of the Co-Administrators, or the reckless disregard of their duties
under the Agreement. The Trust may also terminate the Co-Administration
Agreement prior to September 30, 2001 in the event that the Co-Administrators
fail to meet one of the performance standards set forth in the Agreement.
The Trust has also entered into a Distribution Agreement under which
NFD, as agent, sells shares of each Fund on a continuous basis. NFD pays the
cost of printing and distributing prospectuses to persons who are not
shareholders of the Trust (excluding preparation and typesetting expenses) and
of certain other distribution efforts. No compensation is payable by the Trust
to NFD for such distribution services. NFD is a wholly-owned subsidiary of
Provident Distributors, Inc. ("PDI"). PDI, based in King of Prussia,
Pennsylvania, is an independently owned and operated broker-dealer.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD, or NFD's breach of confidentiality.
Under a Service Mark License Agreement with NFD, Northern Trust
Corporation agrees that the name "Northern Funds" may be used in connection with
the Trust's business on a royalty-free basis. Northern Trust Corporation has
reserved to itself the right to grant the non-exclusive right to use the name
"Northern Funds" to any other person. The Agreement provides that at such time
as the Agreement is no longer in effect, NFD will cease using the name "Northern
Funds."
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<PAGE>
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund 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 Fund may pay Service
Organizations up to 0.25% (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:
(i) processing dividend and distribution payments from the Fund; (ii) providing
information periodically to customers showing their share positions; (iii)
arranging for bank wires; (iv) responding to customer inquiries; (v) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (vi) forwarding shareholder
communications; (vii) assisting in processing share purchase, exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Fund. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Fund's arrangements with Service Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans, the
Board of Trustees reviews, at least quarterly, a written report of the amounts
expended in connection with the Fund's arrangements with Service Organizations
and the purposes for which the expenditures were made. In addition, the Fund's
arrangements with Service Organizations must be approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit the Fund and its
shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to the Fund must be approved by the holders of a majority of
the outstanding shares of the Fund 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 Trust will be committed to the discretion of such disinterested Trustees.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103, serves as counsel to the
Trust.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603 serve as auditors for the Trust.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of the Fund may, in the discretion of Northern, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact the Transfer Agent. In connection with an in-kind securities payment,
the Fund will require, among other things, that the securities be valued on the
day of purchase in accordance with the pricing methods used by the Fund and that
the Fund receive satisfactory assurances that it will have good and marketable
title to the securities received by it; that the securities be in proper form
for transfer to the Fund; and that adequate information be provided concerning
the basis and other tax matters relating to the securities.
Although the Fund generally will redeem shares in cash, the Fund
reserves the right to pay redemptions by a distribution in-kind of securities
(instead of cash) from the 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
-31-
<PAGE>
value per share. If a shareholder receives redemption proceeds in-kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This may
help investors reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher share prices. In order to
be effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. Dollar Cost Averaging does not assure a profit
and does not protect against losses in a declining market. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent a
loss if an investor ultimately redeems shares at a price which is lower than
their purchase price. An investor may want to consider his or her financial
ability to continue purchases through periods of low price levels.
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 Fund 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 Fund involved in the request are priced will be processed on the next
Business Day in the manner described above.
The Trust may redeem shares involuntarily to reimburse the Fund for any
loss sustained by reason of the failure of a shareholder to make full payment
for shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Fund's Prospectus from time to time. The Trust
reserves the right on 60 days' written notice, to redeem the shares held in any
account if at the time of redemption, the net asset value of the remaining
shares in the account falls below $1,000. Such involuntary redemptions will not
be made if the value of shares in an account falls below the minimum solely
because of a decline in the Fund's net asset value. The Trust may also redeem
shares involuntarily if the redemption is appropriate to carry out the Trust's
responsibilities under the 1940 Act (see, e.g., "Amortized Cost Valuation").
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<PAGE>
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern. To invest
through any of the tax-sheltered retirement plans, please call Northern 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, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern and PFPC, brokerage fees
and commissions, fees for the registration or qualification of Fund shares under
federal or state securities laws, expenses of the organization of the Trust,
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 the Trust for violation of
any law, legal, tax and auditing fees and expenses, expenses of preparing and
printing prospectuses, statements of additional information, proxy materials,
reports and notices and the printing and distributing of the same to the Fund's
shareholders and regulatory authorities, compensation and expenses of its
Trustees, payments to Service Organizations, fees of industry organizations such
as the Investment Company Institute, and miscellaneous and extraordinary
expenses incurred by the Trust.
