As filed with the Securities and Exchange Commission on July 6, 2000
Registration Nos. 33-73404
811-8236
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 32 [x]
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 34 [ ]
--
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Northern Funds
(Exact Name of Registrant as Specified in Charter)
50 South LaSalle Street
Chicago, Illinois 60675
(Address of Principal Executive Offices)
Registrant's Telephone Number:
800-595-9111
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Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of beneficial interest
This Post-Effective Amendment No. 32 has been filed by Northern Funds, a
Delaware business trust, for the purpose of adopting under the Securities Act
of 1933 and the Investment Company Act of 1940 the Registration Statement on
Form N-1A of Northern Funds, a Massachusetts business trust, pursuant to the
provisions of Rule 414 under the Securities Act of 1933. In accordance with the
provisions of paragraph (d) of Rule 414, this Registration Statement also
revises and sets forth additional information arising in connection with
Registrant's change of domicile or otherwise necessary to keep the Registration
Statement from being misleading in any material respect. Upon the effectiveness
of the Post-Effective Amendment, the Delaware Trust hereby affirmatively adopts
the Registration Statement (File Nos. 33-73404 and 811-8236) of the
Massachusetts Trust.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED JULY 6, 2000
INFORMATION CONTAINED HEREIN PERTAINING TO THE NORTHERN FUNDS LARGE CAP VALUE
FUND IS SUBJECT TO COMPLETION OR AMENDMENT. A POST-EFFECTIVE AMENDMENT TO THE
NORTHERN FUNDS REGISTRATION STATEMENT RELATING TO SHARES OF THE LARGE CAP VALUE
FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SHARES OF THE
LARGE CAP VALUE FUND MAY NOT BE SOLD NOR MAY OFFERS TO BUY SHARES OF SUCH FUND
BE ACCEPTED PRIOR TO THE TIME THE POST-EFFECTIVE AMENDMENT TO THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
SHARES OF THE LARGE CAP VALUE FUND IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
NORTHERN FUNDS
LARGE CAP VALUE FUND
PROSPECTUS DATED JULY 6, 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.
TABLE OF CONTENTS
PAGE
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RISK/RETURN SUMMARY LARGE CAP VALUE FUND 2
Information about the objectives,
principal strategies and risk
characteristics of each Fund.
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FUND PERFORMANCE 3
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FUND FEES AND EXPENSES 4
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MANAGEMENT OF THE FUND INVESTMENT ADVISER
Details that apply to the Fund. 6
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ADVISORY FEES 7
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FUND MANAGEMENT 8
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OTHER FUND SERVICES 9
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ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES
How to open, maintain and close an - Purchasing Shares 10
account. - Opening an Account 10
- Selling Shares 12
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ACCOUNT POLICIES AND OTHER INFORMATION
- Calculating Share Price 14
- Timing of Fund Purchase Requests 14
- Social Security/Tax Identification
Number 14
- In-Kind Purchases and Redemptions 14
- Miscellaneous Purchase Information 14
- Timing of Redemption and Exchange
Requests 15
- Payment of Redemption Proceeds 15
- Miscellaneous Redemption Information 15
- Exchange Privileges 16
- Telephone Transactions 16
- Making Changes to Your Account
Information 16
- Signature Guarantees 16
- Business Day 17
- Early Closings 17
- Authorized Intermediaries 17
- Service Organizations 17
- Shareholder Communications 18
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DIVIDENDS AND DISTRIBUTIONS 19
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TAX CONSIDERATIONS 20
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RISKS, SECURITIES AND TECHNIQUES RISKS, SECURITIES AND TECHNIQUES
- Additional Information on Investment
Objectives, Principal Investment
Strategies and Related Risks 21
- Additional Description of Securities
and Investment Techniques 25
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FOR MORE INFORMATION ANNUAL/SEMIANNUAL REPORT 33
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STATEMENT OF ADDITIONAL INFORMATION 33
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RISK/RETURN SUMMARY
LARGE CAP VALUE FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will
invest, under normal market conditions, at least 65% of its total assets in the
equity securities of large, established companies which the investment
management team believes are undervalued or overlooked by the market. Such
companies generally will have market capitalizations in excess of $1 billion.
Although the Fund primarily invests in the common stocks of U.S. companies, it
may invest to a limited extent in the stocks of foreign issuers either directly
or indirectly (for example, through American Depository Receipts).
In buying stocks for the Fund, the management team uses a disciplined strategy
to identify companies it believes are worth more than is indicated by current
market prices, focusing on such factors as a company's price-to-earnings ratio,
dividend yield and growth rate, earnings potential and asset valuation. It also
attempts to identify a catalyst that, once recognized by the market, would
result in a higher valuation for the company. The investment management team
will normally sell a security that it believes has achieved its full valuation
or is no longer attractive based upon the evaluation criteria described above.
RISK/RETURN SUMMARY
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.
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.
- 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.
More information about the risks of investing in the Fund is provided in "Risks,
Securities and Techniques" beginning on page 21 of this Prospectus. You should
carefully consider the risks discussed in this section and "Risks, Securities
and Techniques" before investing in the Fund.
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.
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 ("Northern"), its
affiliates, correspondent banks and other institutions on their customers. For
more information, please see "Account Policies and Other Information" on page
__.
SHAREHOLDER FEES
(fees paid directly from your investment)
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SALES
SALES CHARGE
CHARGE DEFERRED (LOAD)
(LOAD) SALES IMPOSED ON
IMPOSED ON CHARGE REINVESTED REDEMPTION EXCHANGE
FUND PURCHASES (LOAD) DISTRIBUTIONS FEES<F1> FEES
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Large Cap Value None None None None None
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ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
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DISTRIBUTION OTHER TOTAL ANNUAL
MANAGEMENT (12B-1) EXPENSES FUND OPERATING
FEES FEES<F2> <F3> EXPENSES<F4>
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1.00% 0.00% 0.65% 1.65%
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Footnotes
<F1> A fee of $15.00 may be applicable for each wire redemption.
<F2> 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.
<F3> These expenses include custodian, transfer agency and co-administration
expenses, proxy costs, if any, as well as other customary Fund expenses.
The co-administrators are entitled to a fee of 0.15%. "Other Expenses" are
based on estimates for the current fiscal year.
<F4> As 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.
DISTRIBUTION TOTAL ANNUAL
(12B-1) OTHER FUND OPERATING
FUND MANAGEMENT FEES FEES EXPENSES EXPENSES
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Large Cap Value 0.85% 0.00% 0.25% 1.10%
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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:
FUND ONE YEAR 3 YEARS
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Large Cap Value $168 $520
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Northern Trust Investments, Inc. ("NTI" or the "Investment Adviser"), formerly
known as Northern Trust Quantitative Advisers, Inc., an Illinois state-chartered
trust company, serves as investment adviser for the Fund. NTI is an affiliate of
The Northern Trust Company ("Northern"), an Illinois state-chartered bank and
member of the Federal Reserve System.
The Investment Adviser and Northern are located at 50 S. LaSalle Street,
Chicago, IL 60675 and are wholly-owned subsidiaries of Northern Trust Corp-
oration, a bank holding company. As of March 31, 2000, Northern Trust Corp-
oration and its subsidiaries had approximately $33.2 billion in assets, $21.5
billion in deposits and employed over 8,700 persons.
Northern has for more than 100 years managed the assets of individuals,
charitable organizations, foundations and large corporate investors. Northern
and its affiliates administered in various capacities (including as master
trustee, investment manager or custodian) approximately $1.6 trillion of assets
as of March 31, 2000, including approximately $323.1 billion of assets for which
Northern 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.
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 the annual rate set forth in the table below (expressed
as a percentage of the Fund's respective average daily net assets).
CONTRACTUAL
FUND RATE
---- ----
Large Cap Value 1.00%
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.
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 Large Cap Value Fund is Carl Domino,
President and Chief Executive Officer of Northern Trust Value Investors, a
division of NTI. Mr. Domino joined Northern in May 2000. From 1987 to 2000, he
served as Managing Partner for Carl Domino Associates, L.P.
OTHER FUND SERVICES
Northern also serves as transfer agent ("Transfer Agent") and custodian for the
Fund. As Transfer Agent, Northern performs various administrative servicing
functions, and any shareholder inquiries should be directed to it. The fees
that Northern receives for its services in those capacities are described in the
Statement of Additional Information. Northern and PFPC Inc. ("PFPC") serve as
co-administrators for Northern Funds. The fees that Northern and PFPC receive
for their co-administrative services are described on page 4 under "Fund Fees
and Expenses."
ABOUT YOUR ACCOUNT
PURCHASING AND SELLING SHARES
PURCHASING SHARES
You may purchase shares directly from Northern Funds or, if you maintain certain
accounts, through Northern 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 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 60750-5986
ABOUT YOUR ACCOUNT
TO ADD TO AN EXISTING ACCOUNT:
- Have your bank wire Federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
BY DIRECT DEPOSIT
TO PURCHASE ADDITIONAL SHARES:
- Determine if your employer has direct deposit capabilities through the
Automated Clearing House ("ACH")
- Have your employer send payments to:
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
- The minimum periodic investment for direct deposit is $50
BY AUTOMATIC INVESTMENT
TO OPEN A NEW ACCOUNT
- Complete a Purchase Application, including the Automatic Investment
section
- Send it to:
Northern Funds
P.O. Box 75986
Chicago, IL 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 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.
ABOUT YOUR ACCOUNT
THROUGH NORTHERN AND OTHER INSTITUTIONS
If you have an account with Northern, you may purchase Northern Funds shares
through Northern. You may also purchase shares through other institutions
(together with Northern, "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 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.
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 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 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
ABOUT YOUR ACCOUNT
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
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 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 AND OTHER INSTITUTIONS
If you purchased your Northern Funds shares through an account at Northern 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 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 or other Service
Organization for more information about redemptions or exchanges
ABOUT YOUR ACCOUNT
ACCOUNT POLICIES AND OTHER INFORMATION
CALCULATING SHARE PRICE. Northern Funds issues shares and redeems shares at net
asset value ("NAV"). The NAV for 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 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 may redeem shares from any
account it maintains to protect the Fund and Northern against loss. In
addition, a $20 charge will be imposed if a check does not clear.
ABOUT YOUR ACCOUNT
- You may initiate transactions between Northern 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 17.
- 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
17.
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.
ABOUT YOUR ACCOUNT
- You may initiate transactions between Northern 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 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, 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 reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. They also reserve this right when The Bond Market
Association recommends that securities markets close or close early.
ABOUT YOUR ACCOUNT
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, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services
may include:
- support services such as assisting investors in processing purchase, exchange
and redemption requests;
- processing dividend and distribution payments from the 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 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 as Investment Adviser (after adjustments). This additional
compensation will be paid by Northern 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, 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.
ABOUT YOUR ACCOUNT
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.
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 is declared as a dividend annually 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).
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."
ABOUT YOUR ACCOUNT
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 their efforts to adhere to these requirements, the Fund
may have to limit its investment activity in some types of instruments.
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.
RISKS, SECURITIES AND TECHNIQUES
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 ARE SUBJECT TO FURTHER RESTRICTIONS AND RISKS
WHICH ARE DESCRIBED IN THE STATEMENT OF ADDITIONAL INFORMATION.
ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVES, 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. 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. The Fund will invest in derivatives only if the
potential risks and rewards are consistent with the Fund's objective,
strategies and overall risk profile. The 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 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.
RISKS, SECURITIES AND TECHNIQUES
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.
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.
RISKS, SECURITIES AND TECHNIQUES
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 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.
RISKS, SECURITIES AND TECHNIQUES
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 maturities 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 100%.
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. They 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.
RISKS, SECURITIES AND TECHNIQUES
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 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.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the 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.
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.
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.
RISKS, SECURITIES AND TECHNIQUES
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 increases because of currency fluctuations.
When used for speculative purposes, forward currency exchange contracts may
result in additional losses that would not otherwise be incurred.
FUTURES CONTRACTS AND RELATED OPTIONS. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. For example, a futures contract may obligate
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
contacts on domestic or foreign exchanges or boards of trade. They may be
used for hedging purposes, to increase total return or to maintain
liquidity to meet potential shareholder redemptions, invest cash balances
or dividends or minimize trading costs.
The value of the Fund's futures contacts may equal up to 100% of its total
assets. However, the Fund will not purchase or sell a futures contract
unless, after the transaction, the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid
for related options used for non-hedging purposes is 5% or less of its
total assets.
SPECIAL RISKS. Futures contracts and options present the following risks:
imperfect correlation between the change in market value of 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 (see below), certain unlisted
over-the-counter options and other securities that are traded in the U.S. but
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
INVESTMENT STRATEGY. The Fund may invest up to 15% of its net assets in
securities that are illiquid. If otherwise consistent with their
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.
RISKS, SECURITIES AND TECHNIQUES
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. 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.
INVESTMENT STRATEGY. The Fund may enter into interest rate swaps and may
purchase interest rate floors or caps to protect against interest rate
fluctuations and fluctuations in the floating rate market. The Fund may
also enter into currency swaps to protect against currency fluctuations.
SPECIAL RISKS. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the amount of interest payments that the
Fund is entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one currency in exchange for
the other currency. Therefore, the entire principal value of a currency
swap is subject to the risk that the other party will default on its
delivery obligations. Like other derivative securities, swaps, floors and
caps can be highly volatile. As a result, they may not always be
successful hedges and they could lower the Fund's total return.
INVESTMENT COMPANIES. To the extent consistent with their respective investment
objectives and policies, 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.
RISKS, SECURITIES AND TECHNIQUES
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 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.
RISKS, SECURITIES AND TECHNIQUES
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 incur a loss in reinvesting the cash collateral it receives.
STRIPPED OBLIGATIONS. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments, banks and other issuers. They
entitle the holder to receive either interest payments or principal payments
that have been "stripped" from a debt obligation. These obligations include
stripped mortgage-backed securities, which are derivative multi-class mortgage
securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the 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.
RISKS, SECURITIES AND TECHNIQUES
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.
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 Advisers to be of comparable quality to rated
instruments eligible for purchase by the Fund.
SPECIAL RISKS. The market values of inverse floaters are subject to
greater volatility than other variable and floating rate instruments due to
their higher degree of leverage. Because there is no active secondary
market for certain variable and floating rate instruments, they may be more
difficult to sell if the issuer defaults on its payment obligations or
during periods when the 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.
RISKS, SECURITIES AND TECHNIQUES
SPECIAL RISKS. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities
may decrease by the time they are actually issued or delivered.
Conversely, selling securities in these transactions involves the risk that
the value of the securities may increase by the time they are actually
issued or delivered. These transactions also involve the risk that the
seller may fail to deliver the security or cash on the settlement date.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. These are securities
issued at a discount from their face value because interest payments are
typically postponed until maturity. Interest payments on pay-in-kind securities
are payable by the delivery of additional securities. The amount of the
discount rate varies depending on factors such as the time remaining until
maturity, prevailing interest rates, a security's liquidity and the issuer's
credit quality. These securities also may take the form of debt securities that
have been stripped of their interest payments.
INVESTMENT STRATEGY. 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.
Northern is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
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 is also 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
Subject to Completion
Preliminary Statement of Additional Information, Dated July 6, 2000
Information contained herein pertaining to the Large Cap Value Fund is subject
to completion or amendment. A post-effective amendment to the registration
statement relating to, among other things, shares of the Large Cap Value Fund
has been filed with the Securities and Exchange Commission. Shares of the Large
Cap Value Fund may not be sold nor may offers to buy shares of this Fund be
accepted prior to the time the post-effective amendment to the registration
statement becomes effective. This statement of additional information shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of shares of the Large Cap Value Fund in any State in which
such offer, solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such State.
PART B
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
U.S. GOVERNMENT SELECT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
CALIFORNIA MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
INTERMEDIATE TAX-EXEMPT FUND
CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
FIXED INCOME FUND
TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
GLOBAL FIXED INCOME FUND (PREVIOUSLY KNOWN AS "INTERNATIONAL FIXED INCOME FUND")
HIGH YIELD MUNICIPAL FUND
HIGH YIELD FIXED INCOME FUND
INCOME EQUITY FUND
STOCK INDEX FUND
LARGE CAP VALUE FUND
GROWTH EQUITY FUND
SELECT EQUITY FUND
BLUE CHIP 20 FUND (PREVIOUSLY KNOWN AS "MARKETCOMMAND FUND")
MID CAP GROWTH FUND
SMALL CAP INDEX FUND
SMALL CAP VALUE FUND (PREVIOUSLY KNOWN AS "SMALL CAP FUND")
SMALL CAP GROWTH FUND
INTERNATIONAL GROWTH EQUITY FUND
INTERNATIONAL SELECT EQUITY FUND
TECHNOLOGY FUND
GLOBAL COMMUNICATIONS FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated July __, 2000 (the
"Additional Statement") is not a prospectus. This Additional Statement should
be read in conjunction with the Prospectus dated July __, 2000 as amended
or supplemented from time to time, for the Money Market Fund, U.S. Government
Money Market Fund, U.S. Government Select Money Market Fund, Tax-Exempt Money
Market Fund, Municipal Money Market Fund, California Municipal Money Market Fund
(collectively, the "Money Market Funds"), U.S. Government Fund, Short-
Intermediate U.S. Government Fund, Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Fixed Income
Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund,
Global Fixed Income Fund, High Yield Municipal Fund, High Yield Fixed Income
Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity
Fund, Blue Chip 20 Fund, Mid Cap Growth Fund, Small Cap Index Fund, Small Cap
Value Fund, Small Cap Growth Fund, International Growth Equity Fund,
International Select Equity Fund, Technology Fund, Global Communications
Fund and Large Cap Value Fund (collectively, the "Non-Money Market Funds," and
together with the Money Market Funds, the "Funds") of Northern Funds (the
"Prospectus"). Copies of the Prospectus may be obtained without charge from
the Northern Trust (the "Transfer Agent") by writing to the Northern Funds
Center, P.O. Box 75986, Chicago, Illinois 60675-5986 or by calling 1-800-595-
9111. Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.
The audited financial statements and related report of Arthur Anderson LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 (except for Tax-Exempt Money Market
Fund, Large Cap Value Fund, Blue Chip 20 Fund and Global Communications Fund,
which did not commence operations during the period), are incorporated herein by
reference in the section entitled "Financial Statements." No other part of the
annual report is incorporated by reference herein. Copies of the annual report
may be obtained, upon request and without charge by calling 1-800-595-9111 (toll
free).
---------------
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 JURIS-
DICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any government
agency. An investment in a Fund involves investment risks, including possible
loss of principal. Although each of the Money Market Funds seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money by
investing in the Funds.
INDEX
Page
ADDITIONAL INVESTMENT INFORMATION...........................................1
Classification and History.............................................1
Investment Objectives and Policies.....................................1
Special Risk Factors and Considerations Relating to California
Municipal Instruments, Florida Municipal Instruments and Arizona
Municipal Instruments.................................................25
California Municipal Instruments......................................26
Florida Municipal Instruments.........................................33
Arizona Municipal Instruments.........................................36
Investment Restrictions...............................................38
ADDITIONAL TRUST INFORMATION...............................................41
Trustees and Officers.................................................41
Investment Adviser, Transfer Agent and Custodian......................50
Co-Administrators and Distributor.....................................60
Service Organizations.................................................64
Counsel and Auditors..................................................65
In-Kind Purchases and Redemptions.....................................65
Automatic Investing Plan..............................................65
Directed Reinvestments................................................66
Redemptions and Exchanges.............................................66
Retirement Plans......................................................66
Expenses..............................................................66
PERFORMANCE INFORMATION....................................................67
Money Market Funds....................................................67
Non-Money Market Funds................................................68
General Information...................................................74
NET ASSET VALUE............................................................76
TAXES .....................................................................77
Federal - General Information.........................................78
Federal - Tax-Exempt Information......................................79
Taxation of Certain Financial Instruments.............................80
Special State Tax Considerations Pertaining to the California Funds...80
Special State Tax Considerations Pertaining to the Florida
Intermediate Tax-Exempt Fund..........................................81
Special State Tax Considerations Pertaining to the Arizona
Tax-Exempt Fund.......................................................82
DESCRIPTION OF SHARES......................................................82
FINANCIAL STATEMENTS.......................................................85
OTHER INFORMATION..........................................................86
APPENDIX A..................................................................1
APPENDIX B..................................................................1
ADDITIONAL INVESTMENT INFORMATION
CLASSIFICATION AND HISTORY
The Trust is an open-end, management investment company. Each Fund is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"), except the California Municipal Money Market, California
Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Arizona Tax-Exempt,
California Tax-Exempt, Global Fixed Income and Blue Chip 20 Funds, which are
classified as non-diversified. Each 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"). The Funds were formerly series of
Northern Funds, a Massachusetts business trust, and were reorganized into the
Trust on July 31, 2000.
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives, strategies and risks
of the Funds as set forth in the Prospectus. The investment objective of each
Fund may be changed without the vote of the majority of the Fund's outstanding
shares. Except as expressly noted below, each Fund's investment policies may be
changed without shareholder approval. In addition to the instruments discussed
below and in the Prospectus, each Fund may purchase other types of financial
instruments, however designated, whose investment and credit quality
characteristics are determined by the Northern Trust Company ("Northern") and
Northern Trust Investments, Inc. (previously known as "Northern Trust
Quantitative Advisors, Inc." and referred to as "NTI," and together with
Northern the "Investment Advisers") to be substantially similar to those of any
other investment otherwise permitted by a Fund's investment policies.
MONEY MARKET FUNDS
Money Market Fund seeks to maximize current income to the
extent consistent with the preservation of capital and
maintenance of liquidity by investing only in high-quality
money market instruments.
U.S. Government Money Market Fund has the same objective as
the Money Market Fund but invests primarily in securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities and related repurchase agreements.
U.S. Government Select Money Market Fund seeks to maximize
current income to the extent consistent with the
preservation of capital and maintenance of liquidity by
investing exclusively in high quality money market
instruments.
Tax-Exempt Money Market Fund seeks to provide a high level
of income exempt from regular Federal income tax, to the
extent consistent with the preservation of capital, by
investing primarily in municipal instruments.
Municipal Money Market Fund seeks high current income exempt
from regular federal tax to the extent consistent with
preserving capital by investing mainly in short-term
municipal instruments.
California Municipal Money Market Fund seeks to provide its
shareholders to the extent consistent with the preservation
of capital and prescribed portfolio standards, a high level
of income exempt from regular federal income tax and
California state personal income tax.
FIXED INCOME FUNDS
U.S. Government Fund seeks high current income from U.S.
Government securities. The Fund's dollar-weighted average
maturity is anticipated to range between one and ten years.
It is designed for investors who seek greater principal
stability than is generally available from higher yielding
corporate bonds.
Short-Intermediate U.S. Government Fund seeks high current
income from a broad range of U.S. Government securities.
The Fund's dollar-weighted average maturity is anticipated
to range between two and five years. It is designed for
investors who seek greater principal stability than is
generally available from higher yielding corporate bonds.
Fixed Income Fund seeks high current income from a broad
range of bonds and other fixed income securities. The
Fund's average maturity is anticipated to range between
seven and twelve years. This Fund generally presents
greater risk and reward potential than the U.S. Government
Fund and the Short-Intermediate U.S. Government Fund.
Global Fixed Income Fund seeks to maximize total return
consistent with reasonable risk while investing in
securities of issuers located in at least three different
countries (one of which may be the U.S.). Total return is
comprised of current income and value fluctuations from
investing in bonds and other fixed income securities of
foreign issuers.