The Trust and PFPC intend to voluntarily reimburse a portion of the
Fund's expenses and/or reduce their advisory and co-administrative fees from the
Fund during the current fiscal year. The result of these reimbursements and fee
reductions will be to increase the performance of the Fund during the periods
for which the reductions and reimbursements are made.
The Fund calculates its total return on an "average annual total
return" basis for various periods. Average annual total return reflects the
average annual percentage change in value of an investment in the Fund over the
measuring period. Total returns may also be calculated on an "aggregate total
return" basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return reflect changes in the price of the shares and assume
that any dividends and capital gain distributions made by the Fund during the
period are reinvested in the shares of the Fund. When considering average total
return figures for periods longer than one year, it is important to note that
the annual total return of the Fund for any one year in the period might have
been more or less than the average for the entire period. The Fund may also
advertise from time to time the total return on a year-by-year or other basis
for various specific periods by means of quotations, charts, graphs or
schedules.
The Fund calculates its "average annual total return" by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
N
P (1+T) = ERV
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.
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<PAGE>
The Fund calculates its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = T = [(ERV/P)]-1
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<PAGE>
The yield of the Fund is computed based on the Fund's net income during
a specified 30-day (or one month) period. More specifically, the Fund's yield is
computed by dividing the per share net income during the relevant period by the
net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis.
The Fund calculates its 30-day (or one month) standard yield in
accordance with the method prescribed by the SEC for mutual funds:
_ _
| / \ 6 |
| | a-b | |
YIELD = 2 | | --- + 1 | - 1|
| | cd | |
|_ \ / _|
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.
GENERAL INFORMATION
Any fees imposed by Northern or other Service Organizations on their
customers in connection with investments in the Fund are not reflected in the
Trust's calculations of performance for the Fund.
The Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, 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 the Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
The performance of the Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of the Fund may be compared to 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 Russell 2500 Index, the Consumer
Price Index or the Dow Jones Industrial Average. Performance data as reported in
national financial publications such as MONEY, FORBES, BARRON'S, THE WALL STREET
JOURNAL and THE NEW YORK TIMES, or in publications of a local or regional
nature, may also be used in comparing the performance of the Fund. From time to
time, the Fund may also quote the mutual fund ratings of Morningstar, Inc. and
other services in their advertising materials.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Fund may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Fund. The Fund may also compare performance to that of other compilations
or indices that may be developed and made available in the future.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.
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<PAGE>
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Fund (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments), economic and political conditions, the
relationship between sectors of the economy and the economy as a whole, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of Northern 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 the Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Fund may also include in advertisements, sales literature,
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of the Fund. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternative to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may include lists of representative clients of Northern.
Materials may refer to the CUSIP numbers of the Fund and may illustrate how to
find the listings of the Fund in newspapers and periodicals.
Materials may also include discussions of other Funds, products, and services.
The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in the Fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
The Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Fund may include
information regarding the background and experience of its portfolio managers.
NET ASSET VALUE
Securities held by the Fund that are listed on a recognized U.S. or
foreign securities exchange are valued at the last quoted sales price on the
securities exchange on which the securities are primarily traded, except that
securities listed on an exchange in the United Kingdom are valued at the average
of the closing bid and ask prices. If securities listed on a U.S. exchange are
not traded on a valuation date, they will be valued at the last quoted bid
price. If securities traded on a foreign securities exchange are not traded on a
valuation date, they will be valued at the most recent quoted sales price.
Securities that are traded in the U.S. over-the-counter markets, absent a last
quoted sales price, are valued at the last quoted bid price. Securities which
are traded in the foreign over-the-counter markets are valued at the last sales
price, except that such securities traded in the United Kingdom are valued at
the average of the closing bid and ask prices. Any securities for which no
current quotations are readily available are valued at fair value as determined
in
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<PAGE>
good faith by Northern under the supervision of the Board of Trustees.