High Yield Municipal Fund seeks a high level of current
income exempt from regular federal income tax.
High Yield Fixed Income Fund seeks a high level of current
income. In seeking current income, the Fund may also
consider the potential for capital appreciation. In
pursuing its investment objective, the Fund invests in high
yield fixed income instruments.
TAX-EXEMPT FIXED INCOME FUNDS
Intermediate Tax-Exempt Fund seeks high current income
exempt from regular federal income tax by investing in a
broad range of municipal instruments with an expected
average maturity of three to ten years.
California Intermediate Tax-Exempt Fund seeks high current
income exempt from regular federal income tax and California
state personal income tax by investing in municipal
instruments with an expected average maturity of three to
ten years.
Florida Intermediate Tax-Exempt Fund seeks high current
income exempt from regular federal income tax by investing
in municipal instruments with an expected average maturity
of three to ten years. The Fund intends, but cannot
guarantee, that its shares will qualify for exemption from
the Florida intangibles tax.
Tax-Exempt Fund seeks high current income exempt from
regular federal income tax by investing in municipal
instruments with an expected average maturity of ten to
thirty years.
Arizona Tax-Exempt Fund seeks high current income exempt
from regular federal income tax and Arizona state personal
income tax by investing in municipal instruments with an
expected average maturity of ten to thirty years.
California Tax-Exempt Fund seeks high current income exempt
from regular federal income tax and California state
personal income tax by investing in municipal instruments
with an expected average maturity of ten and thirty years.
EQUITY FUNDS
Income Equity Fund seeks to achieve high current income and,
as a secondary objective, longer-term capital appreciation.
The Fund invests in convertible and other equity securities.
Because it emphasizes high current income, this Fund is
likely to have the least price fluctuation of the Trust's
equity funds.
Stock Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance
of the securities included in the S&P 500R Composite Stock
Price Index (the "S&P 500 Index").
Large Cap Value Fund seeks to provide long-term capital
appreciation by investing primarily in equity securities of
large, established companies which the investment team
believes are undervalued or overlooked by the market.
Growth Equity Fund seeks long-term capital appreciation by
investing mainly in the equity securities of growth
companies. It is designed for investors willing to accept
above-average price volatility in search of long-term
reward.
Select Equity Fund is also for the more aggressive investor,
seeking long-term capital appreciation by investing
principally in common stocks of companies the its Investment
Adviser believes to have superior growth characteristics.
Any income is incidental to this objective.
Blue Chip 20 Fund seeks to provide long-term capital
appreciation by investing primarily in the equity securities
of a concentrated group (generally between 20 and 40) that
are selected by the investment management team for their
growth. Any income received is incidental to this
objective.
Mid Cap Growth Fund seeks long-term capital appreciation by
investing primarily in equity securities of companies with
market capitalizations that are within the capitalization
range of the Standard & Poor's MidCap 400O Stock Index at
the time of investment.
Small Cap Index Fund seeks to provide investment results
approximating the aggregate price and dividend performance
of the securities included in the Russell 2000 Index.
Small Cap Value Fund seeks long-term capital appreciation;
any income is incidental to this objective. Because it
invests principally in the equity securities of smaller
companies, this Fund is likely to have more price volatility
than the Growth Equity and Select Equity Funds.
Small Cap Growth Fund seeks long-term capital appreciation
by investing primarily in equity securities of companies
with market capitalizations that are within the
capitalization range of the Russell 2000 Small Stock Index.
International Growth Equity Fund offers the potential
benefits of international diversification to investors
willing to accept above-average price volatility while
seeking long-term capital appreciation. While subject to
additional risks such as currency fluctuations and the
higher volatility of foreign securities, this Fund uses
diversification, in an effort to control risk.
International Select Equity Fund seeks long-term growth by
investing principally in common stock of foreign issuers
that the Investment Adviser believes are growing faster than
their markets. Because fewer countries and securities are
generally represented in this Fund than in the International
Growth Equity Fund, it is likely to experience more price
volatility.
Technology Fund seeks long-term capital appreciation by
investing principally in equity securities and securities
convertible into common stock of companies that develop,
produce or distribute products and services related to
advances in technology. The Fund will, under normal market
conditions, invest at least 65% of the value of its total
assets in securities of companies principally engaged in
technology business activities. An issuer is considered
principally engaged in technology business activities if
such issuer is listed on the Morgan Stanley High-Technology
35 Index (the "Morgan Stanley Index"), the SoundView
Technology Index, the Hambrecht and Quist Technology Index
(the "H&Q Index"), the technology grouping of the S&P 500
Index or any other comparable index. Companies engaged in
businesses related to the following products and services
are also considered by Northern Trust to be engaged in
technology business activities whether or not they are
listed in a technology index: industrial and business
machines; communications; computers, software and peripheral
products; electronics, electronic media; internet;
television and video equipment and services; and satellite
technology and equipment.
The Morgan Stanley Index is an equal dollar weighted index
of 35 stocks drawn from nine technology subsectors: computer
services, design software, server software, PC software and
new media, networking and telecom equipment, server
hardware, PC hardware and peripherals, specialized systems
and semi-conductors. The SoundView Technology Index is an
equal dollar weighted index designed to measure the
performance of the technology industry. It is comprised of
100 major technology companies chosen by SoundView Financial
Group. The H&Q Index is comprised of publicly traded stocks
of approximately 250 technology companies. The H&Q Index
includes companies in the electronics, services and related
technologies industries and is a market capitalization
weighted index. Changes in the indices may occur when
Morgan Stanley, SoundView or H&Q choose to modify their
indices or as mergers, acquisitions and failures dictate.
Such changes may happen with fair regularity owing to the
fast-changing nature of the technology industries.
Global Communications Fund seeks to provide long-term
capital appreciation by investing at least 65% of its total
assets in equity securities of domestic and foreign
companies that are engaged in the communications industry.
AMERICAN DEPOSITORY RECEIPTS. Each Equity Fund and the Global Fixed Income
Fund (together with the International Growth Equity Fund and International
Select Equity Fund, the "International Funds") can invest in ADRs. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying foreign securities and are denominated in U.S.
dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder information
that a sponsored depository is required to provide under its contractual
arrangement with the issuer.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Funds may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables, municipal securities
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. In calculating a Fund's
average weighted maturity, the maturity of asset-backed securities will be based
on estimates of average life.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments.
Asset-backed securities acquired by the Funds may include collateralized
mortgage obligations ("CMOs") issued by private companies. CMOs provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect
to be taxed as pass-through entities known as real estate mortgage investment
conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date. The relative
payment rights of the various CMO classes may be structured in a variety of
ways. The Funds will not purchase "residual" CMO interests, which normally
exhibit greater price volatility.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by 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 Funds is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by, changes in the holdings of specific issuers, changes in country and
currency weightings, cash requirements for redemption of shares and by
requirements which enable the Funds to receive favorable tax treatment.
The Funds are not restricted by policy with regard to portfolio turnover
and will make changes in their investment portfolio from time to time as
business and economic conditions as well as market prices may dictate. For the
fiscal year ended March 31, 2000, the turnover rates for the Funds (except for
the Large Cap Value Fund, Blue Chip 20 Fund and Global Communications Fund,
which had not commenced operations during the fiscal year ended March 31, 2000)
are as follows:
FUND PORTFOLIO TURNOVER RATE
U.S. Government Fund 30.56%
Short-Intermediate U.S. Government Fund 45.44%
Fixed Income Fund 105.70%
Global Fixed Income Fund 90.69%
High Yield Municipal Fund 21.69%
High Yield Fixed Income Fund 87.92%
Intermediate Tax-Exempt Fund 68.69%
Tax-Exempt Fund 118.69%
California Intermediate Tax-Exempt Fund 31.29%
Florida Intermediate Tax-Exempt Fund 133.01%
Arizona Tax-Exempt Fund 29.85%
California Tax-Exempt Fund 67.91%
Income Equity Fund 125.49%
Stock Index Fund 12.01%
Growth Equity Fund 88.01%
Select Equity Fund 153.06%
Mid Cap Growth Fund 156.49%
Small Cap Index Fund 57.01%
Small Cap Value Fund 28.97%
FUND PORTFOLIO TURNOVER RATE
Small Cap Growth Fund 127.56%
International Growth Equity Fund 155.57%
International Select Equity Fund 145.46%
Technology Fund 156.37%
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.
A Fund may invest a portion of its net assets in the obligations of foreign
banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs"), which are
U.S. dollar-denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the United States.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
In selecting convertible securities, the Investment Advisers will consider,
among other factors: an evaluation of the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of a
Fund's portfolio as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in lower quality convertible securities are subject
to a significant risk of a change in the credit rating or financial condition of
the issuing entity. Investments in convertible securities of medium or lower
quality are also likely to be subject to greater market fluctuation and to
greater risk of loss of income and principal due to default than investments of
higher quality fixed-income securities. Such lower quality securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher quality securities, which react more to fluctuations in the general
level of interest rates. A Fund will generally reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on a Fund of any single investment, it does not reduce the
overall risk of investing in lower quality securities.
CURRENCY SWAPS. To the extent described in the Prospectus, the Fixed
Income Funds and the Equity Funds (except for the Stock Index Fund and Small Cap
Index Fund) may enter into currency swaps, which involve the exchange of the
rights of a Fund and another party to make or receive payments in specific
currencies.
Currency swaps usually involve the delivery of the entire principal value
of one designated currency in exchange for the other designated currency.
Inasmuch as these transactions are entered into for good faith hedging purposes,
the Fund and the Investment Adviser believe that such obligations do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Fund's borrowing restrictions.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each currency swap will be accrued on a daily
basis, and an amount of liquid assets having an aggregate net asset value at
least equal to such accrued excess, will be segregated by the Fund.
The Fund will not enter into a currency swap unless the unsecured
commercial paper, senior debt or the claims-paying ability of the other party
thereto is rated either A or A-1 or better by Standard and Poor's Ratings
Services ("S&P"), Duff & Phelps Credit Rating Co. ("Duff") or Fitch IBCA Inc.
("Fitch"), or A or P-1 or better by Moody's Investors Services, Inc.
("Moody's"). 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.
EUROPEAN DEPOSITORY RECEIPTS ("EDRS"). Each Equity Fund and each
International 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.
EQUITY SWAPS. Each Equity Fund (except for the Stock Index and Small Cap
Index Funds) may enter into equity swap contracts to invest in a market without
owning or taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable.
Equity swaps may also be used for hedging purposes or to seek to increase total
return. The counterparty to an equity swap contract will typically be a bank,
investment banking firm or broker/dealer. Equity swap contracts may be
structured in different ways. For example, a counterparty may agree to pay the
Fund the amount, if any, by which the notional amount of the equity swap
contract would have increased in value had it been invested in particular stocks
(or an index of stocks), plus the dividends that would have been received on
those stocks. In these cases, the Fund may agree to pay to the counterparty the
amount, if any, by which that notional amount would have decreased in value had
it been invested in the stocks. Therefore, the return to the Fund on any equity
swap contract should be the gain or loss on the notional amount plus dividends
on the stocks less the interest paid by the Fund on the notional amount. In
other cases, the counterparty and the Fund may each agree to pay the other the
difference between the relative investment performances that would have been
achieved if the notional amount of the equity swap contract had been invested in
different stocks (or indices of stocks).
A Fund will enter into equity swaps only on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited
to the net amount of payments that a Fund is contractually obligated to make.
If the other party to an equity swap defaults, a Fund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Fund's potential
exposure, the Trust and its Investment Advisers believe that transactions do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to a Fund's borrowing restrictions.
The Funds will not enter into any equity swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either A, or A-1 or better by Standard & Poor's Ratings Group,
Inc. ("S&P"), Duff & Phelps Credit Rating Co. ("D&P") or Fitch IBCA ("Fitch");
or A or P-1 or better by Moody's Investors Service, Inc. ("Moody's"). If there
is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Advisers are incorrect in
their forecasts of market values, the investment performance of a Fund would be
less favorable than it would have been if this investment technique were not
used.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible loss
on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fixed Income, Global Fixed Income, High Yield Fixed
Income, Income Equity, Large Cap Value, Growth Equity, Select Equity, Blue Chip
20, Mid Cap Growth, Small Cap Value, Small Cap Growth, International Growth
Equity, International Select Equity, Technology and Global Communications Funds
are authorized to enter into forward currency exchange contracts. These
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather may allow a Fund to establish a rate of exchange for a future point
in time.
When entering into a contract for the purchase or sale of a security, a
Fund may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
In addition, when an Investment Adviser anticipates that a particular
foreign currency may decline substantially relative to the U.S. dollar or other
leading currencies, in order to reduce risk, a Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the securities held by a Fund create a
short position in a foreign currency, a Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. A Fund's net long and short foreign currency exposure will not
exceed its total asset value. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
A Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
In addition, the International Funds and the High Yield Fixed Income Fund
may purchase or sell forward currency exchange contracts to seek to increase
total return or for cross-hedging purposes. The International Funds and the
High Yield Fixed Income Fund may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the investment management team
believes that there is a pattern of correlation between the two currencies.
Liquid assets equal to the amount of a Fund's assets that could be required
to consummate forward contracts will be segregated except to the extent the
contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price that is (i) no higher than the Fund's price to sell the
currency or (ii) greater than the Fund's price to sell the currency provided the
Fund segregates liquid assets in the amount of the difference. A forward
contract to buy a foreign currency is "covered" if a Fund holds a forward
contract (or put option) permitting the Fund to sell the same currency at a
price that is (i) as high as or higher than the Fund's price to buy the currency
or (ii) lower than the Fund's price to buy the currency provided the Fund
segregates liquid assets in the amount of the difference.
FOREIGN SECURITIES. The International Growth Equity and International
Select Equity Funds intend to invest primarily in the securities of foreign
issuers. The Global Communications Fund may invest a substantial portion of its
assets in the securities of foreign issuers. In addition, each Equity Fund, the
Fixed Income Fund and the High Yield Fixed Income Fund may invest a portion of
their assets in such securities, including (except with respect to the Fixed
Income Fund) eurodollar convertible securities, which are fixed income
securities that are issued in U.S. dollars outside the United States and are
convertible into or exchangeable for equity securities of the same or a
different issuer. The Money Market Fund may also invest in dollar-denominated
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities, as well as other
foreign issuers. These obligations may be issued by supranational entities,
including international organizations (such as the European Coal and Steel
Community) designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and
related government agencies.
Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded outside
the United States and in investments denominated in foreign currencies. Market
risk involves the possibility that stock prices will decline over short or even
extended periods. The stock markets tend to be cyclical, with periods of
generally rising prices and periods of generally declining prices. These cycles
will affect the value of a Fund that invests in foreign stocks. The holdings of
a Fund that invests in fixed income securities will be sensitive to changes in
interest rates and the interest rate environment. Generally, the prices of
bonds and debt securities fluctuate inversely with interest rate changes. In
addition, the performance of investments in securities denominated in a foreign
currency will depend on the strength of the foreign currency against the U.S.
dollar and the interest rate environment in the country issuing the currency.
Absent other events which could otherwise affect the value of a foreign security
(such as a change in the political climate or an issuer's credit quality),
appreciation in the value of the foreign currency generally can be expected to
increase the value of a foreign currency-denominated security in terms of U.S.
dollars. A rise in foreign interest rates or decline in the value of the
foreign currency relative to the U.S. dollar generally can be expected to
depress the value of a foreign currency-denominated security.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments also
involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
The Money Market Fund, the Fixed Income Fund, the High Yield Fixed Income
Fund, each Equity Fund and each International Fund may invest in foreign debt,
including the securities of foreign governments. Several risks exist concerning
such investments, including the risk that foreign governments may default on
their obligations, may not respect the integrity of such debt, may attempt to
renegotiate the debt at a lower rate, and may not honor investments by United
States entities or citizens.
In addition, the International Funds and the High Yield Fixed Income Fund
may invest their assets in countries with emerging economies or securities
markets. These countries are generally located in the Asia-Pacific region, the
Middle East, Eastern Europe, Latin and South America and Africa. Political and
economic structures in many of these countries may be undergoing significant
evolution and rapid development, and these countries may lack the social,
political and economic stability characteristics of more developed countries.
In general, the securities markets of these countries are less liquid, subject
to greater price volatility, have smaller market capitalizations and have
problems with securities registration and custody. As a result, the risks
presented by investments in these countries are heightened. Additionally,
settlement procedures in emerging countries are frequently less developed and
reliable than those in the United States and may involve a Fund's delivery of
securities before receipt of payment for their sale. Settlement or registration
problems may make it more difficult for a Fund to value its portfolio securities
and could cause the Fund to miss attractive investment opportunities, to have a
portion of its assets uninvested or to incur losses due to the failure of a
counterparty to pay for securities the Fund has delivered or the Fund's
inability to complete its contractual obligations.
Unanticipated political, economic or social developments may affect the
value of a Fund's investment in emerging market countries and the availability
to a 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 a Fund's
investments in such countries illiquid and more volatile than investments in
Japan or most Western European countries, and a 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 a Fund (other than the Money Market Fund) may invest in securities
denominated in foreign currencies, its portfolio securities and other assets are
valued in U.S. dollars. Currency exchange rates may fluctuate significantly
over short periods of time causing, together with other factors, a Fund's net
asset value to fluctuate as well. Currency exchange rates can be affected
unpredictably by the intervention or the failure to intervene by U.S. or foreign
governments or central banks, or by currency controls or political developments
in the U.S. or abroad. To the extent that a Fund's total assets, adjusted to
reflect the Fund's net position after giving effect to currency transactions,
are denominated in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries.
A Fund is also subject to the possible imposition of exchange control
regulations or freezes on the convertibility or currency. In addition, through
the use of forward currency exchange contracts and with other instruments, the
respective net currency positions of the International Funds may expose them to
risks independent of their securities positions. Although the net long and
short foreign currency exposure of the International Funds will not exceed their
respective total asset values, to the extent that a Fund is fully invested in
foreign securities while also maintaining currency positions, it may be exposed
to greater risk than it would have if it did not maintain the currency
positions.
Dividends and interest payable on a Fund's foreign portfolio securities may
be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax law, they may reduce the net return to the shareholders. See "Taxes."
To the extent consistent with its investment objective, a 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.
Investors should understand that the expense ratios of the International
Funds can be expected to be higher than those of Funds investing primarily in
domestic securities. The costs attributable to investing abroad are usually
higher for several reasons, such as the higher cost of investment research,
higher costs of custody of foreign securities, higher commissions paid on
comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities.
Countries in which the other Equity Funds may invest (to the extent
permitted by their 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, 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. Each Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the
time the transaction is negotiated. When-issued purchases and forward
commitment transactions are normally negotiated directly with the other party.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
negotiate a commitment after entering into it. A Fund also may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. The Fund may realize a capital gain or loss in
connection with these transactions.
When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments until three days prior to the settlement date, or will otherwise
cover its position. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under when-
issued purchases, forward commitments and delayed-delivery transactions. For
purposes of determining a Fund's average dollar-weighted maturity, the maturity
of when-issued, delayed-delivery or forward commitment securities will be
calculated from the commitment date.
FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money
Market Funds) may purchase and sell futures contracts and may purchase and sell
call and put options on futures contracts for hedging purposes, for speculative
purposes (to seek to increase total return), or for liquidity management
purposes. When used as a hedge, a Fund may sell a futures contract in order to
offset a decrease in the market value of its portfolio securities that might
otherwise result from a market decline or currency exchange fluctuations. A
Fund may do so either to hedge the value of its portfolio of securities as
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund may purchase a
futures contract as a hedge in anticipation of purchases of securities. In
addition, a Fund may utilize futures contracts in anticipation of changes in the
composition of its portfolio holdings.
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, persons who trade foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC")
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided them by the National Futures Association or any
domestic futures exchange. In particular, a Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised. For a detailed description of futures contracts and
related options, see Appendix B to this Additional Statement.
In connection with a Fund's position in a futures contract or related
option, the Fund will segregate liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
The Trust intends to comply with the regulations of the CFTC exempting the
Funds from registration as a "commodity pool operator."
INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is
normally a general obligation of the issuing insurance company and not a
separate account. The purchase price paid for an IFA becomes part of the
general assets of the insurance company, and the contract is paid from the
company's general assets. The Money Market Fund and Fixed Income Fund will only
purchase highly rated IFAs. The High Yield Fixed Income Fund is not subject to
any minimum rating criteria. Generally, IFAs are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in IFAs may not exist. Therefore, IFAs will be subject to a
Fund's limitation on illiquid investments when the Fund may not demand payment
of the principal amount within seven days and a reliable trading market is
absent.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The U.S.
Government, Short-Intermediate U.S. Government, Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed
Income, Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt, Global Fixed
Income, High Yield Municipal, High Yield Fixed Income, Income Equity and Large
Cap Value Funds may enter into interest rate swaps for hedging purposes and not
for speculation. The U.S. Government, Short-Intermediate U.S. Government, Fixed
Income, Global Fixed Income, High Yield Municipal and High Yield Fixed Income
Funds may also purchase interest rate floors or caps for hedging purposes and
not for speculation. A Fund will typically use interest rate swaps to preserve
a return on a particular investment or portion of its portfolio or to shorten
the effective duration of its portfolio investments. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. The purchase of an interest rate floor or
cap entitles the purchaser to receive payments of interest on a notional
principal amount from the seller, to the extent the specified index falls below
(floor) or exceeds (cap) a predetermined interest rate. The International Funds
and the High Yield Fixed Income Fund may also enter into currency swaps, which
involve the exchange of the rights of a Fund and another party to make or
receive payments in specific currencies.
A Fund will only enter into interest rate swaps or interest rate floor or
cap transactions on a net basis, i.e. the two payment streams are netted out,
with a Fund receiving or paying, as the case may be, only the net amount of the
two payments. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for the other
designated currency. In as much as interest rate and currency swaps are entered
into for good faith hedging purposes, the Trust and the Investment Advisers
believe that such transactions do not constitute senior securities as defined in
the 1940 Act and, accordingly, will not treat them as being subject to a Fund's
borrowing restrictions.
The net amount of the excess, if any, of the Funds' obligations over their
entitlements with respect to each interest rate or currency swap will be accrued
on a daily basis and an amount of liquid assets having an aggregate net asset
value at least equal to such accrued excess will be segregated by the Funds.
Except for the High Yield Fixed Income Fund (which is not subject to any
minimum rating criteria), a Fund will not enter into a currency or interest rate
swap or interest rate floor or cap transaction unless the unsecured commercial
paper, senior debt or the claims-paying ability of the other party thereto is
rated either A or A-1 or better by S&P, D&P or Fitch, or A or P-1 or better by
Moody's. If there is a default by the other party to such transaction, a Fund
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with markets for other similar
instruments which are traded in the interbank market.
INVESTMENT COMPANIES. With respect to the investments of the Funds in the
securities of other investment companies, such investments will be limited so
that, as determined after a purchase is made, either (a) not more than 3% of the
total outstanding stock of such investment company will be owned by a Fund, 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 a Fund will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate securities of
investment companies as a group; and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund.
Certain investment companies whose securities are purchased by the Funds
may not be obligated to redeem such securities in an amount exceeding 1% of the
investment company's total outstanding securities during any period of less than
30 days. Therefore, such securities that exceed this amount may be illiquid.
If required by the 1940 Act, each Fund expects to vote the shares of
other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A 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, each Fund currently
intends to limit its investments in securities issued by other investment
companies to the extent described above. A 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, a 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 a Fund's shares could
also be substantially and adversely affected, and a 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, a 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 "Portfolio 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, a 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, a 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 the markets for the securities underlying
SPDRs purchased or sold by a Fund could result in losses on SPDRs. Trading in
SPDRs involves risks similar to those risks involved in the writing of options
on securities.
LOAN PARTICIPATIONS. The High Yield Fixed Income Fund may invest in loan
participations. Such loans must be to issuers in whose obligations the High
Yield Fixed Income Fund may invest. A loan participation is an interest in a
loan to a U.S. or foreign company or other borrower which is administered and
sold by a financial intermediary. In a typical corporate loan syndication, a
number of lenders, usually banks (co-lenders), lend a corporate borrower a
specified sum pursuant to the terms and conditions of a loan agreement. One of
the co-lenders usually agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fixed Income Fund may
take the form of a direct or co-lending relationship with the corporate
borrower, an assignment of an interest in the loan by a co-lender or another
participant, or a participation in the seller's share of the loan. When the
High Yield Fixed Income Fund acts as co-lender in connection with a
participation interest or when the High Yield Fixed Income Fund acquires certain
participation interests, the High Yield Fixed Income Fund will have direct
recourse against the borrower if the borrower fails to pay scheduled principal
and interest. In cases where the High Yield Fixed Income Fund lacks direct
recourse, it will look to the agent bank to enforce appropriate credit remedies
against the borrower. In these cases, the High Yield Fixed Income Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of such borrower. For example, in the event of the bankruptcy
or insolvency of the corporate borrower, a loan participation may be subject to
certain defenses by the borrower as a result of improper conduct by the agent
bank. Moreover, under the terms of the loan participation, the High Yield Fixed
Income Fund may be regarded as a creditor of the agent bank (rather than of the
underlying corporate borrower), so that the High Yield Fixed Income Fund may
also be subject to the risk that the agent bank may become insolvent. The
secondary market, if any, for these loan participations is limited and any loan
participations purchased by the High Yield Fixed Income Fund will be regarded as
illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fixed Income Fund's portfolio investments, the
issuer of a loan participation will be the underlying borrower. However, in
cases where the High Yield Fixed Income Fund does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the High Yield Fixed Income Fund and the borrower will be
deemed issuers of a loan participation.
MISCELLANEOUS. Securities may be purchased on margin only to obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities. The Funds will not engage in selling securities short. The Funds
may, however, make short sales against the box although the Funds have no
current intention to do so in the coming year. "Selling short against the box"
involves selling a security that a Fund owns for delivery at a specified date in
the future.
MORTGAGE DOLLAR ROLLS. Each Non-Money Market Fund may enter into mortgage
"dollar rolls" in which a 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, a Fund
loses the right to receive principal and interest paid on the securities sold.
However, a 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 a 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 applicable Fund. Each 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 treat mortgage dollar
rolls as two separate transaction; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do 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 a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Investment Adviser's ability to manage a Fund's interest rate and mortgage
prepayments exposure. For these reasons, there is no assurance that mortgage
dollar rolls can be successfully employed.
MUNICIPAL INSTRUMENTS. Municipal instruments are high quality, short-term
instruments, the interest on which is, in the opinion of bond counsel to the
issuers, exempt from Federal income tax. Opinions relating to the validity of
municipal instruments and to Federal and state tax issues relating to these
securities are rendered by bond counsel to the respective issuing authorities at
the time of issuance. Such opinions may contain various assumptions,
qualifications or exceptions that are reasonably acceptable to the Investment
Adviser. Neither the Trust nor the Investment Adviser will review the
proceedings relating to the issuance of municipal instruments or the bases for
such opinions.
Municipal instruments are generally issued to finance public works, such as
airports, bridges, highways, housing, health-related entities, transportation-
related projects, educational programs, water and pollution control and sewer
works. They are also issued to repay outstanding obligations, to raise funds
for general operating expenses and to make loans to other public institutions
and for other facilities. Municipal instruments include private activity bonds
issued by or on behalf of public authorities. Private activity bonds are or
have been issued to obtain funds to provide, among other things, privately
operated housing facilities, pollution control facilities, convention or trade
show facilities, mass transit, airport, port or parking facilities and certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal. Private activity bonds are also issued to privately held or publicly
owned corporations in the financing of commercial or industrial facilities.
State and local governments are authorized in most states to issue private
activity bonds for such purposes in order to encourage corporations to locate
within their communities. The principal and interest on these obligations may
be payable from the general revenues of the users of such facilities.
Municipal instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
Industrial development bonds are in most cases revenue securities and are
not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of an industrial revenue bond is usually directly related to the
credit standing of the private user of the facility involved.
Within the principal classifications of municipal instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, asset-backed securities such as custodial receipts and
participation certificates. Municipal notes include tax, revenue and bond
anticipation notes of short maturity, generally less than three years, which are
issued to obtain temporary funds for various public purposes. Municipal leases
and participation certificates are obligations issued by state or local
governments or authorities to finance the acquisition of equipment and
facilities. Participation certificates may represent participations in a lease,
an installment purchase contract, or a conditional sales contract. Certain
municipal lease obligations (and related participation certificates) may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Municipal leases (and participations in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. The Investment
Adviser, under the supervision of the Trust's Board of Trustees, will determine
the credit quality of any unrated municipal leases on an ongoing basis,
including an assessment of the likelihood that the leases will not be cancelled.
The Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund, California
Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund (the "Tax-Exempt
Funds") and the Municipal Money Market Fund, California Municipal Money Market
Fund and High Yield Municipal Fund (the "Municipal Funds") may also invest in
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund
(if such a fund has been established), the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal bonds with a series of maturity dates are called Serial Bonds.
Each of the Tax-Exempt Funds and the Municipal Funds may purchase Serial Bonds
and other long-term securities provided that it has a remaining maturity meeting
the Fund's maturity requirements. The Fund may also purchase 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 a par at least every thirteen months. Put Bonds with
conditional puts (that is, puts which cannot be exercised if the issuer defaults
on its payment obligations) will present risks that are different than those of
other municipal instruments because of the possibility that the Fund might hold
long-term Put Bonds on which defaults occur following acquisition by the Fund.
The Tax-Exempt Money Market, Municipal Money Market and California
Municipal Money Market Funds may invest in fixed and variable rate notes and
similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's,
SP-2 or A-2 or higher by S&P, AA or higher by D&P or F-2 or higher by Fitch and
tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher
by Moody's, A-2 or higher by S&P, D-2 or higher by D&P or F-2 or higher by
Fitch. The Tax-Exempt Money Market, Municipal Money Market and California
Municipal Money Market Funds may also invest in rated and unrated municipal
bonds, notes, paper or other instruments that are of comparable quality to the
tax-exempt commercial paper permitted to be purchased by the Funds.
Each of the Tax-Exempt Funds and Municipal Funds may acquire securities in
the form of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain municipal obligations.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The Fund may also
purchase certificates of participation that, in the opinion of counsel to the
issuer, are exempt from regular Federal income tax. Certificates of
participation are a type of floating or variable rate of obligation that
represents interests in a pool of municipal obligations held by a bank.
An issuer's obligations under its municipal instruments are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal instruments may be
materially adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's Federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their Federal alternative minimum
taxable income. The Trust cannot predict what legislation, if any, may be
proposed in the future in Congress as regards the Federal income tax status of
interest on municipal instruments or which proposals, if any, might be enacted.
Such proposals, if enacted, might materially and adversely affect the
availability of municipal instruments for investment by the Tax-Exempt and
Municipal Funds and the Funds' liquidity and value. In such an event the Board
of Trustees would reevaluate the Funds' investment objectives and policies and
consider changes in their structure or possible dissolution.
Certain of the municipal instruments held by a Fund may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the municipal instrument at the time of its
original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. A
Fund may invest more than 25% of its total assets in municipal instruments
covered by insurance policies.
In addition, municipal instruments may be backed by letters of credit or
guarantees issued by domestic or foreign banks or other financial institutions
which are not subject to federal deposit insurance. Adverse developments
affecting the banking industry generally or a particular bank or financial
institution that has provided its credit or guarantee with respect to a
municipal instrument held by a Fund, including a change in the credit quality of
any such bank or financial institution, could result in a loss to the Fund and
adversely affect the value of its shares. As described above under "Foreign
Securities," letters of credit and guarantees issued by foreign banks and
financial institutions involve certain risks in addition to those of similar
instruments issued by domestic banks and financial institutions.
The Tax-Exempt Funds and the Municipal Funds may invest in municipal
leases, which may be considered liquid under guidelines established by the
Trust's Board of Trustees. The guidelines will provide for determination of the
liquidity of a municipal lease obligation based on factors including the
following: (i) the frequency of trades and quotes for the obligation; (ii) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (iii) the willingness of dealers to undertake to make a
market in the security; and (iv) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer. The Investment Adviser, under the supervision of the
Trust's Board of Trustees, will also consider the continued marketability of a
municipal lease obligation based upon an analysis of the general credit quality
of the municipality issuing the obligation and the essentiality to the
municipality of the property covered by the lease.
Currently, it is not the intention of the Tax-Exempt Funds and the
Municipal Funds to invest more than 25% of the value of their total assets in
municipal instruments whose issuers are in the same state.
OPTIONS. Each Non-Money Market Fund may buy put options and buy call
options and write covered call and secured put options. Such options may relate
to particular securities, foreign and domestic securities indices, financial
instruments, foreign currencies or (in the case of the Global Fixed Income Fund
and the High Yield Fixed Income Fund) the yield differential between two
securities ("yield curve options"), and may or may not be listed on a domestic
or foreign securities exchange and may or may not be issued by the Options
Clearing Corporation. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price prior to the expiration of
the option, regardless of the market price of the security 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 Funds will write call options only if they are "covered." In the case
of a call option on a security or currency, the option is "covered" if a Fund
owns the 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 call option on an index, the option is covered if a Fund maintains with its
custodian securities comprising the index or liquid assets equal to the contract
value. A call option is also covered if a Fund holds a call on the same
instrument or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the Fund
segregates liquid assets in the amount of the difference. The Funds will write
put options only if they are "secured" by segregated liquid assets in an amount
not less than the exercise price of the option at all times during the option
period.
With respect to yield curve options, a call (or put) option is covered if
the Global Fixed Income Fund or High Yield Fixed Income Fund holds another call
(or put) option on the spread between the same two securities and maintains in a
segregated account liquid assets sufficient to cover the Fund's net liability
under the two options. Therefore, the Fund's liability for such a covered
option is generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the option held
by the Fund. Yield curve options may also be covered in such other manner as
may be in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options are
traded over-the-counter, and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
A Fund's obligation to sell an instrument subject to a covered call option
written by it, or to purchase 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 a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In
addition, a liquid secondary market for particular options, whether traded over-
the-counter or on 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 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 Equity Funds, except the Stock Index
Fund and Small Cap Index 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, a 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.
RELATIVE VALUE APPROACH. In buying and selling securities for the Fixed
Income Funds, the investment management team uses a relative value approach.
This approach involves an analysis of economic and market information, including
economic growth rates, interest and inflation rates, deficit levels, the shape
of the yield curve, sector and quality spreads and risk premiums. It also
involves the use of proprietary valuation models to analyze and compare expected
returns and assumed risks. Under the relative value approach, the investment
management team will emphasize particular securities and particular types of
securities that the team believes will provide a favorable return in light of
these risks.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the 1940
Act. Although the securities subject to a repurchase agreement may bear
maturities exceeding one year, settlement for the repurchase agreement will
never be more than one year after a Fund's acquisition of the securities and
normally will be within a shorter period of time. Securities subject to
repurchase agreements are held either by 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 a
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Funds may use the proceeds of reverse repurchase
agreements to purchase other securities either maturing, or under an agreement
to resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
repurchase price. A Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Fund will segregate liquid assets in an amount at least equal to
the market value of the securities, plus accrued interest, subject to the
agreement.
RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Advisers
believe that smaller companies can provide greater growth potential than larger,
more mature firms, investing in the securities of such companies also involves
greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks, which will be the primary investments of the Small Cap
Index, Small Cap Value and Small Cap Growth Funds', and stocks of recently
organized companies, in which the Small Cap Index, Small Cap Value and Small Cap
Growth Funds may also invest, have been more volatile in price than the larger
capitalization stocks included in the S&P 500 Index. Among the reasons for this
greater price volatility are the lower degree of market liquidity (the
securities of companies with small stock market capitalizations may trade less
frequently and in limited volume) and the greater sensitivity of small companies
to changing economic conditions. For example, these companies are associated
with higher investment risk due to the greater business risks of small size and
limited product lines, markets, distribution channels and financial and
managerial resources.
The values of small company stocks will frequently fluctuate independently
of the values of larger company stocks. Small company stocks may decline in
price as large company stock prices rise, or rise in price as large company
stock prices decline. You should, therefore, expect that the net asset value of
a Fund's shares will be more volatile than, and may fluctuate independently of,
broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when a Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.
RISKS RELATED TO MEDIUM AND LOWER QUALITY SECURITIES. Investments in
medium and lower quality securities present special risk considerations. Medium
quality securities, although considered investment grade, are also considered to
have speculative characteristics. Lower quality securities are considered
predominately speculative by traditional investment standards. In some cases,
these obligations may be highly speculative and have poor prospects for reaching
investment grade standard. While any investment carries some risk, certain
risks associated with lower quality securities are different from those for
investment-grade securities. The risk of loss through default is greater because
lower quality securities are usually unsecured and are often subordinate to an
issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities may be quite volatile
and may result in wider fluctuations of a Fund's net asset value per share.
There remains some uncertainty about the performance level of the market
for lower quality securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the markets for lower quality securities (resulting in a greater number of
bond defaults) and the value of lower quality securities held in a portfolio of
investments.
The economy and interest rates can affect lower quality securities
differently than other securities. For example, the prices of lower quality
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher quality investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
The market value of lower quality securities tends to reflect individual
corporate developments to a greater extent than that of higher quality
securities which react primarily to fluctuations in the general level of
interest rates. Lower quality securities are often issued in connection with a
corporate reorganization or restructuring or as a part of a merger, acquisition,
takeover or similar event. They are also issued by less established companies
seeking to expand. Such issuers are often highly leveraged, may not have
available to them more traditional methods of financing and are generally less
able than more established or less leveraged entities to make scheduled payments
of principal and interest in the event of adverse economic developments or
business conditions.
A holder's risk of loss from default is significantly greater for lower
quality securities than is the case for holders of other debt securities because
such securities are generally unsecured and are often subordinated to the rights
of other creditors of the issuers of such securities. Investment by a Fund in
defaulted securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by a Fund of its initial investment
and any anticipated income or appreciation will be uncertain. A Fund may also
incur additional expenses in seeking recovery on defaulted securities. If an
issuer of a security defaults, a Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty would likely result in
increased volatility for the market prices of lower quality securities as well
as a Fund's net asset value. In general, both the prices and yields of lower
quality securities will fluctuate.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as liquid as, and
is more volatile than, the secondary market for higher quality securities. In
addition, market trading volume for high yield fixed income securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the market price and a Fund's ability to dispose of particular
portfolio investments. A less developed secondary market may also make it more
difficult for a Fund to obtain precise valuations of the high yield securities
in its portfolio.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower quality
convertible securities held by a Fund, especially in a thinly traded market.
Illiquid or restricted securities held by a Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
The credit ratings assigned by a rating agency evaluate the safety of a
rated security's principal and interest payments, but do not address market
value risk and, therefore, may not fully reflect the true risks of an
investment. Because the ratings of the rating agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the Investment Adviser performs its own analysis of the
issuers whose lower quality securities a Fund holds. Because of this, a Fund's
performance may depend more on its Investment Adviser's credit analysis than is
the case of mutual funds investing in higher quality securities.
SECURITIES LENDING. Collateral for loans of portfolio securities made by a
Fund may consist of cash, cash equivalents, securities issued or guaranteed by
the U.S. Government or its agencies or (except for the U.S. Government Money
Market Fund, U.S. Government Select Money Market Fund, U.S. Government Fund and
Short-Intermediate U.S. Government Fund) irrevocable bank letters of credit (or
any combination thereof). The borrower of securities will be required to
maintain the market value of the collateral at not less than the market value of
the loaned securities, and such value will be monitored on a daily basis. When
a Fund lends its securities, it continues to receive dividends and interest on
the securities loaned and may simultaneously earn interest on the investment of
the cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur.
STANDBY COMMITMENTS. The Tax-Exempt Funds and Municipal Funds may enter
into standby commitments with respect to municipal instruments held by them,
respectively. Under a standby commitment, a dealer agrees to purchase at a
Fund's option a specified municipal instrument. Standby commitments may be
exercisable by the Tax-Exempt Funds and Municipal Funds at any time before the
maturity of the underlying municipal instruments and may be sold, transferred or
assigned only with the instruments involved.
The Tax-Exempt Funds and Municipal Funds expect that standby commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tax-Exempt Funds and
Municipal Funds may pay for a standby commitment either separately in cash or by
paying a higher price for municipal instruments which are acquired subject to
the commitment (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding
standby commitments held by the Tax-Exempt Funds and Municipal Funds will not
exceed 1/2 of 1% of the value of the Fund's total assets calculated immediately
after each standby commitment is acquired.
The Tax-Exempt Funds and Municipal Funds intend to enter into standby
commitments only with dealers, banks and broker-dealers which, in the Investment
Adviser's opinion, present minimal credit risks. The Tax-Exempt Funds and
Municipal Funds will acquire standby commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. The acquisition of a standby commitment will not affect the valuation
of the underlying municipal instrument. The actual standby commitment will be
valued at zero in determining net asset value. Accordingly, where the Tax-
Exempt Funds and Municipal Funds pay directly or indirectly for a standby
commitment, the Funds' costs will be reflected as an unrealized loss for the
period during which the commitment is held by the Fund and will be reflected as
unrealized loss for the period during which the commitment is held by the Tax-
Exempt Funds and the Municipal Funds and will be reflected as unrealized loss
for the period during which the commitment is held by the Tax-Exempt Funds and
the Municipal Funds and will be reflected in realized gain or loss when the
commitment is exercised or expires.
STOCK INDICES. The S&P 500 Index is a market value-weighted index
consisting of 500 common stocks which are traded on the New York Stock Exchange,
AMEX and the Nasdaq National Market System and selected by the S&P through a
detailed screening process starting on a macro-economic level and working toward
a micro-economic level dealing with company-specific information such as market
value, industry group classification, capitalization and trading activity.
S&P's primary objective for the S&P 500 Index is to be the performance benchmark
for the U.S. equity markets. The companies chosen for inclusion in the S&P 500
Index tend to be leaders in important industries within the U.S. economy.
However, companies are not selected by S&P for inclusion because they are
expected to have superior stock price performance relative to the market in
general or other stocks in particular. S&P makes no representation or warranty,
implied or express, to purchasers of the Stock Index Fund shares or any member
of the public regarding the advisability of investing in the Fund or the ability
of the S&P 500 Index to track general stock market performance. As of March 31,
2000, the approximate market capitalization range of the companies included in
the S&P 500 Index was between $11.639 trillion and $12.309 trillion.
The S&P MidCap 400O Stock Index ("S&P MidCap 400 Index") is a market-
weighted index composed of 400 common stocks chosen by S&P for market size,
liquidity and industry group representation. The purpose of the S&P MidCap 400
Index is to represent the performance of the medium-capitalization sector of the
U.S. securities market. Medium capitalized stocks which are included in the S&P
500 Index are excluded from the S&P MidCap 400 Index. Except for a limited
number of Canadian securities, the S&P MidCap 400 does not include foreign
securities. As of March 31, 2000, the approximate market capitalization range
of the companies included in the S&P MidCap 400 Index was between $9.413 billion
and $10.331 billion.
The Russell 2000 Index is a market value-weighted index composed of the
stocks of the smallest 2000 companies in the Russell 3000 Index, which is
composed of the stocks of 3000 large U.S. domiciled companies (based on market
capitalization) that represent approximately 98% of the investable U.S. equity
markets. Because of its emphasis on the smallest 2000 companies, the Russell
2000 Index represents approximately 10% of the total market capitalization of
the Russell 3000 Index. As of March 31, 2000, the average market capitalization
of the companies included in the Russell 2000 Index was approximately $1.61
billion. The Russell 2000 Index is reconstituted annually to reflect changes in
market capitalization. The primary criteria used by Frank Russell & Company
("Russell") to determine the initial list of securities eligible for inclusion
in the Russell 3000 Index (and accordingly, the Russell 2000 Index) is total
market capitalization adjusted for large private holdings and cross-ownership.
However, companies are not selected by Russell for inclusion in the Russell 2000
Index because they are expected to have superior stock price performance
relative to the market in general or other stocks in particular. Russell makes
no representation or warranty, implied or express, to purchasers of the Small
Cap Index or the Small Cap Growth Fund shares or any member of the public
regarding the advisability of investing in the Fund or the ability of the
Russell 2000 Index to track general market performance of small capitalization
stocks.
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 Funds may purchase securities registered in the STRIPS
program. Under the STRIPS program, the Funds are able to have their beneficial
ownership of zero coupon securities recorded directly in the book-entry record-
keeping system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities.
In addition, the Funds, other than the U.S. Government Select Money Market
Fund, may acquire U.S. Government obligations and their unmatured interest
coupons that have been separated ("stripped") by their holder, typically a
custodian bank or investment brokerage firm. Having separated the interest
coupons from the underlying principal of the U.S. Government obligations, the
holder will resell the stripped securities in custodial receipt programs with a
number of different names, including "Treasury Income Growth Receipts" ("TIGRs")
and "Certificate of Accrual on Treasury Securities" ("CATS"). The stripped
coupons are sold separately from the underlying principal, which is usually sold
at a deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. 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 Funds, including stripped mortgage-backed securities ("SMBS").
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mortgage-
backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class receives all of the principal. However, in
some instances, one class will receive some of the interest and most of the
principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a risk that the initial investment will not be fully recouped. SMBS
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
may be considered liquid under guidelines established by the Trust's Board of
Trustees if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the net asset
value per share.
SUPRANATIONAL BANK OBLIGATIONS. A Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development (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.
TRACKING VARIANCE. As discussed in the Prospectus, the Stock Index and
Small Cap Index Funds are subject to the risk of tracking variance. Tracking
variance may result from share purchases and redemptions, transaction costs,
expenses and other factors. Share purchases and redemptions may necessitate the
purchase and sale of securities by a Fund and the resulting transaction costs
which may be substantial because of the number and the characteristics of the
securities held. In addition, transaction costs are incurred because sales of
securities received in connection with spin-offs and other corporate
organizations are made to conform a Fund's holdings with its investment
objective. Tracking variance may also occur due to factors such as the size of
a Fund, the maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Fund's designated Index or the manner in which
the Index is calculated or because the indexing and investment approach of the
Investment Adviser does not produce the intended goal of the Fund. Tracking
variance is monitored by the Investment Adviser at least quarterly. In the
event the performance of a Fund is not comparable to the performance of its
designated Index, the Board of Trustees will evaluate the reasons for the
deviation and the availability of corrective measures. If substantial deviation
in a Fund's performance were to continue for extended periods, it is expected
that the Board of Trustees would consider recommending to shareholders possible
changes to the Fund's investment objective.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations that may be acquired by the Funds include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, 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 their respective investment objectives, the
Funds 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. With respect to the variable and
floating rate instruments that may be acquired by the Funds, the Investment
Advisers will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instruments are
subject to demand features, will monitor their financial status and ability to
meet payment on demand. In determining weighted average portfolio maturity, an
instrument may, subject to applicable SEC regulations, be deemed to have a
maturity shorter than its nominal maturity based on the period remaining until
the next interest rate adjustment or the time a Fund can recover payment of
principal as specified in the instrument. Where necessary to ensure that a
variable or floating rate instrument meets a 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 Funds
include variable amount master demand notes, which permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate, and (except for the Money Market Funds) leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage interest in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. The Funds
may deem the maturity of variable and floating rate instruments to be less than
their stated maturities based on their variable and floating rate features
and/or their put features. Unrated variable and floating rate instruments will
be determined by the Investment Advisers to be of comparable quality at the time
of purchase to rated instruments which may be purchased by the Funds.