Temporary short-term investments are valued at amortized cost which Northern 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 is not required to calculate the net asset value of the Fund
on days during which no shares are tendered to the Fund for redemption and no
orders to purchase or sell shares are received by the Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
The discussions of Federal and state tax consequences in the Prospectus
and this Additional Statement are based on the Internal Revenue Code of 1986, as
amended (the "Code") and the laws and regulations issued thereunder as in effect
on the date of this Additional Statement. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
The Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Code. As a regulated
investment company, the Fund is generally exempt from Federal income tax on its
net investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, the Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of the Fund's total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net
long-term capital gain 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 the Fund will generally be taxable to
you in the tax year in which they are paid, with one exception. Dividends and
distributions declared by the Fund in October, November or December and paid in
January are taxed as though they were paid by December 31.
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<PAGE>
In the case of corporate shareholders, distributions of the Fund for
any taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Fund may constitute "qualifying dividends."
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
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). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by the Fund, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause the 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 the Fund
invests, the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's 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.
The Trust may hereafter create series in addition to the Trust's existing
series, which represent interests in thirty-three portfolios.
Under the terms of the Trust Agreement, each share of the Fund has a
par value of $.0001, represents a proportionate interest in the Fund with each
other share of its class and is entitled to such dividends and distributions out
of the income belonging to the Fund as are declared by the Trustees. Upon any
liquidation of the Fund, shareholders of each class of the Fund are entitled to
share pro rata in the net assets belonging to that class available for
distribution. Shares do not have any preemptive or conversion rights. The right
of redemption is described under "Redeeming and Exchanging Shares" in the
Prospectus. In addition, pursuant to the terms of the 1940 Act, the right of a
shareholder to redeem shares and the date of payment by the Fund may be
suspended for more than seven days (i) for any period during which the New York
Stock Exchange is closed, other than the customary weekends or holidays, or
trading in the markets the Fund normally utilizes is closed or is restricted as
determined by the SEC, (ii) 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
(iii) for such other period as the SEC may by order permit for the protection of
the shareholders of the Fund. The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions. 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
Fund are not issued.
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<PAGE>
The proceeds received by the Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of the Trust. 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 investment
portfolio of the trust entitled to vote on a matter will vote in the aggregate
and not by portfolio, except as required by law or when the matter to be voted
on affects only the interests of shareholders of a particular portfolio.
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 the Trust 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 Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees without the vote or consent of shareholders, either to one vote for
each share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders, including the election of
Trustees (this method of voting being referred to as "dollar-based voting").
However, to the extent required by the 1940 Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees and, accordingly, the holders of more than 50% of the aggregate
voting power of the Trust may elect all of the Trustees, irrespective of the
vote of the other shareholders. Meetings of shareholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the shares entitled to vote at
such meeting. To the extent required by law, the Trust will assist in
shareholder communications in connection with a meeting called by shareholders.
The shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder
approval (except as stated in the next paragraph), to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust, or any series thereof. In addition, the
Trustees, without shareholder approval, may adopt a "master-feeder" structure by
investing substantially all of the assets of a series of the Trust in the
securities of another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with
the merger, consolidation, termination or other reorganization of the Trust or
any series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
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<PAGE>
The Trust Agreement permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Business Trust Act (the "Delaware Act"),
shareholders are not personally liable for obligations of the Trust. The
Delaware Act entitles shareholders of the Trust to the same limitation of
liability as is available to shareholders of private for-profit corporations.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in many other states. As a result, to the extent
that the Trust or a shareholder is subject to the jurisdiction of courts in such
other states, those courts may not apply Delaware law and may subject the
shareholders to liability. To offset this risk, the Trust Agreement (i) contains
an express disclaimer of shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation and instrument entered into or executed by the Trust or its Trustees
and (ii) provides for indemnification out of the property of the applicable
series of the Trust of any shareholder held personally liable for the
obligations of the Trust solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason.
Thus, the risk of a shareholder incurring financial loss beyond his or her
investment because of shareholder liability is limited to circumstances in which
all of the following factors are present: (i) a court refuses to apply Delaware
law; (ii) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (iii) the applicable series of the
Trust is unable to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to
any person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
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.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
The term "majority of the outstanding shares" of either Northern Funds
or a particular Fund or investment portfolio means, with respect to the approval
of an investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (i) 67% or more of the
shares of Northern Funds or such Fund
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<PAGE>
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.