Variable and floating rate instruments including inverse floaters held by a
Fund will be subject to the Fund's limitation on illiquid investments, absent a
reliable trading market, when the Fund may not demand payment of the principal
amount within seven days.
WARRANTS. The Equity Funds 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 a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which the Funds invest, are dependent on a variety of
factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, D&P, 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 a Fund undergoes a rating revision, the Fund may continue to hold the
security if the Investment Advisers determine such retention is warranted.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, each Fund may invest in
zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates
representing interests in such stripped debt obligations or coupons. The market
prices of zero coupon bonds, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, a Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the Fund.
SPECIAL RISK FACTORS AND CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL
INSTRUMENTS, FLORIDA MUNICIPAL INSTRUMENTS AND ARIZONA MUNICIPAL INSTRUMENTS
Some of the risk factors relating to investments by the California, Florida
Intermediate Tax-Exempt and Arizona Tax-Exempt Funds in California, Florida, and
Arizona municipal instruments are summarized below. This summary does not
purport to be a comprehensive description of all relevant factors. Although the
Trust has no reason to believe that the information summarized herein is not
correct in all material respects, this information has not been independently
verified for accuracy or thoroughness by the Trust. Rather, the information
presented herein with respect to California municipal instruments was culled
from official statements and prospectuses issued in connection with various
securities offerings of the State of California and local agencies in California
available as of the date of this Additional Statement and, with respect to the
Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds, the information is
derived principally from official statements relating to issues of Florida and
Arizona municipal instruments released prior to the date of this Additional
Statement. Further, any estimates and projections presented herein should not
be construed as statements of fact. They are based upon assumptions which may
be affected by numerous factors and there can be no assurance that target levels
will be achieved.
CALIFORNIA MUNICIPAL INSTRUMENTS
General
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the California Funds, or result in the default of existing
obligations, including obligations which may be held by the California Funds.
It should be noted that the creditworthiness of obligations issued by local
issuers may be unrelated to the creditworthiness of California, and that there
is no obligation on the part of California to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12 percent of the total United States population and grew by 26 percent in
the 1980s, more than double the national rate. Population growth slowed to less
than 1 percent annually in 1994 and 1995, but rose to 1.8 percent in 1996 and
1.6 percent in 1997. During the early 1990's, net population growth in the
State was due to births and foreign immigration, but in recent years, in-
migration from the other states has increased.
Total personal income in the State, at an estimated $902 billion in 1998,
accounts for almost 13 percent of all personal income in the nation. Total
employment is over 15 million, the majority of which is in the service, trade
and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10 percent recession peak to under 6 percent in early 1999. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994 particularly in high technology manufacturing and services,
including computer software, electronic manufacturing and motion
picture/television production, and other services, entertainment and tourism,
and both residential and commercial construction. International economic
problems starting in 1997 had some moderating impact on California's economy,
but negative impacts, such as a sharp drop in exports to Asia which have hurt
the manufacturing and agricultural sectors, have apparently been offset by
increased exports to Latin American and other nations, and a greater strength in
services, computer software and construction. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California municipal instruments may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by
Article XIIIA of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1 percent
of full cash value of the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2 percent per year, except
under new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above the 1
percent limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1 percent ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1 percent limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed a non-voter approved levy of "general taxes" which
were not dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a two-
thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50 percent of any excess, with the other 50 percent paid to schools and
community colleges. With more liberal annual adjustment factors since 1988, and
depressed revenues since 1990 because of the recession, few governments are
currently operating near their spending limits, but this condition may change
over time. Local governments may by voter approval exceed their spending limits
for up to four years. During fiscal year 1986-87, State receipts from proceeds
of taxes exceeded its appropriations limit by $1.1 billion, which was returned
to taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $6.8 billion under the limit
for fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal instruments or on the ability of the
State or local governments to pay debt service on such California municipal
instruments. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of May 1,
1999, the State had outstanding approximately $19.7 billion of long-term general
obligation bonds, plus $246 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.6 billion of lease-
purchase debt supported by the State General Fund. The State also had about
$15.3 billion of authorized and unissued long-term general obligation bonds and
lease-purchase debt. In FY 1997-98, debt service on general obligation bonds
and lease purchase debt was approximately 4.4 percent of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1997-1998 were the
California personal income tax (51 percent of total revenues), the sales tax (32
percent), bank and corporation taxes (11 percent), and the gross premium tax on
insurance (2 percent). The State maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund, but which is required to be replenished as
soon as sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 35 percent).
Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, during this period the State experienced substantial revenue
shortfalls, and greater than anticipated social service costs. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor responded to these deficits by enacting a series of fiscal steps
between FY1991-92 and FY1994-95, including significant cuts in health and
welfare and other program expenditures, tax increases, transfers of program
responsibilities and some funding sources from the State to local governments,
and transfer of about $3.6 billion in annual local property tax revenues
primarily from cities and counties to local school districts, thereby reducing
State funding for schools.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. The last of these deficit notes was repaid in
April, 1996.
The State's financial condition improved markedly in the years from FY1995-
96 onward, with a combination of better than expected revenues, slowdown in
growth of social welfare programs, and continued spending restraint based on the
actions taken in earlier years. The State's cash position also improved, and no
external deficit borrowing has occurred over the fiscal year since FY 1994-95.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98, and $1.0 billion in
1998-99) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the
recession years was finally eliminated. The Department of Finance estimates
that the State's budget reserve (the SFEU) totaled about $1.8 billion at June
30, 1998 and $1.9 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession resulted
in significant increases in State funding for local school districts under
Proposition 98. From the recession level of about $4,300 per pupil, annual
State funding has increased to over $6,000 per pupil in FY 1999-2000. A
significant amount of the new moneys have been directed to specific educational
reforms, including reduction of class sizes in many grade levels. The improved
budget condition also allowed annual increases in support for higher education
in the State, permitting increased enrollment and reduction of student fees.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal
law, new time limits are placed on receipt of welfare aid. Generally, health and
welfare costs have been contained even during the recent period of economic
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000.
FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act,
the Legislature passed a number of additional fiscal bills. Taking these into
account, the Administration projected in September, 1998 that the balance in the
SFEU at June 30, 1999 would be about $1.2 billion.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these was a phased-in cut in the
Vehicle License Fee (an annual tax on the value of cars registered in the State,
the "VLF"). Starting on January 1, 1999, the VLF has been reduced by 25
percent. Under pre-existing law, VLF funds are automatically transferred to
cities and counties, so the new legislation provided for the General Fund to
make up the reductions. If State General Fund revenues continue to grow above
certain targeted levels in future years, the cut could reach as much as 67.5
percent by the year 2003. The initial 25 percent VLF cut will be offset by
about $500 million in General Fund money in FY 1998-99, and $1 billion annually
for future years. Other tax cuts in FY 1998-99 included an increase in the
dependent credit exemption for personal income tax filers, restoration of a
renter's tax credit for taxpayers, and a variety of business tax relief
measures. The total cost of these tax cuts was estimated at $1.4 billion for FY
1998-99.
The Administration released new projections for the balance of FY 1998-99
on May 14, 1999 as part of the May Revision of the Governor's Proposed Budget
for 1999-2000 (the "May Revision"). The May Revision revealed that the State's
economy was much stronger in late 1998 and into 1999 than the Administration had
thought when it made its first FY 1999-2000 Budget Proposal in January 1999. As
a result, the May Revision updated 1998-99 General Fund revenues to be $57.9
billion, almost $1 billion above the original FY 1998-99 estimates, and over
$1.6 billion above the Administration's January estimate. Most of the increase
is from personal income taxes, reflecting stronger wage employment than
previously estimated and extraordinary growth in capital gain realizations
resulting from the stock market's rise. The May Revision projected the SFEU
will have a balance of almost $1.9 billion at June 30, 1999.
Although, as noted, the Administration projected a budget reserve in the
SFEU of about $1.9 billion on June 30, 1999, the General Fund balance on that
date also reflects $1.0 billion of "loans" which the General Fund made to local
schools in the recession years, representing cash outlays above the mandatory
minimum funding level. Settlement of litigation over these transactions in July
1996 calls for repayment of these loans over the period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $300 million appropriation
from the General Fund toward this settlement.
FY 1999-2000 Budget. The newly elected Governor, Gray Davis, released his
proposed FY 1999-00 Budget in January 1999. It projected somewhat lower General
Fund revenues than in earlier projections, due to slower economic growth which
was expected in late 1998, but totaling an estimated $60.3 billion. The May
Revision has sharply increased the revenue estimates, by over $2.7 billion, to a
total of almost $63.0 billion, which would represent a 9 percent increase above
FY 1998-99. Again, the greatest increase is expected in personal income taxes
(about 10 percent year-over-year increase), with more moderate increases in
sales taxes (6 percent) and corporate taxes (3 percent).
The 1999-00 Budget Act was signed on June 29, 1999, only the second time in
the decade the budget was in place at the start of the fiscal year. After the
Governor used his line-item veto power to reduce expenditures by about $581
million, the final spending plan called for about $63.7 billion of General Fund
expenditures, $16.1 billion of Special Fund expenditures, and $1.5 billion in
bond funded expenditures. The Governor's final budget actions left the SFEU
with an estimated balance of $881 million at June 30, 2000, but the Governor
also reduced spending to set aside $300 million for future appropriation for
either employee pay raises or potential litigation costs. If not fully used,
these "set-aside" funds would increase the SFEU year-end balance.
The final Budget Act generally provided increased funding for a wide range
of programs. Education spending under Proposition 98 received the largest
increase (over $2.3 billion above 1998-99), with other significant increases for
higher education, health and welfare, natural resources and capital outlay. The
budget provides several hundred million dollars in direct new aid to cities and
counties. A proposal is being drafted to place a constitutional amendment on
the ballot in 2000 to provide more extensive, permanent fiscal relief for local
government.
The final spending plan includes several targeted tax cuts for businesses,
totaling under $100 million in 1999-00. The plan also includes a one-time, one-
year additional cut of 10 percent in the Vehicle License Fee for calendar year
2000. This cut will cost the General Fund about $500 million in each of 1999-00
and 2000-01 to make up lost funds for local governments. Under the 1998 law, the
VLF cut to 35 percent would become permanent in the year 2001 if General Fund
revenues reach a certain specified level in 2000-01.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending
growth also put pressure on local governments. There can be no assurances that,
if economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced in
the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of July 1, 1999 were assigned ratings of "A+"
from S&P, "Aa3" from Moody's and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in
welfare payments and the use of certain cigarette tax funds for health costs.
All of these cases are subject to further proceedings and appeals, and if
California eventually loses, the final remedies may not have to be implemented
in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Instruments. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue municipal instruments, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50 percent following passage of Proposition 13.
Subsequently, the California Legislature enacted measures to provide for the
redistribution of the State's General Fund surplus to local agencies, the
reallocation of certain State revenues to local agencies and the assumption of
certain governmental functions by the State to assist municipal issuers to raise
revenues. Total local assistance from the State's General Fund was budgeted at
approximately 75 percent of General Fund expenditures in recent years, including
the effect of implementing reductions in certain aid programs. To reduce State
General Fund support for school districts, the 1992-93 and 1993-94 Budget Acts
caused local governments to transfer $3.9 billion of property tax revenues to
school districts, representing loss of the post-Proposition 13 "bailout" aid.
Local governments have in return received greater revenues and greater
flexibility to operate health and welfare programs. However, except for
agreement in 1997 on a new program for the State to substantially take over
funding for local trial courts (saving cities and counties some $400 million
annually), there has been no large-scale reversal of the property tax shift to
help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally,
counties play a large role in the new system, and are given substantial
flexibility to develop and administer programs to bring aid recipients into the
workforce. Counties are also given financial incentives if either at the county
or statewide level, the "Welfare-to-Work" programs exceed minimum targets;
counties are also subject to financial penalties for failure to meet such
targets. Counties remain responsible to provide "general assistance" for able-
bodied indigents who are ineligible for other welfare programs. The long-term
financial impact of the new CalWORKs system on local governments is still
unknown.
Assessment Bonds. California municipal instruments which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement
is not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California municipal instruments in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California municipal instruments.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
FLORIDA MUNICIPAL INSTRUMENTS
The financial condition of the State of Florida may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities
but also by entities that are not under the control of the State. Adverse
developments affecting the State's financing activities, its agencies or its
political subdivisions could adversely affect the State's financial condition.
The State's revenues increased from $32,957,715,000 during the 1996-97
fiscal year ended June 30, 1997 to $35,849,518,000 during the fiscal year ended
June 30, 1998. The State's operating expenditures increased from
$31,494,591,000 during the 1996-97 fiscal year ended June 30, 1997 to
$33,373,020,000 during the 1997-98 fiscal year ended June 30, 1998. The Office
of Economic and Demographic Research of the Florida Legislature also projected
non-agricultural jobs to grow 3.5% and 3.1% in fiscal years 1998-99 and 1999-
2000, respectively. The revenue growth in the 1998-1999 fiscal year is driven
by the State's sales tax collections. The sales tax accounts for close to 75% of
total revenues through March 31, 1999. A March 31, 1999 estimate shows an
expected year-end surplus of $573.8 million. When this is combined with the
Budget Stabilization Fund balance of $786.9 million, Florida's total reserves
are $1,360.7 million.
The Constitution of the State of Florida limits the right of the State and
its local governments to tax. The Constitution requires the State to have a
balanced budget and to raise revenues to defray its operating expenses. The
State may not borrow for the purpose of maintaining ordinary operating expenses,
but may generally borrow for capital improvements.
An amendment to the Florida Constitution adopted in 1994 requires that
state revenues in excess of an allowed amount plus a growth factor must be
contributed to a Budget Stabilization Fund until this fund reaches a certain
amount at which time the excess state revenues must be distributed to the
taxpayers. The growth factor is the average annual rate of growth in the state
personal income over the most recent 20 quarters times the amount of state
revenue allowed under the Constitution for the prior fiscal year. Included among
the categories of revenues that are exempt from this revenue limitation are
revenues pledged to state bonds and other payments related to debt. A two-thirds
vote of the Florida legislature can raise the amount of the limit on state
revenues. It is difficult to predict the impact of this amendment on Florida
state finances, especially since courts have not interpreted it extensively. To
the extent that local governments traditionally receive revenues from the state
which are subject to or limited by this Constitutional amendment, the further
distribution of such state revenues may be adversely impacted by the amendment.
There are a number of methods by which the State of Florida may incur debt.
The State may issue bonds backed by the State's full faith and credit to finance
or refinance certain capital projects authorized by its voters. The total
outstanding principal of State bonds pledging the full faith and credit of the
State may not exceed 50% of the total tax revenues of the State for the two
preceding fiscal years, excluding any tax revenues held in trust. The State
also may issue certain bonds backed by the State's full faith and credit to
finance or refinance pollution control, solid waste disposal and water
facilities for local governments; county roads; school districts and capital
public education projects without voter authorization. The State may also,
pursuant to specific constitutional authorization, directly guarantee certain
obligations of the State's authorities, agencies and instrumentalities.
Payments of debt service on State bonds backed by the State's full faith and
credit and State-guaranteed bonds and notes are legally enforceable obligations
of the State. Revenue bonds to finance or refinance certain capital projects
also may be issued by the State of Florida without voter authorization.
However, revenue bonds are payable solely from funds derived directly from
sources other than state tax revenues.
The State of Florida currently imposes, among other taxes, an ad valorem
tax on intangible property and a corporate income tax. The Florida Constitution
prohibits the levying of a personal income tax. Certain other taxes the State
of Florida imposes include: an estate or inheritance tax which is limited by the
State's Constitution to an amount not in excess of the amount allowed to be
credited upon or deducted from federal estate taxes or the estate taxes of
another state; and a 6% sales tax on most goods and certain services with an
option for counties to impose up to an additional 1% sales tax on such goods and
services. In addition, counties chartered before June 1, 1976 or county with a
consolidated county/municipal government may assess up to a 1% discretionary
sales surtax within the county for the development, construction, maintenance
and operation of a fixed guideway rapid transit system.
The Constitution reserves the right to charge an ad valorem tax on real
estate and tangible personal property to Florida's local governments. All other
forms of taxation are preempted to the State of Florida except as may be
provided by general law. Motor vehicles, boats, airplanes, trailers, trailer
coaches and mobile homes, as defined by law, may be subject to a license tax for
their operation, but may not be subject to an ad valorem tax.
Under the Constitution, ad valorem taxes may not be levied in excess of the
following millage upon the assessed value of real estate and tangible personal
property: for all county purposes, ten mills; for all municipal purposes, ten
mills; for all school purposes, ten mills; for water management purposes for the
northwest portion of the State, .05 mills; for water management purposes for the
remaining portion of the State, one mill; and for all other special districts a
millage authorized by law and approved by referendum. When authorized by
referendum, the above millage caps may be exceeded for up to two years.
Counties, school districts, municipalities, special districts and local
governmental bodies with taxing powers may issue bonds to finance or refinance
capital projects payable from ad valorem taxes in excess of the above millage
cap when approved by referendum. It should be noted that several municipalities
and counties have charters that further limit either ad valorem taxes or the
millage that may be assessed.
The Florida legislature has passed a number of mandates which limit or
place requirements on local governments without providing the local governments
with compensating changes in their fiscal resources. The Florida legislature
enacted a comprehensive growth management act which forces local governments to
establish and implement comprehensive planning programs to guide and control
future development. This legislation prohibits public or private development
that does not conform with the locality's comprehensive plan. Local governments
may face greater requirements for services and capital expenditures than they
had previously experienced if their locality experiences increased growth or
development. The burden for funding these potential services and capital
expenditures which has been left to the local governments may be quite large.
The Florida Constitution limits the assessed value of homestead real
property for ad valorem tax purposes to the lower of (A) three percent (3%) of
the assessed value for the prior year; or (B) the percentage change in the
Consumer Price Index for the preceding calendar year. In addition, no such
assessed value shall exceed "just value" and such just value shall be reassessed
(notwithstanding the 3% cap) as of January 1 of the year following a change of
ownership of the assessed real property.
Florida has grown dramatically since 1980 and as of April 1, 1997 ranked
fourth nationally with an estimated population of 14.7 million. Florida's
substantial population increases over the past few years are expected to
continue. It is anticipated that corresponding increases in State revenues will
be necessary during the next decade to meet increased burdens on the various
public and social services provided by the State. Much of this growth is being
funded by bonded revenues secured by the expanding real property tax base. As of
1997, real property values exceed $724 billion. Residential property values
account for over $400 billion in value while commercial and industrial property
values exceed $100 billion.
Florida's job market continues to reflect strong performance. The state's
March 1999 unemployment rate was 4.1 percent, 0.3 percentage points lower than
the year ago rate of 4.4 percent. Florida's unemployment rate was one of the
lowest since October 1973 when it was 3.4 percent. The U.S. unemployment rate
was 4.2 percent in March 1999, just above Florida's rate. Fueled by low
interest rates, construction had the fastest growth rate at 5.8 percent and
added 20,000 jobs over the year. Similarly, finance, insurance, and real estate
and government also experienced year to year increases of 19,100 jobs and 16,400
jobs, respectively. The apparel and textiles industries lost 1,500 jobs due to
tariffs and foreign competition. The State is gradually becoming less dependent
on employment related to construction, agriculture and manufacturing, and more
dependent on employment related to trade and services. Presently, services
constitute 34.9% and trade 25.6% of the State's total non-farm jobs.
Personal income in the State has been growing strongly the last several
years and has generally outperformed both the nation as a whole and the
Southeast in particular. The reasons for this are strong population growth and
diversification of the economy. From 1992 through 1997, the State's per capita
income rose an average of 5.0% per year, while the national per capita income
increased an average of 4.8%. For 1997, the State's per capita personal income
rose an average of 4.0% while the national per capita personal income rose 4.7%.
In 1997, per capita personal income in Florida was $24,795, while the national
per capita personal income was $25,298. The structure of the State's income
differs from that of the nation and the Southeast. Because the State has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (social security and pension benefits,
among other sources of income) are a relatively more important source of income.
Transfer payments, such as social security, are occasionally subject to
legislative change.
Tourism is one of Florida's most important industries. According to Visit
Florida (formerly the Florida Tourism Commission), about 47 million people
visited the State in 1997. Tourists to Florida effectively represent additional
residents, spending their dollars predominantly at eating and drinking
establishments, hotels and motels, and amusement and recreation parks. Their
expenditures generate additional business activity and State tax revenues. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus to a degree, reducing its seasonality.
The State also has a strong construction industry, with single and multi-
family housing starts accounting for approximately 9.2% of total U.S. housing
starts in 1997, while the State's population was only 5.5% of the nation's total
population. The reason for such a dynamic construction industry was the rapid
growth of the State's population. Since 1985, total housing starts have
averaged approximately 148,000 per year. Total housing starts were 132,813 in
1997, and are projected to be 97,600 in 1998-99.
Florida has experienced a diversifying economic base as technology related
industry, healthcare and financial services have grown into leading elements of
Florida's economy, complementing the State's previous reliance primarily on
agriculture and tourism. With the increasing costs and capital needs related to
its growing population, Florida's ability to meet its expenses will be dependent
in part upon the State's continued ability to foster business and economic
growth. Florida has also increased its funding of capital projects through more
frequent debt issuance rather than its historical pay-as-you go method.
At the regional level, local economies within Florida perform differently
according to their urban or rural qualities and level of economic
diversification. The spectrum of local economies spans dense urban centers such
as Miami and Tampa to rural agricultural regions of citrus, cattle ranching and
sugar cane production. For example, Central Florida is a premier world-class
resort/vacation destination with its economy driven by the presence of Disney
World, studio theme parks and other tourist oriented recreational parks with a
laser/optical research node and motion picture industries helping to diversify
the Central Florida local economy. In contrast to the highly urban areas of
Southeast Florida, North Florida and the Florida Panhandle are rural in many
areas with local economies is dominated by the logging and paper industries,
defense, tourism, state government and retirement.
Florida has a moderate debt burden. As of June 30, 1998 full faith and
credit bonds totaled $8.7 billion and revenue bonds totaled $5 billion for a
total debt of $13.7 billion. Full faith and credit debt per capita was $577. In
the 1998 fiscal year, debt service as a percent of Governmental Fund
expenditures was 2.0%. In recent years debt issuance for the State has been
increasing. The State brought a new indenture to the market in late Fiscal Year
1998, the Florida Lottery Bonds. These bonds will finance capital improvements
for Florida schools.
The payment on most Florida municipal instruments held by the Florida
Intermediate Tax-Exempt Fund will depend upon the issuer's ability to meet its
obligations. If the State or any of its political subdivisions were to suffer
serious financial difficulties jeopardizing their ability to pay their
obligations, the marketability of obligations issued by the State or localities
within the State, and the value of the Florida Intermediate Tax-Exempt Fund's
portfolio, could be adversely affected.
ARIZONA MUNICIPAL INSTRUMENTS
Under its Constitution, the State of Arizona is not permitted to issue
general obligation bonds secured by the State's full faith and credit. However,
agencies and instrumentalities of the State are authorized under specified
circumstances to issue bonds secured by revenues. The State enters into certain
lease transactions that are subject to annual renewal at its option. Local
governmental units in the State are also authorized to incur indebtedness. The
major source of financing for such local government indebtedness is an ad
valorem property tax. In addition, to finance public projects, local
governments may issue revenue bonds to be paid from the revenues of an
enterprise or the proceeds of an excise tax, from assessment bonds payable from
special proceeds of an excise tax, or from assessment bonds payable by special
assessments. Arizona local governments have also financed public projects
through leases that are subject to annual appropriation at the option of the
local government.
There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions without voter approval.
It is possible that if such a proposal were enacted, there would be an adverse
impact on State or local government financing. It is not possible to predict
whether any such proposals will be enacted in the future or what would be their
possible impact on state or local government financing.
The State is required by law to maintain a balanced budget. To achieve
this objective, it has in the past utilized a combination of spending reductions
and tax increases. In recent years, the State's fiscal situation has improved,
even while tax reduction measures have been enacted each year since 1992. In
1992, voters passed a measure that requires a two-thirds vote of the legislature
to increase state taxes.
The State's population, because of continued employment growth, is expected
to record above-average growth rates. After population growth of 3% in 1997 and
2.9% in 1998, 2.8% growth is expected in 1999 and 2.6% in 2000. That translates
into almost 132,000 more people in the state in 1999 and 126,000 in 2000.
The State's diversified economic base is not dependent on any single
industry. Principal economic sectors include services, manufacturing, mining,
tourism, and the military. Agriculture, at one time a major sector, plays a much
smaller role in the economy. For several decades, the population has grown at a
substantially higher rate than the population of the United States.
The economy of the State is growing. Since the current boom peaked in
1994, when employment grew by 6.8%, the rate of growth has slowed, but only
modestly. Through November 1998 (the latest data available), employment was
4.7% higher than the year before.
Different parts of the State have different growth rates and structures.
The Phoenix metropolitan area accounts for 70.6% of all Arizona jobs and almost
80% of the State's employment growth. The Tucson area saw growth accelerate in
1998 by 3%, versus 1.8% in 1997. The balance of the State also grew at more
moderate levels.
On a percentage basis, this expansion has not been as strong as previous
expansions. Yet, in terms of absolute employment growth, this expansion has
created more jobs than any period of economic growth in the State's history.
For example, since the beginning of the current expansion in March 1991, more
than 580,000 jobs have been created. In comparison, 297,200 jobs were created
in the 1975-1980 expansion, and about 450,000 jobs were created in the expansion
that lasted from 1982 to 1990.
According to the national Blue Chip Economic Indicators, after real GDP
growth of 3.9% in 1997 and 3.6% in 1998, growth is expected to moderate to 2.2%
in 1999. Inflation is expected to remain low and interest rates are also likely
to be low and through most of 1999.
As of 1998, 47% of all manufacturing employment in the Phoenix area and 25%
in Pima County is in high technology. The national average is 14.3%. The high-
tech areas include computers, telecommunications, electronic components,
aviation, and instrumentation. In the Phoenix area, the economy is weighted
towards electronic components employment, which accounts for 27% of all
manufacturing jobs. Tucson's high-tech manufacturing employment is more evenly
spread among computers, electronic components, aviation and instrumentation.
It is expected that international trade in the high-tech industry will
continue to grow, which will be a positive for the Arizona economy. But in the
near term, the unbalanced mix of employment could be a problem. Roughly 52% of
Arizona manufacturing exports are of high-tech products; further, nearly 40% of
the state's exports are to Japan, Malaysia, Taiwan, Hong Kong and Singapore, all
of which are experiencing some degree of economic problems.
In 1997, Arizona's total exports as a percent of personal income ranked
fifth in the U.S. at 13.5%, compared to 9.2% for the nation. When analyzing data
using only high-tech exports, Arizona ranked second at 7.1%, versus 2.1%
nationally. Thus, the impact of the reduction in high-tech exports will likely
affect Arizona more than other states. This is expected to result in some
continued layoffs in the manufacturing sector.
The unemployment rate, 4.1% for 1998, is also expected to remain relatively
low, especially in the State's metropolitan areas. However, it is expected to
increase in both 1999 and 2000. The current level of unemployment, the lowest in
nearly three decades, suggests a tight labor market. The modest rise in
unemployment projected for 1999 suggests that labor markets will moderately
soften. After employment growth of 5.6% in 1996, 4.5% in 1997 and an estimated
4.6% in 1998, employment should increase by another 3.5% in 1999 with growth
continuing at about 3% in 2000 and 2001. The Phoenix area's unemployment rate
remains low, at about 2.7%.
The outlook for continued, albeit slower, growth for the U.S. economy acts
as a base for the Arizona economy. The state has been one of the top five
employment-growth states for quite some time, and it is expected to remain in
the top five through 1999. There are other positive factors as well. First, as
of November 1998, manufacturing was 2.3% above the November 1997 rate. Second,
the unemployment rate is low in greater Phoenix and for many other parts of
Arizona. That suggests that job growth will continue. Third, California, the
State's leading domestic trading partner, is expected to enjoy continued, albeit
slower, growth. Fourth, single-family housing markets continue to boom. Although
the absolute level of permits is expected to decline from 1998's record levels,
the outlook is for a relatively strong housing market.
Housing, which is expected to be up by about 15% in 1998, is expected to
decrease by about 10% in 1999. The slowdown is expected to be in single-family
activity. In 1999, even if single-family housing slows, commercial construction
is expected to continue to do well throughout most of the year, despite higher
vacancy rates in the Phoenix-area office and industrial markets. This is
expected to prevent any significant problem in construction employment in 1999,
despite the likelihood of a slowdown.
Another uncertainty is the tourism market. Given the strong economy,
tourist activity is expected to be strong. But declines in the value of the
Canadian dollar, the peso and other currencies versus the U.S. dollar could hurt
winter visitation in Arizona.
Personal income, after growing by 8% in 1996 and 7.3% in 1997, is expected
to grow by another 8% in 1998, 7.8% in 1999, and 7% in 2000.
Overall, General Fund revenues are expected to grow modestly, including 4%
in FY 1999 and 5.7% in FY 2001. However, the FY 1999 rate of growth reflects the
impact of the $120 million tax reduction program passed last year, and the FY
2000 revenue estimate includes an incremental reduction to account for an
additional $60 million of tax reductions already enacted.
The Governor's budget proposals in 1999 sought to limit overall spending,
continue the growth of the State's "rainy day" funds, reflect conservative
revenue forecasts to reflect a slowing economy, and propose for the 8th and 9th
consecutive years tax reductions.
State policy makers have been very successful in recent years in depositing
monies into various accounts that have been established for a "rainy day."
These monies are reserved for a true budget emergency precipitated by an
economic downturn. By the end of FY 2001, the rainy day fund is expected to
reach $425 million, or 7.08% of the General Fund revenues.
OTHER INFORMATION ON CALIFORNIA, FLORIDA AND ARIZONA MUNICIPAL INSTRUMENTS
The Investment Adviser believes that it is likely that sufficient
California, Florida and Arizona municipal instruments and certain specified
federal obligations should be available to satisfy the respective investment
objectives, policies and limitations of the California, Florida Intermediate
Tax-Exempt and the Arizona Tax-Exempt Funds. If the Trust's Board of Trustees,
after consultation with the Investment Adviser, should for any reason determine
that it is impracticable to satisfy a Fund's investment objective, policies and
limitations because of the unavailability of suitable investments, the Board
would re-evaluate the particular Fund's investment objective and policies and
consider changes in its structure and name or possible dissolution.
INVESTMENT RESTRICTIONS
The Funds are subject to the fundamental investment restrictions enumerated
below which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of such Fund's outstanding shares.
No Fund may:
(1) Make loans, except 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 a Fund from investing directly or
indirectly in portfolio instruments secured by real estate or
interests therein or acquiring securities of real estate investment
trusts or other issuers that deal in real estate.
(3) Invest in commodities or commodity contracts, except that a 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 a Fund may be deemed to be
an underwriter under the Securities Act of 1933 (the "1933 Act") in
connection with the purchase and sale of portfolio instruments in
accordance with its investment objective and portfolio management
policies.
(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, except for the
Technology Fund and the Global Communications Fund, such purchase
would cause 25% or more in the aggregate of the market value of the
total assets of the Fund to be invested in the securities of one or
more issuers having their principal business activities in the same
industry, provided that with respect to each Money Market Fund there
is no limitation, and each Money Market Fund reserves freedom of
action, when otherwise consistent with its investment policies, to
concentrate its investments in obligations (other than commercial
paper) issued or guaranteed by U.S. banks (including foreign branches
of U.S. banks) and U.S. branches of foreign banks and repurchase
agreements and securities loans collateralized by such bank
obligations. For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal
credit finance companies and business credit finance companies are
deemed to be separate industries; and wholly-owned finance companies
are considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents. The Technology Fund may not, except during temporary
defensive periods, purchase the securities of any issuer, if, as a
result of such purchase, less than 25% of the assets of the Technology
Fund would be invested in the securities of issuers principally
engaged in technology business activities. The Global Communications
Fund may not, except during temporary defensive periods, purchase the
securities of any issuer, if as a result of such purchase, less than
25% of the assets of the Fund would be invested in the securities of
issuers that are in the communications industry.
(7) Borrow money, except that to the extent permitted by applicable law
(a) a 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) a Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (c) a Fund
may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, and (d) a
Fund may purchase securities on margin. If due to market fluctuations
or other reasons a Fund's borrowings exceed the limitations stated
above, the Trust will promptly reduce the borrowings of a Fund in
accordance with the 1940 Act. In addition, as a matter of fundamental
policy, a 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. This restriction does not,
however, apply to any Fund classified as a non-diversified company
under the 1940 Act.
(9) Notwithstanding any of a Fund's other fundamental investment
restrictions (including, without limitation, those restrictions
relating to issuer diversification, industry concentration and
control), a 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.
For the purposes of Investment Restrictions (1) and (7) above, the Funds
expect that they 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 July 31, 2000, the
Funds had not filed such an application.
Also, as a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of the Fund involved, at
least 80% of the net assets of each Tax-Exempt and Municipal Fund will be
invested in debt instruments, the interest on which is, in the opinion of bond
counsel or counsel for issuers, if any, exempt from regular Federal income tax,
except in extraordinary circumstances such as when the Investment Adviser
believes that market conditions indicate that a Fund should adopt a temporary
defensive posture by holding uninvested cash or investing in taxable securities.
Interest earned on "private activity bonds" that is treated as an item of tax
preference under the Federal alternative minimum tax will be deemed by a
Municipal Fund, but will not be deemed by a Tax-Exempt Fund, to be exempt from
regular Federal income tax for purposes of determining whether the Municipal and
Tax-Exempt Funds meet this fundamental policy.
As a non-fundamental investment restriction that can be changed without
shareholder approval, the Global Fixed Income, Florida Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt
and Blue Chip 20 Funds may not hold, at the end of any tax quarter, more than
10% of the outstanding voting securities of any one issuer, except that up to
50% of the total value of the assets of each Fund may be invested in any
securities without regard to this 10% limitation so long as no more than 25% of
the total value of its assets is invested in the securities of any one issuer
(except the U.S. Government, its agencies and instrumentalities. Also, as a
non-fundamental investment restriction, these Funds will not hold any securities
(except U.S. government securities) that would cause, at the end of any tax
quarter, more than 5% of their respective total assets to be invested in the
securities of any one issuer, except that up to 50% of the respective Fund's
total assets may be invested without regard to this limitation so long as no
more than 25% of the Fund's total assets are invested in any one issuer (except
the U.S. government, its agencies and instrumentalities).
Except as otherwise provided in Investment Restriction (6), for the purpose
of such restriction in determining industry classification with respect to the
Funds other than the International Funds, the Technology Fund and the Global
Communications Fund, the Trust intends to use the industry classification titles
in the Bloomberg Industry Group Classification. With respect to the
International Funds, the Trust intends to use the Morgan Stanley Capital
International industry classification titles. With respect to the Technology
Fund, the Trust intends to consider an issuer to be principally engaged in
technology business activities if such issuer is listed in the Morgan Stanley
Index, the H&Q Index, the SoundView Technology Index, the technology grouping of
the S&P 500 Index or any other comparable index. With respect to the Global
Communications Fund, the Trust considers communications companies to be those
that design, develop, manufacture, distribute or sell communication services and
equipment that enable or enhance data, voice and video transmissions. The
freedom of action reserved in Investment Restriction (6) above with respect to
U.S. branches of foreign banks is subject to the requirement that they are
subject to the same regulation as domestic branches of U.S. banks, and such
freedom with respect to foreign branches of U.S. banks is subject to the
requirement that the domestic parent be unconditionally liable in the event that
a foreign branch fails to pay on its instruments for any reason. Securities
held in escrow or separate accounts in connection with a Fund's investment
practices described in this Additional Statement and in the relevant Prospectus
are not deemed to be mortgaged, pledged or hypothecated for purposes of the
foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by a Fund, does not exceed 10% of the
value of the Fund's total assets.
The Money Market, U.S. Government Money Market, U.S. Government Select
Money Market, Municipal Money Market, Tax-Exempt Money Market and California
Municipal Money Market Funds intend, as a non-fundamental policy, to diversify
their investments in accordance with current SEC regulations. Investments in the
securities of any single issuer (excluding cash, cash items, certain repurchase
agreements, U.S. Government securities and securities of other investment
companies) will be limited to not more than 5% of the value of a Fund's total
assets at the time of purchase, except that (a) 25% of the total assets of the
California Municipal Money Market Fund may be invested in fewer than five
issuers; and (b) 25% of the value of the total assets of the other Money Market
Funds may be invested in the securities of any one issuer for a period of up to
three Business Days. A security that has an unconditional guarantee meeting
special SEC requirements (a "Guarantee") does not need to satisfy the foregoing
issuer diversification requirements that would otherwise apply, but the
Guarantee is instead subject to the following diversification requirements:
immediately after the acquisition of the security, a Money Market Fund may not
have invested more than 10% of its total assets in securities issued by or
subject to Guarantees from the same person, except that a Fund, subject to
certain conditions, may invest up to 25% of its total assets in securities
issued or subject to Guarantees of the same persons. This percentage is 100% if
the Guarantee is issued by the U.S. Government or an agency thereof. In
addition, the Municipal Money Market, Tax-Exempt Money Market and California
Municipal Money Market Funds will limit their investments in certain conduit
securities that are not rated in the highest short-term rating category as
determined by two nationally recognized statistical rating organizations (each
an "NRSRO") (or one NRSRO if the security is rated by only one NRSRO) or, if
unrated, are not of comparable quality to First Tier Securities ("Second Tier
Securities") to 5% of their total assets, with investments in any one such
issuer being limited to no more than 1% of a Fund's total assets or $1 million,
whichever is greater, measured at the time of purchase. Conduit securities
subject to this limitation are municipal instruments that are not subject to a
Guarantee and involve an arrangement whereunder a person, other than a municipal
issuer, provides for or secures repayment of the security and are not: (i)
fully and unconditionally guaranteed by a municipal issuer; or (ii) payable from
the general revenues of the municipal issuer or other municipal issuers; or
(iii) related to a project owned and operated by a municipal issuer; or
(iv) related to a facility leased to and under the control of an industrial or
commercial enterprise that is part of a public project which, as a whole, is
owned and under the control of a municipal issuer. The Money Market, U.S.
Government and U.S. Government Select Money Market Funds will limit their
investments in all Second Tier Securities (that are not subject to Guarantees)
in accordance with the foregoing percentage limitations.
In addition to the foregoing, each Money Market Fund is subject to
additional diversification requirements imposed by SEC regulations on the
acquisition of securities subject to other types of demand features and puts
whereunder a Fund has the right to sell the securities to third parties.
Each Investment Restriction which involves a maximum percentage (other than
the restriction set forth above in Investment Restriction (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 involved will, within three days thereafter (not including Sundays and
holidays), reduce the amount of its borrowings to an extent that the net asset
coverage of such borrowings shall conform to such limits.
Although the foregoing Investment Restrictions would permit the Money
Market Funds to acquire options, enter into forward currency contracts and
engage in short sales and interest rate and currency swaps, they are not
currently permitted to engage in these transactions under SEC regulations. In
addition, the U.S. Government Select Money Market Fund does not intend to
purchase any bank or corporate obligation during the current fiscal year.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
The business and affairs of the Trust and each Portfolio 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.
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
Mr. Richard G. Cline 65 Trustee Chairman, Hawthorne Investors,
4200 Commerce Court Inc. (a management advisory
Suite 300 services and private investment
Lisle, IL 60532 company) since January 1996;
Chairman, Hussman International,
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.
Mr. Edward J. Condon, 60 Trustee Chairman of The Paradigm Group,
Jr. Ltd. (a financial advisor) since
Sears Tower, Suite 965 July 1993; Vice President and
233 S. Wacker Drive Treasurer of Sears, Roebuck and
Chicago, IL 60606 Co. (a retail 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.
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
Mr. Wesley M. Dixon, 72 Trustee Director of Kinship Capital
Jr. Corporation (a financial services
400 Skokie Blvd., company) from 1985 to 1996; Vice
Suite 300 Chairman and Director of G.D.
Northbrook, IL 60062 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, 67 Trustee Partner of Arthur Andersen & Co.
Jr. S.C. (an accounting firm) from 1966
1534 Basswood Circle to 1989. Financial Consultant,
Glenview, IL 60025 Ernst & 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
50-H New England Ave. and Chief Investment Officer of The
P.O. Box 640 Ford Foundation (a charitable
Summit, NJ 07902-0640 trust) from 1981 to 1993. Director:
the University of Iowa 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.
Mr. Raymond E. George, 69 Trustee Senior Vice President and Senior
Jr. <F1> Fiduciary Officer of The Northern
703 Prospect Avenue Trust Company from 1990 to 1993.
Winnetka, IL 60093 Trustee: Northern Institutional
Funds.
Ms. Sandra Polk Guthma 56 Trustee President and CEO of Polk Bros.
420 N. Wabash Avenue Foundation (an Illinois not-for-
Suite 204 profit corporation) from 1993 to
Chicago, IL 60611 present; Director of Business
Transformation from 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.
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
Mr. Michael E. 63 Trustee President of Sara Lee Foundation
Murphy<F2> (philanthropic organization) since
Suite 2222 November 1997; Vice Chairman and
20 South Clark Street Chief Administrative Officer of
Chicago, IL 60603 Sara Lee Corporation (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, 42 Trustee Partner in the law firm of Sidley &
Esq.<F3> Austin. Trustee: Northern
One First National Institutional Funds.
Plaza
Chicago, IL 06063
Mr. William H. 71 Chairman Vice Chairman of Ameritech (a
Springer and telecommunications holding company)
701 Morningside Drive Trustee 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.
Mr. Richard P. Strubel 61 Trustee President and Chief Operating
737 N. Michigan Avenue Officer, UNext.com (a provider of
Suite 1405 educational services via the
Chicago, IL 60611 internet) since 1999; Managing
Director of Tandem Partners, Inc.
(a privately held management
services firm) from 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.
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
Mr. Stephen Timbers<F4> 55 Trustee President of Northern Trust Global
50 South LaSalle Investments, a division of Northern
Street, B-3 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 Senior Vice President and other
50 South LaSalle Stree President positions at The Northern Trust
Chicago, IL 60675 Company (since 1979).
Mr. Lloyd A. Wennlund 42 Vice Senior Vice President and other
50 South LaSalle Stree President positions at The Northern Trust
Chicago, IL 60675 Company, President of Northern
Trust Securities, Inc., and
Managing Executive, Mutual Funds
for Northern Trust Global
Investments (since 1989).
Mr. Brian R. Curran 32 Vice Director of Fund Administration at
4400 Computer Drive President PFPC (formerly FDISG) (since 1997);
Westborough, MA 01581 and Director of Fund Administration at
Treasurer State Street Bank & Trust Company
(February 1997 to October 1997);
Senior Auditor at Price Waterhouse
LLP (an accounting firm) (February
1994 to February 1997).
Ms. Suzanne E. Anderso 27 Assistant Client Treasury Manager of Mutual
4400 Computer Drive Treasurer Fund Administration at PFPC (since
Westborough, MA 01581 August 1998); Manager of Fund
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).
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
Jeffrey A. Dalke, Esq. 49 Secretary Partner in the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18th and Cherry Street
Philadelphia, PA
19103-6996
Linda J. Hoard, Esq. 52 Assistant Vice President at PFPC (formerly
4400 Computer Drive Secretary FDISG) (since 1998); Attorney
Westborough, MA 01581 Consultant for Fidelity Management
& Research Co. (a financial service
company), Investors Bank & Trust
Company (a financial service
provider) and FDISG (September 1994
to June 1998).
Ms. Therese Hogan 37 Assistant Director of the State Regulation
4400 Computer Drive Secretary Department at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994).
<F1> Mr. George is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
<F2> Mr. Murphy is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
<F3> Ms. Skinner is deemed to be an "interested" Trustee because her law firm
provides legal services to Northern Trust Corporation.
<F4> 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 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 Advisers, 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 Agreements, 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 certain other investment
companies for which NFD, PFPC or an affiliate thereof is the investment adviser,
administrator and/or distributor.
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, and the Chairman of the Board earns an
additional fee of $3,500, 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.
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
and Global Communications Fund, which did not commence operations during the
fiscal year ended March 31, 2000:
U.S. U.S.