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As of September 20, 2000, 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
September 20, 2000 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:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
--------- ---------
<S> <C> <C>
MONEY MARKET FUND
Short-Term Investment Fund of NTC 945,040,000 14.50%
The Northern Trust Bank - Miami 995,735,732 15.30%
Northern Trust Bank Florida M&I Sweep Account 426,419,643 6.5%
U.S. GOVERNMENT MONEY MARKET FUND
TNT - Miami on behalf of its customers 30,881,741 6.1%
Sunstone Financial Group, Inc. 37,842,277 9.9%
Northern Trust Bank Florida - M&I Sweep Account 62,452,512 12.4%
U.S. GOVERNMENT SELECT MONEY MARKET FUND
Northern Trust Bank Florida - M&I Sweep Account 96,746,257 13.7%
TNT - Miami on behalf of its customers 167,021,554 23.6%
MUNICIPAL MONEY MARKET FUND
TNT - Miami on behalf of its customers 59,767,082 21.7%
CALIFORNIA MUNICIPAL MONEY MARKET FUND
Northern Trust Bank California - M&I Sweep Account 57,568,946 12.4%
Lester Marital Trust 34,291,377 7.4%
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
First Data Investors Services Group FBO Northern Funds 286,412 7.0%
Auto House Trust Cash Processing Unit - Miami 266,653 6.5%
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
--------- ---------
<S> <C> <C>
FIXED INCOME FUND
CCT Combs Funds 5,205,805 7.3%
HIGH YIELD FIXED INCOME FUND
Northern Trust Company Pension Plan 2,471,025 11.5%
SMALL CAP INDEX
CCT Combs Funds 1,530,784 17.2%
STOCK INDEX FUND
CCT Combs Funds 2,249,292 8.2%
SELECT EQUITY FUND
First Data Investors Services Group FBO Northern Funds 1,947,775 11.8%
TECHNOLOGY FUND
Charles Schwab and Co., Inc. on behalf of its customers 3,524,519 7.8%
First Data Investor Services Group FBO Northern Funds 2,868,961 6.4%
LARGE CAP VALUE
Ann Dater 24,534 5.2%
Elizabeth L. Davenport 146,875 31.0%
</TABLE>
As of September 20, 2000, Northern possessed sole or shared voting or
investment power for its customer accounts with respect to more than 50% of the
outstanding shares of Northern Funds. As of the same date, the Trust's Trustees
and officers as a group owned less than 1% of the outstanding shares of each
Fund.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Trust's prospectuses.
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.
-43-
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations 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 Standard & Poor's 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 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.
A-1
<PAGE>
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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 Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is
more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial 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.
A-2
<PAGE>
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic 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 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 Standard & Poor's
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.
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-3
<PAGE>
"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" - Bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B" - Bonds are generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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 ratings used by Fitch 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.
A-4
<PAGE>
"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 change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have
a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
`NR' indicates the Fitch does not rate the issuer or issue in question.
Thomson Financial 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" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
A-5
<PAGE>
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a
very strong capacity to pay debt service 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. Margins of
protection 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 margins of protection.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
A-6
<PAGE>
APPENDIX B
As stated in the Prospectus, the Fund may enter into certain futures
transactions. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within 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 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.
B-1
<PAGE>
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 the S&P 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the S&P's 100 or indexes based on an
industry or market indexes, such as the S&P 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 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.
A Fund may also use futures contracts on foreign currencies for
non-hedging (speculative) purposes to increase total return.
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 or NTI may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which
B-2
<PAGE>
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, even if the futures are used for hedging (non-speculative) purposes. One
risk arises because of the imperfect correlation between movements in the price
of the futures and movements in the price of the instruments which are the
subject of the hedge. The price of the future may move more than or less than
the price of the instruments being hedged. If the price of the futures moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Fund involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the futures, or if otherwise deemed to be appropriate by the
Investment Adviser. Conversely, a Fund may buy or sell fewer futures contracts
if the volatility over a particular time period of the prices of the instruments
being hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Investment
Adviser. It is also possible that, where a Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of instruments held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value in its
portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Investment Adviser may
still not result in a successful hedging transaction over a short time frame.
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.
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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.
Futures purchased or sold by a Fund (and related options) may be traded
on foreign exchanges. 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, customers who trade foreign futures of foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, the
investments of a Fund in foreign futures, or foreign options transactions may
not be provided the same protections in respect to 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.
VI. OPTIONS ON FUTURES CONTRACTS
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example, 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). See "Risks of Transactions
in Futures Contracts" above. 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
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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
Each Fund intends to comply with the regulations of the CFTC
exempting it from registration as a "Commodity Pool Operator." Accounting for
futures contracts will be in accordance with generally accepted accounting
principles.
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