Government Government Tax-Exempt Municipal
Money Money Select Money Money
Market Market Money Market Market
Fund Fund Market Fund Fund Fund
--------- --------- --------- --------- ---------
Steven Timbers $ 0 $ 0 $ 0 N/A $ 0
William H. Springer<F2> 420 36 29 N/A 189
Richard G. Cline<F2> 420 37 29 N/A 189
Edward J. Condon, Jr.<F2> 420 37 29 N/A 189
John W. English<F2> 420 37 29 N/A 189
Sandra Polk Guthman<F2> 420 37 29 N/A 189
Richard P. Strubel<F2> 420 37 29 N/A 189
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
California
Municipal Short- California
Money U.S. Intermediate Intermediate Intermediate
Market Government Government Tax-Exempt Tax-Exempt
Fund Fund Fund Fund Fund
--------- --------- ---------- --------- ---------
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer<F2> 36 29 5 55 6
Richard G. Cline<F2> 36 29 5 55 6
Edward J. Condon, Jr.<F2> 36 29 5 55 6
John W. English<F2> 36 29 5 55 6
Sandra Polk Guthman<F2> 36 29 5 55 6
Richard P. Strubel<F2> 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
Florida Global
Intermediate Fixed Tax- Arizona California Fixed
Tax-Exempt Income Exempt Tax-Exempt Tax-Exempt Income
Fund Fund Fund Fund Fund Fund
---------- ------ ------- ---------- ---------- ------
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer<F2> 3 48 43 10 1 1
Richard G. Cline<F2> 3 48 43 10 1 1
Edward J. Condon, Jr.<F2> 3 48 43 10 1 1
John W. English<F2> 3 48 43 10 1 1
Sandra Polk Guthman<F2> 3 48 43 10 1 1
Richard P. Strubel<F2> 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
High
High Yield
Yield Fixed Income Stock Growth
Municipal Income Equity Equity Equity
Fund Fund Fund Fund Fund
-------- -------- -------- -------- --------
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer<F2> 1 8 18 35 81
Richard G. Cline<F2> 1 8 18 35 81
Edward J. Condon, Jr.<F2> 1 8 18 35 81
John W. English<F2> 1 8 18 35 81
Sandra Polk Guthman<F2> 1 8 18 35 81
Richard P. Strubel<F2> 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
Small Small Small
Select Mid Cap Cap Cap Cap
Equity Growth Index Value Growth
Fund Fund Fund Fund Fund
------ ------ ------ ------ ------
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer<F2> 19 20 10 20 3
Richard G. Cline<F2> 19 20 10 20 3
Edward J. Condon, Jr.<F2> 19 20 10 20 3
John W. English<F2> 19 20 10 20 3
Sandra Polk Guthman<F2> 19 20 10 20 3
Richard P. Strubel<F2> 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
Inter- Inter- Total
national national Compensation
Growth Select from
Equity Equity Technology Fund
Fund Fund Fund Complex<F1>
------- ------- ------- -------
Steven Timbers $ 0 $ 0 $ 0 $ 0
William H. Springer<F2> 38 13 73 1,250
Richard G. Cline<F2> 38 13 73 1,250
Edward J. Condon, <F2>Jr. 38 13 73 1,250
John W. English<F2> 38 13 73 1,250
Sandra Polk Guthman<F2> 38 13 73 1,250
Richard P. Strubel<F2> 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
<F1> Fund complex includes thirty-two investment portfolios of the Trust and
twenty portfolios of Northern Institutional Funds, a separately
registered investment company.
<F2> 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 Advisers 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 March
31, 2000, Northern Trust Corporation and its subsidiaries had approximately
$33.2 billion in assets, $21.5 billion in deposits and employed over 8,700
persons. Northern and its affiliates administered in various capacitates
(including master trustee, investment manager or custodian) approximately $1.6
trillion of assets as of March 31, 2000, including approximately $323.1 billion
of assets for which Northern and its affiliates had investment management
responsibilities.
Under the Advisory Agreements with the Trust, the Investment Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds (other than the Stock Index, Large Cap Value,
Small Cap Index and Small Cap Value Funds), and also provides certain ancillary
services. NTI provides similar services to the Stock Index, Large Cap Value
Small Cap Index and Small Cap Value Funds. The Investment Advisers are also
responsible for monitoring and preserving the records required to be maintained
under the regulations of the SEC (with certain exceptions unrelated to its
activities for Northern Funds). In making investment recommendations for the
Funds, investment advisory personnel may not inquire or take into consideration
whether issuers of securities proposed for purchase or sale for the Funds'
accounts are customers of Northern's commercial banking department. These
requirements are designed to prevent investment advisory personnel for the Funds
from knowing which companies have commercial business with Northern 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 Agreements with
Northern and NTI (the "Advisory Agreements") have been approved by the Board of
Trustees, including the "non-interested" Trustees, and the initial shareholder
of the Trust. The Advisory Agreements provide that in executing portfolio
transactions and in selecting brokers or dealers (i) with respect to common and
preferred stocks, the Investment Advisers shall use their best judgment to
obtain the best overall terms available, and (ii) with respect to other
securities, the Investment Advisers shall attempt to obtain best net price and
execution. Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
In assessing the best overall terms available for any transaction, the
Investment Advisers are to consider all factors they deem relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available and in
selecting the broker or dealer to execute a particular transaction, the
Investment Advisers may consider the brokerage and research services provided to
the Funds and/or other accounts over which the Investment Advisers or an
affiliate of the Investment Advisers exercise investment discretion. A broker
or dealer providing brokerage and/or research services may receive a higher
commission than another broker or dealer would receive for the same transaction.
These brokerage and research services may include industry and company analyses,
portfolio services, quantitative data, market information systems and economic
and political consulting and analytical services.
Supplemental research information so received is in addition to, and not in
lieu of, services required to be performed by the Investment Advisers and does
not reduce the advisory fees payable to the Investment Advisers by the Funds.
The Trustees will periodically review the commissions paid by the Funds to
consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits inuring to the Funds. It is
possible that certain of the supplemental research or other services received
will primarily benefit one or more other investment companies or other accounts
for which investment discretion is exercised. Conversely, a Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
For the fiscal years or periods indicated, the amount of commissions paid
by each Fund (except the Tax-Exempt Money Market Fund, the Blue Chip 20 Fund,
the Large Cap Value Fund and the Global Communications Fund, which did not
commence operations during the fiscal year ended March 31, 2000) was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
Income Equity Fund $ 174,737 $ 36,166 $ 91,382
Stock Index Fund $ 41,073 $ 12,651 $ 32,541
Growth Equity Fund $1,228,486 $ 252,010 $ 475,781
Select Equity Fund $ 632,894 $ 119,043 $ 312,832
Mid Cap Growth Fund<F1> $ 572,622 $ 46,823 N/A
Small Cap Value Fund $ 271,927 $ 137,526 $ 324,908
International Growth
Equity Fund $2,645,022 $1,717,776 $ 1,455,258
International Select
Equity Fund $1,136,403 $1,024,518 $ 610,796
Technology Fund $1,063,227 $ 84,102 $ 79,005
Small Cap Growth Fund<F2 $ 378,161 N/A N/A
Small Cap Index Fund<F3> $ 36,831 N/A N/A
<F1> The Mid Cap Growth Fund commenced operations on March 31, 1998.
<F2> The Small Cap Growth Fund commenced operations on October 1, 1999.
<F3> The Small Cap Index Fund commenced operations on September 3, 1999.
No commissions were paid by the Funds to any "affiliated" persons (as
defined in the 1940 Act) of the Funds. Transactions on foreign stock exchanges
involve payment for brokerage commissions which are generally fixed. Over-the-
counter issues, including corporate debt and government securities, are normally
traded on a "net" basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. With respect to
over-the-counter transactions, the Investment Advisers will normally deal
directly with dealers who make a market in the instruments involved except in
those circumstances where more favorable prices and execution are available
elsewhere. The cost of foreign and domestic securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down.
The Trust is required to identify any securities of its "regular brokers or
dealers" or their parents which the Trust acquired during its most recent fiscal
year.
During the fiscal year ended March 31, 2000, the Money Market Fund acquired
or sold securities of Bear Stearns & Co., Inc., Morgan Stanley Dean Witter & Co.
and Citigroup, Inc. As of March 31, 2000 the Money Market Fund owned securities
of Morgan Stanley Dean Witter & Co., Morgan JP & Co., Inc., and Citigroup, Inc.
in the amounts of $100,000,000, $14,850,550 and $44,553,938, respectively.
During the fiscal year ended March 31, 2000, the U.S. Government Money
Market Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the U.S. Government Select
Money Market Fund did not acquire or sell securities of its regular broker-
dealers.
During the fiscal year ended March 31, 2000, the Municipal Money Market
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the California Municipal Money
Market Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the U.S. Government Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Intermediate Tax-Exempt
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000; the Florida Intermediate Tax-
Exempt Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Fixed Income Fund acquired
or sold securities of Morgan Stanley Dean Witter & Co. As of March 31, 2000,
the Fixed Income Fund owned securities Donaldson, Lufkin & Jenrette and Morgan
Stanley Dean Witter & Co. in the amount of $83,300 and $9,426,465, respectively.
During the fiscal year ended March 31, 2000, the Tax-Exempt Fund did not
acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the California Tax-Exempt Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Global Fixed Income Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the High Yield Municipal Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the High Yield Fixed Income
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Income Equity Fund
acquired or sold securities of Citigroup, Inc., Soloman Smith Barney, Goldman
Sachs Group, Inc. As of March 31, 2000, the Income Equity Fund owned Citigroup,
Inc. in the amount of $4,490,625.
During the fiscal year ended March 31, 2000, the Stock Index Fund acquired
or sold securities of Merrill Lynch & Co., Inc., Morgan Stanley Dean Witter &
Co. and Citigroup, Inc. As of March 31, 2000, the Stock Index Fund owned
securities of Bear Stearns Co., Merrill Lynch & Co., Inc., Morgan JP & Co..,
Inc., Morgan Stanley Dean Witter & Co. and Citigroup, Inc. in the amount of
$217,905, $1,648,500, $974,950, $4,004, 354 and $8,570,508.
During the fiscal year ended March 31, 2000, the Growth Equity Fund
acquired or sold securities of Citigroup, Inc., Goldman Sachs Group, Inc.,
Merrill Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co. As of March 31,
2000, the Growth Equity Fund owned securities of Citigroup, Inc., Goldman Sachs
Group, Inc., Merrill Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co. in
the amount of $25,836,063, $10,693,400, $11,340,000 and $20,553,000,
respectively.
During the fiscal year ended March 31, 2000, the Select Equity Fund
acquired or sold securities Citigroup, Inc., Goldman Sachs Group, Inc., Merrill
Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co. As of March 31, 2000,
the Select Equity Fund owned securities Citigroup, Inc., Merrill Lynch & Co.,
Inc. and Morgan Stanley Dean Witter & Co. in the amount of $9,924,281,
$5,145,000 and $7,956,000, respectively.
During the fiscal year ended March 31, 2000, the Mid Cap Growth Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Small Cap Value Fund sold
securities of Banque Paribas. As of March 31, 2000, the Small Cap Value Fund
did not own securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the International Growth
Equity Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the International Select
Equity Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Technology Fund did not
acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Small Cap Index Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Small Cap Growth Fund did
not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000, the Short-Intermediate U.S.
Government Fund did not acquire or sell securities of its regular broker-
dealers.
During the fiscal year ended March 31, 2000, the California Intermediate
Tax-Exempt Fund did not acquire or sell securities of its regular broker-
dealers.
During the fiscal year ended March 31, 2000, the Arizona Tax-Exempt Fund
did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 2000 the Tax-Exempt Money Market
Fund, Blue Chip 20 Fund and Large Cap Value Fund had not yet commenced
operations.
During the fiscal year ending March 31, 2000, the Trust directed brokerage
transactions to brokers because of research services provided. The amount of
such transactions and related commissions were as follows: for the Income Equity
Fund, $109,778,038 in research commission transactions and $135,241 in research
commissions; for the Stock Index Fund, $5,209,674 in research commission
transactions and $1,639 in research commissions; for the Growth Equity Fund,
$781,421,216 in research commission transactions and $884,679 in research
commissions; for the Select Equity Fund, $436,692,031 in research commission
transactions and $488,655 in research commissions; for the Mid Cap Growth Fund,
$345,394,304 in research commission transactions and $426,161 in research
commissions; for the Small Cap Value Fund, $6,434,143 in research commission
transactions and $15,385 in research commissions; for the International Growth
Equity Fund, $647,750,361 in research commission transactions and $1,542,637 in
research commissions; for the International Select Equity Fund, $276,669,177 in
research commission transactions and $699,732 in research commissions; for the
Technology Fund, $883,346,181 in research commission transactions and $723,252
in research commissions; Small Cap Growth Fund $140,430,961 in research
commission transactions and $201,763 in research commissions; and for the Small
Cap Index Fund $51,060 in research commission transactions and $41 in research
commissions.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Investment
Advisers believe such practice to be in the Funds' interests.
Northern'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 a Fund as well as
other fiduciary or agency accounts managed by it (including any other portfolio,
investment company or account for which an Investment Adviser acts as adviser),
the Agreement provides that the Investment Adviser, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for such Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect to
other securities. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Investment Adviser in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Fund and other accounts
involved. In some instances, this procedure may adversely affect the size of
the position obtainable for the Fund or the amount of the securities that are
able to be sold for the Fund. To the extent that the execution and price
available from more than one broker or dealer are believed to be comparable, the
Agreement permits each Investment Adviser, at its discretion but subject to
applicable law, to select the executing broker or dealer on the basis of the
Investment Adviser's opinion of the reliability and quality of the broker or
dealer.
The Advisory Agreements provide that the Investment Advisers may render
similar services to others so long as their services under such Agreements are
not impaired thereby. The Advisory Agreements also provide that the Trust will
indemnify the Investment Advisers against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.
From time to time, the Investment Advisers may voluntarily waive a portion
or all of their fees otherwise payable to it with respect to the Funds.
For the fiscal years or periods indicated, Northern and NTI received
advisory fees from the Funds (except the Tax-Exempt Money Market Fund, the Blue
Chip 20 Fund, the Large Cap Value Fund and the Global Communications Fund, which
did not commence operations during the fiscal year ended March 31, 2000), after
fee waivers and reimbursements, as follows:
-----------------------------------------
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
Money Market Fund $21,337,474 $15,349,562 $9,490,597
----------------------------------------------------------------------------
U.S. Government
Money Market Fund 1,832,019 1,730,444 1,364,316
----------------------------------------------------------------------------
U.S. Government
Select Money Market Fund 2,235,613 1,450,638 673,956
----------------------------------------------------------------------------
Municipal Money Market Fund 9,375,019 8,162,930 6,064,365
----------------------------------------------------------------------------
California Municipal
Money Market Fund 1,681,915 1,091,368 719,108
----------------------------------------------------------------------------
U.S. Government Fund 2,335,719 1,895,842 1,527,868
----------------------------------------------------------------------------
Short-Intermediate U.S.
Government Fund 172,817 N/A N/A
----------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 3,648,930 2,242,387 1,973,661
----------------------------------------------------------------------------
Arizona Tax-Exempt Fund 164,571 N/A N/A
----------------------------------------------------------------------------
California Intermediate
Tax-Exempt Fund 257,088 N/A N/A
----------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 245,302 196,206 125,977
----------------------------------------------------------------------------
Fixed Income Fund 3,434,120 1,752,818 1,105,332
----------------------------------------------------------------------------
Tax-Exempt Fund 2,593,221 1,365,071 1,035,810
----------------------------------------------------------------------------
California Tax-Exempt Fund<F1> 683,887 404,924 88,551
----------------------------------------------------------------------------
Global Fixed Income Fund 141,742 118,107 129,287
----------------------------------------------------------------------------
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
High Yield Municipal Fund<F2> 78,978 0 N/A
----------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 719,949 0 N/A
----------------------------------------------------------------------------
Income Equity Fund 1,523,983 978,113 818,335
----------------------------------------------------------------------------
Stock Index Fund<F3> 1,462,807 490,454 226,431
----------------------------------------------------------------------------
Growth Equity Fund 8,308,852 4,529,273 3,339,695
----------------------------------------------------------------------------
Select Equity Fund 2,587,737 1,249,368 802,297
----------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 2,945,148 216,101 N/A
----------------------------------------------------------------------------
Small Cap Index Fund 272,650 N/A N/A
----------------------------------------------------------------------------
Small Cap Value Fund<F3> 2,300,175 2,669,690 2,460,252
----------------------------------------------------------------------------
Small Cap Growth Fund 1,164,481 N/A N/A
----------------------------------------------------------------------------
International Growth Equity Fund 4,338,480 1,946,058 1,756,185
----------------------------------------------------------------------------
International Select Equity Fund 1,739,316 1,195,310 1,138,571
----------------------------------------------------------------------------
Technology Fund 11,833,280 1,757,940 754,963
----------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds
commenced operations on December 31, 1998, December 31, 1998, and March 31,
1998, respectively.
<F3> NTI assumed investment advisory responsibilities for these Funds on April
1, 1998.
For the fiscal years or periods indicated, Northern voluntarily waived and
reimbursed advisory fees for each of the Funds (except the Tax-Exempt Money
Market Fund, the Blue Chip 20 Fund, the Large Cap Value Fund and the Global
Communications Fund which did not commence operations during the fiscal year
ended March 31, 2000) as follows:
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
Money Market Fund $10,668,715 $7,674,790 $4,745,304
----------------------------------------------------------------------------
U.S. Government
Money Market Fund 916,008 865,224 682,159
----------------------------------------------------------------------------
U.S. Government
Select Money Market Fund 1,117,803 725,320 632,972
----------------------------------------------------------------------------
Municipal Money Market Fund 4,687,501 4,081,471 3,032,186
----------------------------------------------------------------------------
California Municipal
Money Market Fund 840,957 545,685 568,061
----------------------------------------------------------------------------
U.S. Government Fund 0 0 N/A
----------------------------------------------------------------------------
Short-Intermediate
U.S. Government Fund 51,244 N/A N/A
----------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 261,783 160,168 140,974
----------------------------------------------------------------------------
Arizona Tax-Exempt Fund 57,140 N/A N/A
----------------------------------------------------------------------------
California Intermediate
Tax-Exempt Fund 74,191 N/A N/A
----------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 48,941 23,427 26,197
----------------------------------------------------------------------------
Fixed Income Fund 13,304 0 0
----------------------------------------------------------------------------
Tax-Exempt Fund 224,793 97,545 73,985
----------------------------------------------------------------------------
California Tax-Exempt Fund<F1> 60,182 28,923 53,795
----------------------------------------------------------------------------
Global Fixed Income Fund 16,334 15,857 10,037
----------------------------------------------------------------------------
High Yield Municipal Fund<F2> 42,569 10,562 N/A
----------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 28,215 41,621 N/A
----------------------------------------------------------------------------
Income Equity Fund 302,971 172,607 144,411
----------------------------------------------------------------------------
Stock Index Fund<F3> 758,958 245,227 117,685
----------------------------------------------------------------------------
Growth Equity Fund 1,466,266 799,277 589,353
----------------------------------------------------------------------------
Select Equity Fund 1,065,540 514,443 330,356
----------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 562,586 93,569 N/A
----------------------------------------------------------------------------
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
Small Cap Index Fund 209,942 N/A N/A
----------------------------------------------------------------------------
Small Cap Value Fund<F3> 947,188 1,099,279 1,013,041
----------------------------------------------------------------------------
Small Cap Growth Fund 232,138 N/A N/A
----------------------------------------------------------------------------
International Growth Equity Fund 858,732 389,208 351,234
----------------------------------------------------------------------------
International Select Equity Fund 347,406 239,060 227,712
----------------------------------------------------------------------------
Technology Fund 2,366,647 351,585 150,991
----------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds
commenced operations on December 31, 1998, December 31, 1998, and March 31,
1998, respectively.
<F3> NTI assumed investment advisory responsibilities for these Funds on April
1, 1998.
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 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 each of the Funds.
For the fiscal years or periods indicated, the amount of transfer agency
fees incurred by each of the Funds (except the Tax-Exempt Money Market Fund, the
Blue Chip 20 Fund, the Large Cap Value Fund and Global Communications Fund which
did not commence operations during the fiscal year ended March 31, 2000) was as
follows:
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
Money Market Fund $534,357 $3,837,356 $2,372,628
----------------------------------------------------------------------------
U.S. Government
Money Market Fund 458,003 432,607 341,076
----------------------------------------------------------------------------
U.S. Government
Select Money Market Fund 558,896 362,656 217,819
----------------------------------------------------------------------------
Municipal Money Market Fund 2,343,728 2,040,714 1,516,077
----------------------------------------------------------------------------
California Municipal
Money Market Fund 420,474 272,840 214,526
----------------------------------------------------------------------------
U.S. Government Fund 311,426 252,777 203,714
----------------------------------------------------------------------------
Short-Intermediate
U.S. Government Fund 29,916 N/A N/A
----------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 521,423 320,338 281,949
----------------------------------------------------------------------------
Arizona Tax-Exempt Fund 29,592 N/A N/A
----------------------------------------------------------------------------
California Intermediate
Tax-Exempt Fund 44,208 N/A N/A
----------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 39,232 29,284 20,290
----------------------------------------------------------------------------
Fixed Income Fund 459,681 233,707 147,377
----------------------------------------------------------------------------
Tax-Exempt Fund 375,731 195,008 147,971
----------------------------------------------------------------------------
California Tax-Exempt Fund1 98,777 57,846 18,926
----------------------------------------------------------------------------
Global Fixed Income Fund 17,599 14,885 15,480
----------------------------------------------------------------------------
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
High Yield Municipal Fund<F2> 16,206 1,408 N/A
----------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 99,754 5,549 N/A
----------------------------------------------------------------------------
Income Equity Fund 182,693 115,071 96,274
----------------------------------------------------------------------------
Stock Index Fund<F3> 370,290 122,613 57,352
----------------------------------------------------------------------------
Growth Equity Fund 977,501 532,850 392,901
----------------------------------------------------------------------------
Select Equity Fund 304,436 146,983 94,387
----------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 350,769 30,967 N/A
----------------------------------------------------------------------------
Small Cap Index Fund 74,359 N/A N/A
----------------------------------------------------------------------------
Small Cap Value Fund<F3> 270,610 314,078 289,438
----------------------------------------------------------------------------
Small Cap Growth Fund 116,448 N/A N/A
----------------------------------------------------------------------------
International Growth Equity Fund 443,843 194,604 175,617
----------------------------------------------------------------------------
International Select Equity Fund 173,930 119,530 113,856
----------------------------------------------------------------------------
Technology Fund 1,183,313 175,792 75,496
----------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds
commenced operations on December 31, 1998, December 31, 1998, and March 31,
1998, respectively.
Northern maintains custody of the assets of the Funds (other than the
International Funds) pursuant to the terms of its Custodian Agreement with the
Trust. Northern maintains custody of the assets of the International Funds
pursuant to the terms of its Foreign Custody Agreement with the Trust. Under
each of these agreements, Northern (i) holds each 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.
Under its Foreign Custody Agreement, Northern has entered into agreements with
financial institutions and depositories located in foreign countries with
respect to the custody of the International Funds' foreign securities.
As compensation for the services rendered to each Fund (other than the
International Funds) under the Custodian Agreement, and the assumption by
Northern of certain related expenses, Northern is entitled to payment from each
of the Funds as follows: (a) a basic custodial fee of (i) $18,000 annually for
each Fund, plus (ii) 1/100th of 1% annually of each Fund's average daily net
assets to the extent they exceed $100 million, plus (b) a basic accounting fee
of (i) $25,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each
Fund's average daily net assets to the extent they exceed $50 million, plus (c)
a fixed dollar fee for each trade in portfolio securities, plus (d) a fixed
dollar fee for each time that Northern 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.
As compensation for the services rendered to the International Funds under
the Foreign Custody Agreement, and the assumption by Northern of certain related
expenses, Northern is entitled to payment from each of those Funds as follows:
(i) $35,000 annually for each Fund, plus (ii) 9/100th of 1% annually of each
Fund's average daily net assets, plus (iii) reimbursement for fees incurred by
Northern as foreign Custodian for telephone, postage, courier fees, office
supplies and duplicating. As compensation for basic accounting services
rendered to the International Funds by Northern, Northern is entitled to receive
$25,000 for the first $50 million of each of those Fund's average daily net
assets and 1/100th of 1% of each Fund's average daily net assets in excess of
$50 million.
Northern's fees under the Custodian Agreement and Foreign Custody Agreement
are subject to reduction based on the Funds' daily uninvested cash balances (if
any).
For the fiscal years or periods indicated, the amount of custody and fund
accounting fees incurred by each Fund (except the Tax-Exempt Money Market Fund,
the Blue Chip 20 Fund, the Large Cap Value Fund and the Global Communications
Fund which did not commence operations during the fiscal year ended March 31,
2000) was as follows:
-----------------------------------------
Fiscal Fiscal Fiscal
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2000 1999 1998
----------------------------------------------------------------------------
Money Market Fund $ 1,116,911 $844,081 $540,182
----------------------------------------------------------------------------
U.S. Government
Money Market Fund 129,082 136,794 114,701
----------------------------------------------------------------------------
U.S. Government
Select Money Market Fund 141,547 110,597 79,062
----------------------------------------------------------------------------
Municipal Money Market Fund 506,030 478,551 358,220
----------------------------------------------------------------------------
California Municipal
Money Market Fund 124,4949 100,159 86,643
----------------------------------------------------------------------------
U.S. Government Fund 85,542 85,772 72,223
----------------------------------------------------------------------------
Short-Intermediate
U.S. Government Fund 19,517 N/A N/A
----------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 133,526 103,042 91,127
----------------------------------------------------------------------------
Arizona Tax-Exempt Fund 24,066 N/A N/A
----------------------------------------------------------------------------
California Intermediate
Tax-Exempt Fund 16,546 N/A N/A
----------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 44,751 48,986 46,979
----------------------------------------------------------------------------
Fixed Income Fund 108,328 84,111 64,094
----------------------------------------------------------------------------
Tax-Exempt Fund 109,924 78,492 64,384
----------------------------------------------------------------------------
California Tax-Exempt Fund<F1> 52,345 50,725 48,223
----------------------------------------------------------------------------
Global Fixed Income Fund 74,639 77,396 74,075
----------------------------------------------------------------------------
High Yield Municipal Fund<F2> 32,180 14,132 N/A
----------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 49,759 14,132 N/A
----------------------------------------------------------------------------
Income Equity Fund 68,332 61,425 56,325
----------------------------------------------------------------------------
Stock Index Fund<F3> 161,471 122,803 133,408
----------------------------------------------------------------------------
Growth Equity Fund 190,939 143,431 115,833
----------------------------------------------------------------------------
Select Equity Fund 95,486 72,051 60,090
----------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 76,366 44,274 N/A
----------------------------------------------------------------------------
Small Cap Index Fund 33,857 N/A N/A
----------------------------------------------------------------------------
Small Cap Value Fund<F3> 128,362 141,187 136,631
----------------------------------------------------------------------------
Small Cap Growth Fund 31,312 N/A N/A
----------------------------------------------------------------------------
International Growth Equity Fund 427,038 257,479 228,550
----------------------------------------------------------------------------
International Select Equity Fund 215,982 182,139 167,301
----------------------------------------------------------------------------
Technology Fund 230,322 78,748 55,245
----------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds
commenced operations on December 31, 1998, December 31, 1998, and March 31,
1998, respectively.
Unless sooner terminated, the Trust's Advisory Agreements, Transfer Agency
Agreement, Custodian Agreement and Foreign Custody Agreement will continue in
effect with respect to a particular 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
(or NTI) and by Northern (or NTI) on 60 days' written notice to the Trust.
Northern is active as an underwriter of municipal instruments. Under the
1940 Act, the Funds are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which Northern is serving as a principal underwriter. In the opinion of
Northern, this limitation will not significantly affect the ability of the Funds
to pursue their respective investment objectives.
In the Advisory Agreements, 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 Agreements provide 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 Funds 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 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 each Fund, computed daily and payable
monthly, at an annual rate of 0.15% of the average daily net assets of each
Fund.
On October 1, 1999, the Co-Administrators replaced Sunstone Financial
Group, Inc. ("Sunstone") as administrators of the Trust. For the period October
1, 1999 through March 31, 2000, the Co-Administrators received fees under the
Co-Administration Agreement with the Trust (except for the Tax-Exempt Money
Market Fund, the Blue Chip 20 Fund, the Large Cap Value Fund and the Global
Communications Fund which had not commenced operations during that period) in
the amount of:
October 1, 1999 through
March 31, 2000
-------------------------------------------------------------------
Money Market Fund $4,041,889
-------------------------------------------------------------------
U.S. Government Money Market Fund 343,105
-------------------------------------------------------------------
U.S. Government Select Money Market Fund 524,334
-------------------------------------------------------------------
Municipal Money Market Fund 1,751,974
-------------------------------------------------------------------
California Municipal Money Market Fund 329,861
-------------------------------------------------------------------
U.S. Government Fund 260,615
-------------------------------------------------------------------
Short-Intermediate U.S. Government Fund 43,067
-------------------------------------------------------------------
Intermediate Tax-Exempt Fund 495,423
-------------------------------------------------------------------
Arizona Tax-Exempt Fund 42,484
-------------------------------------------------------------------
California Intermediate Tax-Exempt Fund 63,665
-------------------------------------------------------------------
Florida Intermediate Tax-Exempt Fund 29,138
-------------------------------------------------------------------
Fixed Income Fund 448,081
-------------------------------------------------------------------
Tax-Exempt Fund 376,842
-------------------------------------------------------------------
California Tax-Exempt Fund 89,031
-------------------------------------------------------------------
Global Fixed Income Fund 14,623
-------------------------------------------------------------------
High Yield Municipal Fund 13,412
-------------------------------------------------------------------
High Yield Fixed Income Fund 91,452
-------------------------------------------------------------------
Income Equity Fund 163,974
-------------------------------------------------------------------
Stock Index Fund 365,583
-------------------------------------------------------------------
Growth Equity Fund 878,775
-------------------------------------------------------------------
Select Equity Fund 268,378
-------------------------------------------------------------------
Mid Cap Growth Fund 380,808
-------------------------------------------------------------------
Small Cap Index Fund 93,115
-------------------------------------------------------------------
Small Cap Value Fund 175,742
-------------------------------------------------------------------
Small Cap Growth Fund 158,810
-------------------------------------------------------------------
International Growth Equity Fund 419,437
-------------------------------------------------------------------
International Select Equity Fund 148,066
-------------------------------------------------------------------
Technology Fund 1,306,074
-------------------------------------------------------------------
Prior to October 1, 1999, Sunstone, 207 E. Buffalo Street, Milwaukee,
Wisconsin 53202 acted as the Trust's administrator pursuant to an administration
agreement substantially similar to the Co-Administration Agreement currently in
effect with Northern and PFPC.
For the fiscal years or periods indicated, Sunstone received, after
waivers, administrative fees for each Fund (except for the Tax-Exempt Money
Market Fund, the Blue Chip 20 Fund, the Large Cap Value Fund and the Global
Communications Fund which had not commenced operations during that periods) as
follows:
-------------------------------------------
April 1, 1999 Fiscal Year Fiscal Year
through Ended Ended
September 30, March 31, March 31,
1999 1999 1998
---------------------------------------------------------------------------
Money Market Fund $1,382,470 $2,447,894 $1,186,568
---------------------------------------------------------------------------
U.S. Government
Money Market Fund 117,181 294,367 217,652
---------------------------------------------------------------------------
U.S. Government Select
Money Market Fund 118,738 226,085 124,207
---------------------------------------------------------------------------
-------------------------------------------
April 1, 1999 Fiscal Year Fiscal Year
through Ended Ended
September 30, March 31, March 31,
1999 1999 1998
---------------------------------------------------------------------------
Municipal Money Market Fund 614,944 1,339,727 929,212
---------------------------------------------------------------------------
California Municipal
Money Market Fund 101,923 176,849 131,467
---------------------------------------------------------------------------
U.S. Government Fund 69,942 171,664 124,997
---------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 104,404 215,890 178,379
---------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 11,094 17,638 11,284
---------------------------------------------------------------------------
Fixed Income Fund 83,811 154,709 85,293
---------------------------------------------------------------------------
Tax-Exempt Fund 69,849 128,048 92,041
---------------------------------------------------------------------------
California Tax-Exempt Fund<F1> 20,688 35,426 6,684
---------------------------------------------------------------------------
Global Fixed Income Fund 4,058 10,053 10,534
---------------------------------------------------------------------------
High Yield Municipal Fund<F2> 4,021 708 N/A
---------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 21,083 2,958 N/A
---------------------------------------------------------------------------
Income Equity Fund 35,907 78,886 57,142
---------------------------------------------------------------------------
Stock Index Fund 61,178 77,739 30,318
---------------------------------------------------------------------------
Growth Equity Fund 203,469 349,439 235,526
---------------------------------------------------------------------------
Select Equity Fund 70,285 94,686 53,548
---------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 58,855 14,391 N/A
---------------------------------------------------------------------------
Small Cap Value Fund 95,578 224,567 157,708
---------------------------------------------------------------------------
International Growth Equity Fund 77,579 132,079 115,012
---------------------------------------------------------------------------
International Select Equity Fund 39,340 82,930 74,312
---------------------------------------------------------------------------
Technology Fund 203,852 87,044 41,187
---------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
For the fiscal years or periods indicated, Sunstone waived administrative
fees with respect to each Fund (except for the Tax-Exempt Fund, the Blue Chip 20
Fund, the Large Cap Value Fund and the Global Communications Fund which had not
commenced operations during that periods) as follows:
-------------------------------------------
April 1, 1999 Fiscal Year Fiscal Year
through Ended Ended
September 30, March 31, March 31,
1999 1999 1998
---------------------------------------------------------------------------
Money Market Fund $2,577,188 $3,308,194 $2,372,408
---------------------------------------------------------------------------
U.S. Government
Money Market Fund 226,721 354,550 293,967
---------------------------------------------------------------------------
U.S. Government Select
Money Market Fund 195,282 317,904 202,525
---------------------------------------------------------------------------
Municipal Money Market Fund 1,148,712 1,721,373 1,344,926
---------------------------------------------------------------------------
California Municipal
Money Market Fund 198,934 232,414 244,331
---------------------------------------------------------------------------
U.S. Government Fund 136,588 207,505 180,577
---------------------------------------------------------------------------
Intermediate Tax-Exempt Fund 0 264,621 244,548
---------------------------------------------------------------------------
Florida Intermediate
Tax-Exempt Fund 18,617 26,288 19,151
---------------------------------------------------------------------------
Fixed Income Fund 157,593 195,856 135,774
---------------------------------------------------------------------------
Tax-Exempt Fund 116,912 164,475 129,918
---------------------------------------------------------------------------
California Tax-Exempt Fund<F1> 39,095 51,343 21,785
---------------------------------------------------------------------------
Global Fixed Income Fund 7,665 12,274 12,687
---------------------------------------------------------------------------
High Yield Municipal Fund<F2> 6,876 1,405 N/A
---------------------------------------------------------------------------
High Yield Fixed Income Fund<F2> 37,098 5,367 N/A
---------------------------------------------------------------------------
Income Equity Fund 74,162 93,722 87,270
---------------------------------------------------------------------------
Stock Index Fund 128,680 106,182 55,711
---------------------------------------------------------------------------
Growth Equity Fund 384,024 449,843 353,831
---------------------------------------------------------------------------
Select Equity Fund 117,997 125,790 88,034
---------------------------------------------------------------------------
Mid Cap Growth Fund<F2> 86,497 32,060 N/A
---------------------------------------------------------------------------
Small Cap Value Fund 151,532 246,554 276,453
---------------------------------------------------------------------------
International Growth Equity Fund 152,635 159,830 148,415
---------------------------------------------------------------------------
International Select Equity Fund 73,434 96,366 96,473
---------------------------------------------------------------------------
Technology Fund 265,065 176,646 72,057
---------------------------------------------------------------------------
<F1> The California Tax-Exempt Fund commenced operations on April 8, 1997.
<F2> The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth
Funds commenced operations on December 31, 1998, December 31, 1998, and
March 31, 1998, respectively.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until September 30, 2001, and thereafter for successive one-year terms
with respect to each Fund, provided that the Agreement is approved annually (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."
SERVICE ORGANIZATIONS
As stated in the Funds' Prospectus, the Funds may enter into agreements
from time to time with Service Organizations providing for support and/or
distribution services to customers of the Service Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Funds may pay
Service Organizations up to 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 a 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 Funds. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Funds' arrangements with Service Organizations under the agreements are
governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans,
the Board of Trustees reviews, at least quarterly, a written report of the
amounts expended in connection with the Funds' arrangements with Service
Organizations and the purposes for which the expenditures were made. In
addition, the Funds' arrangements with Service Organizations must be approved
annually by a majority of the Trustees, including a majority of the Trustees who
are not "interested persons" of the Funds as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Trustees").
The Board of Trustees believes that there is a reasonable likelihood that
their arrangements with Service Organizations will benefit each Fund and its
shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to a Fund must be approved by the holders of a majority of the
outstanding shares of the Fund involved. So long as the Distribution and
Service Plan is in effect, the selection and nomination of the members of the
Board of Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Trust will be committed to the discretion of such disinterested Trustees.
For the fiscal period ended March 31, 2000, the U.S. Government Money
Market Fund, Fixed Income Fund, Income Equity Fund, Stock Index Fund, Growth
Equity Fund, Select Equity Fund, Small Cap Index Fund, Small Cap Value Fund,
Small Cap Growth Fund, International Growth Equity Fund, International Select
Equity Fund and Technology Fund paid fees of $52,761, $67, $476, $37, $37, $110,
$106, $110, $92, $586, $73 and $7,796, respectively, under the Service Plan. No
other Funds paid fees under either Plan.
For the fiscal period ended March 31, 1999, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Stock
Index Fund, Select Equity Fund, Small Cap Value Fund, International Growth
Equity Fund, International Select Equity Fund and Technology Fund paid fees of
$25,567, $29,542, $146, $37, $37, $73, $110, $957, $37 and $2,103, respectively,
under the Service Plan. No other Funds paid fees under either Plan.
For the fiscal period ended March 31, 1998, the Money Market Fund, U.S.
Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Select
Equity Fund, Small Cap Value Fund, International Select Equity Fund and
Technology Fund paid fees of $107, $40,296, $181, $145, $440, $368, $78 and
$449, respectively, under the Service Plan. No other Funds paid fees under
either Plan.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103, serve as counsel to the Trust.
Arthur Anderson LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603 serve as auditors for the Trust. The financial
statements dated March 31, 2000, incorporated by reference into this Additional
Statement have been incorporated in reliance on the report of Arthur Anderson
LLP given on the authority of said firm as experts in auditing and accounting.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of a Fund may, in the discretion of Northern, be made in
the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of
payment, contact the Transfer Agent. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
Although each Fund generally will redeem shares in cash, each Fund reserves
the right to pay redemptions by a distribution in-kind of securities (instead of
cash) from such Fund. The securities distributed in-kind would be readily
marketable and would be valued for this purpose using the same method employed
in calculating the Fund's net asset value per share. If a shareholder receives
redemption proceeds in-kind, the shareholder should expect to incur transaction
costs upon the disposition of the securities received in the redemption.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This
may help investors reduce their average cost per share because the agreed upon
fixed investment amount allows more shares to be purchased during periods of
lower share prices and fewer shares during periods of higher share prices. In
order to be effective, Dollar Cost Averaging should usually be followed on a
sustained, consistent basis. Investors should be aware, however, that shares
bought using Dollar Cost Averaging are purchased without regard to their price
on the day of investment or to market trends. Dollar Cost Averaging does not
assure a profit and does not protect against losses in a declining market. In
addition, while investors may find Dollar Cost Averaging to be beneficial, it
will not prevent a loss if an investor ultimately redeems shares at a price
which is lower than their purchase price. An investor may want to consider his
or her financial ability to continue purchases through periods of low price
levels.
DIRECTED REINVESTMENTS
In addition to having your income dividends and/or capital gains
distributions reinvested in shares of the Fund from which such distributions are
paid, you may elect the directed reinvestment option and have dividends and
capital gains distributions automatically invested in another Northern Fund.
Reinvestments can only be directed to an existing Northern Funds account (which
must meet the minimum investment requirement). Directed reinvestments may be
used to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account. Directed reinvestments from a qualified plan
account to a regular account may have adverse tax consequences including
imposition of a penalty tax and, therefore, you should consult your own tax
adviser before commencing these transactions.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares of
the Funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Funds involved in the request are priced will be processed on the next
Business Day in the manner described above.
The Trust may redeem shares involuntarily to reimburse a Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Funds' Prospectus from time to time. 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").
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain tax-
sheltered retirement plans, including profit-sharing plans, 401(k) plans, money
purchase pension plans, target benefit plans and individual retirement accounts.
Further information about how to participate in these plans, the fees charged
and the limits on contributions can be obtained from Northern. 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, each 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 Funds'
shareholders and regulatory authorities, compensation and expenses of its
Trustees, payments to Service Organizations, fees of industry organizations such
as the Investment Company Institute, and miscellaneous and extraordinary
expenses incurred by the Trust.
The Trust and PFPC intend to voluntarily reimburse a portion of the Funds'
expenses and/or reduce their advisory and co-administrative fees from the Funds
during the current fiscal year. The result of these reimbursements and fee
reductions will be to increase the performance of the Funds during the periods
for which the reductions and reimbursements are made.
PERFORMANCE INFORMATION
MONEY MARKET FUNDS
From time to time the Trust may advertise quotations of "yields" and
"effective yields" with respect to each Money Market Fund, and the Municipal
Money Market Fund, Tax-Exempt Money Market Fund and the California Municipal
Money Market Fund may advertise their "tax-equivalent yields" and "tax-
equivalent effective yields." These yield figures will fluctuate, are based on
historical earnings and are not intended to indicate future performance.
"Yield" refers to the net investment income generated by an investment in the
Fund over a seven-day period identified in the advertisement. This net
investment income is then "annualized." That is, the amount of net investment
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
In arriving at quotations as to "yield," the Trust first determines the net
change during the period in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period, then divides such
net change by the value of the account at the beginning of the period to obtain
the base period return, and then multiplies the base period return by 365/7.
"Effective yield" is calculated similarly but, when annualized, the net
investment income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "effective
yield" with respect to the shares of a Money Market Fund is computed by adding 1
to the base period return (calculated as above), raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after-tax yield equivalent to a Fund's tax-free yield.
It is calculated by taking that portion of the seven-day "yield" which is tax-
exempt and adjusting it to reflect the tax savings associated with a stated tax
rate. The "tax-equivalent current yield" will always be higher than the Fund's
yield.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion of
the yield by 1 minus a stated income tax rate and then adding the quotient to
the taxable portion of the yield, if any. There may be more than one tax-
equivalent yield if more than one stated income tax rate is used.
The "tax-equivalent effective yield" demonstrates the level of taxable
yield necessary to produce an after-tax yield equivalent to a Fund's tax-free
effective yield. It is calculated by taking that portion of the seven-day
"effective yield" which is tax-exempt and adjusting it to reflect the tax
savings associated with a stated tax rate. The "tax-equivalent effective yield"
will always be higher than the Fund's effective yield.
"Tax-equivalent effective yield" is computed by dividing the tax-exempt
portion of the effective yield by 1 minus a stated income tax-rate, and then
adding the quotient to the taxable portion of the effective yield, if any.
There may be more than one tax-equivalent effective yield, if more than one
stated income tax rate is used.
The annualized yield of each Money Market Fund (except the Tax-Exempt Money
Market Fund, which did not commence operations during the period) for the seven-
day period ended March 31, 2000 was as follows1:
-------------------------------------------------------------------------------
Tax-
Tax- Equivalent
Effective Equivalent Effective
Yield Yield Yield Yield
-------------------------------------------------------------------------------
Money Market Fund 5.52% 5.67% N/A N/A
-------------------------------------------------------------------------------
U.S. Government Money Market Fund 5.54% 5.70% N/A N/A
-------------------------------------------------------------------------------
U.S. Government Select
Money Market Fund 5.45% 5.60% N/A N/A
-------------------------------------------------------------------------------
Municipal Money Market Fund 3.39% 3.45% 4.91% 5.00%
-------------------------------------------------------------------------------
California Municipal
Money Market Fund 2.79% 2.83% 4.04% 4.10%
-------------------------------------------------------------------------------
<F1> An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian" and "Co-Administrators and
Distributor." In the absence of such fee reductions and expense limitations,
the annualized yield of each Fund (except the Tax-Exempt Money Market Fund,
which did not commence operations during the period) for the same seven-day
period would have been as follows<F1>:
-------------------------------------------------------------------------------
Tax-
Tax- Equivalent
Effective Equivalent Effective
Yield Yield Yield Yield
-------------------------------------------------------------------------------
Money Market Fund 5.32% 5.47% N/A N/A
-------------------------------------------------------------------------------
U.S. Government
Money Market Fund 5.34% 5.50% N/A N/A
-------------------------------------------------------------------------------
U.S. Government Select
Money Market Fund 5.25% 5.40% N/A N/A
-------------------------------------------------------------------------------
Municipal Money Market Fund 3.19% 3.25% 4.62% 4.71%
-------------------------------------------------------------------------------
California Municipal
Money Market Fund 2.59% 2.63% 3.75% 3.81%
-------------------------------------------------------------------------------
<F1> An income tax rate of 31% is used in the calculation of tax-equivalent
yield and tax-equivalent effective yield.
A Money Market Fund may also quote, from time to time, total return
information using the formula described in the following section.
NON-MONEY MARKET FUNDS
The Non-Money Market Funds calculate their total returns separately on an
"average annual total return" basis for various periods. Average annual total
return reflects the average annual percentage change in value of an investment
in the Fund over the measuring period. Total returns for each Non-Money Market
Fund may also be calculated on an "aggregate total return" basis for various
periods. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return reflect
changes in the price of the shares and assume that any dividends and capital
gain distributions made by a Fund during the period are reinvested in the shares
of the Fund. When considering average total return figures for periods longer
than one year, it is important to note that the annual total return of a Fund
for any one year in the period might have been more or less than the average for
the entire period. The Non-Money Market Funds may also advertise from time to
time the total return on a year-by-year or other basis for various specific
periods by means of quotations, charts, graphs or schedules.
A Non-Money Market Fund calculates its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
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.
A Non-Money Market Fund calculates its "aggregate total return" by
determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
Aggregate Total Return = T = [(ERV/P)]-1
The calculations set forth below are made assuming that (i) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, and (ii) all recurring fees
charged to all shareholder accounts are included. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 2000
AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE RETURNS (%)
SINCE SINCE
FUND NAME<F1> 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT FUND
(4/1/94 inception) 1.67% 5.71% --- 5.26% 1.67% 32.00% --- 36.01%
SHORT-INTERMEDIATE
U.S. GOVERNMENT FUND
(10/1/99 inception) --- --- --- --- --- --- --- 1.76%
INTERMEDIATE TAX-EXEMPT FUND
(4/1/94 inception) (0.14%) 4.35% --- 4.36% (0.14%) 23.70% --- 29.13%
CALIFORNIA INTERMEDIATE
TAX-EXEMPT FUND
(10/1/99 inception) --- --- --- --- --- --- --- 2.37%
FLORIDA INTERMEDIATE
TAX-EXEMPT FUND
(8/15/96 inception)
0.30% --- --- 4.59% 0.30% --- --- 17.68%
FIXED INCOME FUND
(4/1/94 inception) 0.57% 6.60% --- 6.20% 0.57% 37.67% --- 43.44%
TAX-EXEMPT FUND
(4/1/94 inception) (1.50%) 5.23% --- 36.50% (1.50%) 29.01% --- 5.33%
ARIZONA TAX-EXEMPT FUND
(10/1/99 inception) --- --- --- --- --- --- --- 2.43%
CALIFORNIA TAX-EXEMPT FUND
(4/8/97 inception) (0.93%) --- --- 5.63% (0.93%) --- --- 17.71%
</TABLE>
<F1> As of March 31, 2000, the Blue Chip 20 Fund, Large Cap Value Fund and
Global Communications Fund had not commenced operations.
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 2000
AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE RETURNS (%)
SINCE SINCE
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL FIXED INCOME FUND<F2>
(4/1/94 inception) (5.11%) 3.15% --- 4.70% (5.11%) 16.78% --- 31.69%
HIGH YIELD MUNICIPAL FUND
(12/31/98 inception) (5.40%) --- --- (3.95%) (5.40%) --- --- (4.90%)
HIGH YIELD FIXED INCOME FUND
(12/31/98 inception) 0.80% --- --- 2.27% 0.80% --- --- 2.83%
INCOME EQUITY FUND
(4/1/94 inception) 19.10% 16.69% --- 14.15% 19.10% 116.32% --- 121.11%
STOCK INDEX FUND
(10/7/96 inception) 17.27% --- --- 25.41% 17.27% --- --- 119.86%
GROWTH EQUITY FUND
(4/1/94 inception) 27.60% 26.97% --- 23.38% 27.60% 229.97% --- 252.61%
SELECT EQUITY FUND
(4/6/94 inception) 59.78% 34.97% --- 30.17% 59.78% 347.83% --- 384.45%
MID CAP GROWTH FUND
(3/31/98 inception) 108.66% --- --- 56.38% 108.66% --- --- 144.55%
SMALL CAP INDEX FUND
(9/3/99 inception) --- --- --- --- --- --- --- 23.22%
SMALL CAP VALUE FUND
(4/1/94 inception) 30.01% 14.66% --- 12.19% 30.01% 98.19% --- 99.38%
SMALL CAP GROWTH FUND
(9/30/99 inception) --- --- --- --- --- --- --- 93.05%
</TABLE>
<F2> Prior to June 30, 2000, this Fund was named the International Fixed Income
Fund and was required to invest at least 65% of its total assets in fixed
income securities of foreign issuers
<TABLE>
<CAPTION>
FOR PERIODS ENDED MARCH 31, 2000
AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE RETURNS (%)
SINCE SINCE
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL GROWTH EQUITY FUND
(4/1/94 inception) 30.51% 14.83% --- 11.71% 30.51% 99.63% --- 94.25%
INTERNATIONAL SELECT EQUITY FUND
(4/5/94 inception) 31.25% 13.87% --- 11.09% 31.25% 91.45% --- 87.72%
TECHNOLOGY FUND
(4/1/96 inception) 154.28% --- --- 70.50% 154.28% --- --- 743.79%
</TABLE>
The yield of a Non-Money Market Fund is computed based on the Fund's net
income during a specified 30-day (or one month) period. More specifically, the
Fund's yield is computed by dividing the per share net income during the
relevant period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis.
A Non-Money Market Fund calculates its 30-day (or one month) standard yield
in accordance with the method prescribed by the SEC for mutual funds:
a-b 6
Yield = 2[(---- + 1) -1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = net asset value per share on the last day of the period.
Based on the foregoing calculations, for the 30-day period ended March 31,
2000, the yields for the U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt, Global
Fixed Income, High Yield Municipal, High Yield Fixed Income and Income Equity
Funds, after fee waivers, were ___%, ___%, ___%, ___%, ___%, ___%, ___%, ___%,
___% and ___, respectively. Also for the 30-day period ended March 31, 2000,
the yields for the U.S. Government, Intermediate Tax-Exempt, Florida
Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt, Global
Fixed Income, High Yield Municipal and High Yield Fixed Income Funds, absent fee
waivers, were ___%, ___%, ___%, ___%, ___%, ___%, ___%, ___%, ___% and ___%,
respectively.
A Non-Money Market Fund's "tax-equivalent" yield is computed by: (i)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (ii)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax. For the 30-day period ended March 31, 2000, and
using a federal income tax rate of __%, the 30-day tax-equivalent yields, after
fee waivers, were ___%, ___%, ___%, ___% and ___% for the Intermediate Tax-
Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, California Tax-Exempt and
High Yield Municipal Funds, respectively. Also, for the 30-day period ended
March 31, 2000, and using a federal income tax rate of __%, the 30-day tax-
equivalent yields, absent fee waivers, were ___%, ___%, ___%, ___% and ___% for
the Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt,
California Tax-Exempt and High Yield Municipal Funds, respectively.
GENERAL INFORMATION
The performance information set forth above includes the reinvestment of
dividends and distributions. Certain performance information set forth above
reflects fee waivers in effect; in the absence of fee waivers, these performance
figures would be reduced. Any fees imposed by Northern, NTI or other Service
Organizations on their customers in connection with investments in the Funds are
not reflected in the Trust's calculations of performance for the Funds.
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
The performance of each Fund may be compared to those of other mutual funds
with similar investment objectives and to stock, bond and other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or to the S&P 500 Index, the S&P MidCap 400 Index, the Russell
2000 or 1000 Small Stock Index, the Consumer Price Index or the Dow Jones
Industrial Average. In addition, performance of the U.S. Government and Fixed
Income Funds may be compared to the Lehman Brothers Government Bond Index (or
its two components, the Treasury Bond Index and Agency Bond Index), the Lehman
Brothers Corporate Bond Index, the Lehman Brothers Intermediate Government Bond
Index and the Lehman Brothers Government/Corporate Bond Index. Performance of
the Intermediate Tax-Exempt and Tax-Exempt Funds may be compared to the Lehman
Brothers Mutual Fund Intermediate Municipal Index, Lehman Brothers Municipal
Bond or 5-Year Municipal Bond Indices; performance of the California
Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund
California Intermediate Index; performance of the Florida Intermediate Tax-
Exempt Fund may be compared to the Lehman Brothers Florida Intermediate Tax-
Exempt Index; performance of the Arizona Tax-Exempt Fund may be compared to the
Lehman Brothers Arizona Municipal Bond Index; performance of the California Tax-
Exempt Fund may be compared to the Lehman Brothers California Exempt Municipal
Index and performance of the California Intermediate Tax-Exempt Fund, Florida
Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt
Fund may be compared to the Lehman Brothers Mutual Fund Intermediate Municipal
Index. Performance of the High Yield Municipal Fund may be compared to Lehman
Brothers Municipal Non-Investment Grade Bond Index. Performance of the High
Yield Fixed Income Fund may be compared to Merrill Lynch High Yield Master II
Index, Lehman Brothers High Yield Corporate Bond Index and Salomon Brothers
Extended High-Yield Market Index. Performance of the Income Equity Fund may be
compared to the Merrill Lynch All U.S. Convertibles Index and the Merrill Lynch
Investment Grade Convertible Bond Index. Performance of the International
Growth Equity and International Select Equity Funds may be compared to the
Morgan Stanley Capital International Europe, Australia and Far East Index ("MSCI
EAFE"), the MSCI EAFE blended with Emerging Markets Free Index and the J.P.
Morgan International Government Bond Index. Performance of the Global Fixed
Income Fund may be compared to the J.P. Morgan Global Bond Index. Performance
of the Income Equity Fund may be compared to the Merrill Lynch All U.S.
Convertibles Index. Performance of the Global Communications Fund may be
compared to the Morgan Stanley High-Technology 35 Index, the MSCI EAFE or the
MSCI EAFE blended with Emerging Markets Free Index and the J.P. Morgan
International Government Bond Index. Performance of the Technology Fund may be
compared to the Morgan Stanley High-Technology 35 Index, the Morgan Stanley
Index, the Hambrecht and Quist Technology Index, the SoundView Technology Index,
the technology grouping of the S&P 500 Index and any other comparable technology
index. Performance data as reported in national financial publications such as
Money, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature, may also be used in comparing the
performance of a Fund. From time to time, the Funds may also quote the mutual
fund ratings of Morningstar, Inc. and other services in their advertising
materials.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. The Funds may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Funds. The Funds may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Funds may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original
investment in the Fund, but also of the additional Fund shares received through
reinvestment.
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic and political conditions, the relationship
between sectors of the economy and the economy as a whole, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and Treasury bills. From time to time advertisements,
sales literature, communications to shareholders or other materials may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Northern and NTI as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Funds may also include in advertisements, sales literature,
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of a Fund. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Fund and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternative to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may include lists of representative clients of Northern and NTI.
Materials may refer to the CUSIP numbers of the Funds and may illustrate how to
find the listings of the Funds in newspapers and periodicals. Materials may
also include discussions of other Funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data.
The Funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
A Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include
information regarding the background and experience of its portfolio managers.
NET ASSET VALUE
As stated in the Prospectus for the Money Market Funds, each Money Market
Fund seeks to maintain a net asset value of $1.00 per share and, in this
connection, values its instruments on the basis of amortized cost pursuant to
Rule 2a-7 under the 1940 Act. This method values a security at its cost on the
date of purchase and thereafter assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price a Fund would receive if the
Fund sold the instrument. During such periods the yield to investors in the
Fund may differ somewhat from that obtained in a similar entity which uses
available indications as to market value to value its portfolio instruments.
For example, if the use of amortized cost resulted in a lower (higher) aggregate
Fund value on a particular day, a prospective investor in the Fund would be able
to obtain a somewhat higher (lower) yield and ownership interest than would
result from investment in such similar entity and existing investors would
receive less (more) investment income and ownership interest. However, the
Trust expects that the procedures and limitations referred to in the following
paragraphs of this section will tend to minimize the differences referred to
above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the Funds'
operations and delegating special responsibilities involving portfolio
management to Northern, has established procedures that are intended, taking
into account current market conditions and the Funds' investment objectives, to
stabilize the net asset value of each Money Market Fund, as computed for the
purposes of purchases and redemptions, at $1.00 per share. The Trustees'
procedures include periodic monitoring of the difference (the "Market Value
Difference") between the amortized cost value per share and the net asset value
per share based upon available indications of market value. Available
indications of market value used by the Trust consist of actual market
quotations or appropriate substitutes which reflect current market conditions
and include (i) quotations or estimates of market value for individual portfolio
instruments and/or (ii) values for individual portfolio instruments derived from
market quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference of a given Money Market
Fund exceeds 1/2 of 1%, the Trustees' procedures provide that the Trustees will
take such steps as they consider appropriate (e.g., selling portfolio
instruments to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a net asset value per share based upon available indications
of market value which under such circumstances would vary from $1.00) to
eliminate or reduce to the extent reasonably practicable any material dilution
or other unfair results to investors or existing shareholders which might arise
from Market Value Differences. In particular, if losses were sustained by a
Fund, the number of outstanding shares might be reduced in order to maintain a
net asset value per share of $1.00. Such reduction would be effected by having
each shareholder proportionately contribute to the Fund's capital the necessary
shares to restore such net asset value per share. Each shareholder will be
deemed to have agreed to such contribution in these circumstances by investing
in the Fund.
Rule 2a-7 requires that each Money Market Fund limit its investments to
instruments which Northern determines (pursuant to guidelines established by the
Board of Trustees) to present minimal credit risks and which are "Eligible
Securities" as defined by the SEC and described in the Prospectus. The Rule
also requires that each Money Market Fund maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to its policy of
maintaining a stable net asset value per share and precludes the purchase of any
instrument deemed under the Rule to have a remaining maturity of more than 397
days. Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Rule requires a Money
Market Fund to invest its available cash in such a manner as to reduce such
maturity to the prescribed limit as soon as reasonably practicable.
Securities held by the other Funds that are listed on a recognized U.S. or
foreign securities exchange are valued at the last quoted sales price on the
securities exchange on which the securities are primarily traded, except that
securities listed on an exchange in the United Kingdom are valued at the average
of the closing bid and ask prices. If securities listed on a U.S. exchange are
not traded on a valuation date, they will be valued at the last quoted bid
price. If securities traded on a foreign securities exchange are not traded on
a valuation date, they will be valued at the most recent quoted sales price.
Securities that are traded in the U.S. over-the-counter markets, absent a last
quoted sales price, are valued at the last quoted bid price. Securities which
are traded in the foreign over-the-counter markets are valued at the last sales
price, except that such securities traded in the United Kingdom are valued at
the average of the closing bid and ask prices. Any securities for which no
current quotations are readily available are valued at fair value as determined
in 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 a Fund on days
during which no shares are tendered to a Fund for redemption and no orders to
purchase or sell shares are received by a Fund, or on days on which there is an
insufficient degree of trading in the Fund's portfolio securities for changes in
the value of such securities to affect materially the net asset value per share.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
The discussions of Federal and state tax consequences in the Prospectus
and this Additional Statement are based on the 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
Each 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, each Fund is generally exempt from Federal income tax on its net
investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer), and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
Each Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder has held the shares, whether such gain was recognized by
the Fund prior to the date on which a shareholder acquired shares of the Fund
and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.
Dividends and distributions from each Fund will generally be taxable to you
in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Fund in October, November or December and paid in
January are taxed as though they were paid by December 31.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Income Equity Fund, Stock Index Fund,
Growth Equity Fund, Select Equity Fund, Blue Chip 20 Fund, Mid Cap Growth, Small
Cap Index Fund, Small Cap Value Fund, Small Cap Growth Fund, Technology Fund and
Large Cap Value Fund, may constitute "qualifying dividends." The other Funds,
however, are not expected to pay qualifying dividends.
If for any taxable year any Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
all distributions (whether or not derived from exempt-interest income) would be
taxable as ordinary income to the extent of such Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although each Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, each Fund may be subject
to the tax laws of such states or localities.
FEDERAL - TAX-EXEMPT INFORMATION
As described in the Prospectus, the Municipal Money Market, California
Municipal Money Market, Tax-Exempt Money Market, Intermediate Tax-Exempt,
California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt,
Arizona Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds are
designed to provide investors with Federally tax-exempt interest income. The
Funds are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Funds would not be
suitable for tax-exempt institutions or for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, would
not gain any additional benefit from the Funds' dividends being tax-exempt. In
addition, the Funds may not be an appropriate investment for persons or entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, which occupies more
than 5% of the usable area of such facilities or for which such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations,
partnerships and their partners and S corporations and their shareholders.
In order for the Municipal Money Market, California Municipal Money Market,
Tax-Exempt Money Market, Intermediate Tax-Exempt, California Intermediate Tax-
Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt,
California Tax-Exempt or High Yield Municipal Funds to pay federal exempt-
interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of the Fund must consist of
tax-exempt obligations. An exempt-interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by a Fund with respect to any taxable year which qualifies as federal exempt-
interest dividends will be the same for all shareholders receiving dividends
from the Fund with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a tax exempt Fund generally is not deductible for federal income tax
purposes to the extent attributable to exempt-interest-dividends. If a
shareholder holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions for investment companies that regularly
distribute at least 90% of its net tax-exempt interest. No such regulations had
been issued as of the date of this Additional Statement.
Corporate taxpayers will be required to take into account all exempt-
interest dividends from the Tax-Exempt Funds and the Municipal Funds in
determining certain adjustments for alternative minimum tax purposes.
The Funds will determine annually the percentages of their respective net
investment income which are exempt from tax, which constitute an item of tax
preference for purposes of the federal alternative minimum tax, and which are
fully taxable, and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Funds.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments and
futures contacts and options that may be engaged in by a Fund, and investments
in passive foreign investment companies ("PFICs"), are complex and, in some
cases, uncertain. Such transactions and investments may cause a Fund to
recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as
ordinary income.
In addition, in the case of any shares of a PFIC in which a Fund invests,
the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA FUNDS
Assuming each of the California Funds qualifies as a regulated investment
company, it will be relieved of liability for California state franchise and
corporate income tax to the extent its earnings are distributed to its
shareholders. Each of the California Funds may be taxed on its undistributed
taxable income. If for any year one of the California Funds does not qualify as
a regulated investment company, all of that Fund's taxable income (including
interest income on California municipal instruments for franchise tax purposes
only) may be subject to California state franchise or income tax at regular
corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of a regulated investment company, or series thereof,
consists of obligations the interest on which, if held by an individual, is
exempt from taxation by California ("California municipal instruments") then a
regulated investment company, or series thereof, will be qualified to pay
dividends exempt from California state personal income tax to its non-corporate
shareholders (hereinafter referred to as "California exempt-interest
dividends"). "Series" of a regulated investment company is defined as a
segregated portfolio of assets, the beneficial interest in which is defined as a
series of stock of the company. Each of the California Funds intends to qualify
under the above requirements so that it can pay California exempt-interest
dividends. If one of the California Funds fails to so qualify, no part of that
Fund's dividends to shareholders will be exempt from the California state
personal income tax. Each of the California Funds may reject purchase orders
for shares if it appears desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, each of the California
Funds will notify each shareholder of the portion of the dividends paid by the
Fund to the shareholder with respect to such taxable year which is exempt from
California state personal income tax. The total amount of California exempt-
interest dividends paid by the Fund with respect to any taxable year cannot
exceed the excess of the amount of interest received by the Fund for such year
on California municipal instruments over any amounts that, if the Fund were
treated as an individual, would be considered expenses related to tax-exempt
income or amortizable bond premium and would thus not be deductible under
federal income or California state personal income tax law. The percentage of
total dividends paid by the Fund with respect to any taxable year which
qualifies as California exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or "related persons"
with respect to California municipal instruments held by one of the California
Funds, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection, rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. See "Federal - Tax-Exempt Information"
above.
To the extent any dividends paid to shareholders are derived from the
excess of net long-term capital gains over net short-term capital losses, such
dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gain dividends for federal income tax
purposes. See "Federal - General Information" above. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of one of the
California Funds is not deductible for California state personal income tax
purposes if that Fund distributes California exempt-interest dividends during
the shareholder's taxable year.
In addition, any loss realized by a shareholder of the California Funds
upon the sale of shares held for six months or less may be disallowed to the
extent of any exempt-interest dividends received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution will be treated as long-term capital loss to the extent of
such long-term capital gains distribution. Finally, any loss realized upon the
redemption of shares within thirty days before or after the acquisition of other
shares of the same Fund may be disallowed under the "wash sale" rules.
California may tax income derived from repurchase agreements involving
federal obligations because such income represents a premium paid at the time
the government obligations are repurchased rather than interest paid by the
issuer of the obligations.
The foregoing is only a summary of some of the important California state
personal income tax considerations generally affecting the California Funds and
their shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the California Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of a Fund's dividends
constituting California exempt-interest dividends is excludable from income for
California state personal income tax purposes only. Any dividends paid to
shareholders subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
one of the California Funds, including, in particular, corporate investors which
may be subject to either California franchise tax or California corporate income
tax, should consult their tax advisers with respect to the application of such
taxes to the receipt of Fund dividends and as to their own California state tax
situation, in general.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE FLORIDA INTERMEDIATE TAX-
EXEMPT FUND
The State of Florida does not currently impose an income tax on
individuals. Thus, individual shareholders of the Florida Intermediate Tax-
Exempt Fund will not be subject to any Florida income tax on distributions
received from the Fund. However, Florida does currently impose an income tax on
certain corporations. Consequently, distributions may be taxable to corporate
shareholders.
The State of Florida currently imposes an "intangibles tax" at the annual
rate of 2 mills or 0.20% on certain securities and other intangible assets owned
by Florida residents. Every natural person is entitled to an exemption of the
first $20,000 of the value of taxable property against the first mill of the
annual tax. Spouses filing jointly are entitled to a $40,000 exemption. With
respect to the second mill, natural persons are entitled to an exemption of the
first $100,000 of otherwise taxable property (joint filers are entitled to a
$200,000 exemption). Taxpayers are limited to only one exemption under each
provision. Notes, bonds and other obligations issued by the State of Florida or
its municipalities, counties, and other taxing districts, or by the United
States Government, its agencies and certain U.S. territories and possessions
(such as Guam, Puerto Rico and the Virgin Islands) as well as cash are exempt
from this intangibles tax. If on December 31 of any year at least 90 percent of
the net asset value of the portfolio of the Florida Intermediate Tax-Exempt Fund
consists solely of such exempt assets, then the Fund's shares will be exempt
from the Florida intangibles tax payable in the following year.
In order to take advantage of the exemption from the intangibles tax in any
year, it may be necessary for the Fund to sell some of its non-exempt assets
held in its portfolio during the year and reinvest the proceeds in exempt assets
including cash prior to December 31. Transaction costs involved in
restructuring the portfolio in this fashion would likely reduce the Fund's
investment return and might exceed any increased investment return the Fund
achieved by investing in non-exempt assets during the year.
Outside the State of Florida, income distributions may be taxable to
shareholders under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. Government obligations which, if realized directly, would be
exempt from such income taxes. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE ARIZONA TAX-EXEMPT FUND
Individuals, trusts and estates who are subject to Arizona income tax will
not be subject to such tax on dividends paid by the Arizona Tax-Exempt Fund, to
the extent that such dividends qualify as exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Code and are
attributable to either (i) obligations of the State of Arizona or its political
subdivisions thereof or (ii) obligations issued by the governments of Guam,
Puerto Rico, or the Virgin Islands. In addition, dividends paid by the Arizona
Tax-Exempt Fund which are attributable to interest payments on direct
obligations of the United States government will not be subject to Arizona
income tax to the extent the Arizona Tax-Exempt Fund qualifies as a regulated
investment company under Subchapter M of the Code. Other distributions from the
Arizona Tax-Exempt Fund, however, such as distributions of short-term or long-
term capital gains, will generally not be exempt from Arizona income tax.
There are no municipal income taxes in Arizona. Moreover, because shares
of the Arizona Tax-Exempt Fund are intangibles, they are not subject to Arizona
property tax. Shareholders of the Arizona Tax-Exempt Fund should consult their
tax advisors about other state and local tax consequences of their investment in
the Arizona Tax-Exempt Fund.
DESCRIPTION OF SHARES
The Trust Agreement permits 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-two portfolios, each of which is
discussed in this Additional Statement.
Under the terms of the Trust Agreement, each share of each Fund has a par
value of $.0001, represents a proportionate interest in the particular Fund with
each other share of its class and is entitled to such dividends and
distributions out of the income belonging to the Fund as are declared by the
Trustees. Upon any liquidation of a Fund, shareholders of each class of a Fund
are entitled to share pro rata in the net assets belonging to that class
available for distribution. Shares do not have any preemptive or conversion
rights. The right of redemption is described under "Redeeming and Exchanging
Shares" in the Prospectus. In addition, pursuant to the terms of the 1940
Act, the right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days (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. In addition, the Trust reserves the right to
adopt, by action of the Trustees, a policy pursuant to which it may, without
shareholder approval, redeem upon not less than 30 days' notice all of a Fund's
shares if such shares have an aggregate value below a designated amount and if
the Trustees determine that it is not practical, efficient or advisable to
continue the operation of such Fund and that any applicable requirements of the
1940 Act have been met. Shares when issued as described in the Prospectus are
validly issued, fully paid and nonassessable, except as stated below. In the
interests of economy and convenience, certificates representing shares of the
Funds are not issued.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of 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 Fund entitled
to vote on a matter will vote in the aggregate and not by Fund, except as
required by law or when the matter to be voted on affects only the interests of
shareholders of a particular Fund.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as 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.
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 or portfolio present at a meeting, if the
holders of more than 50% of the outstanding shares of Northern Funds or such
Fund or portfolio are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of Northern Funds or such Fund or portfolio.
As of April 30, 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 April 30, 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:
NUMBER PERCENTAGE
OF SHARES OF SHARES
MONEY MARKET FUND
Short-Term Investment Fund of NTC 945,040,000 15.0%
The Northern Trust Bank - Miami 995,735,732 15.8%
Northern Trust Bank Illinois - M&I Sweep Account 340,358,679 5.4%
Northern Trust Bank Florida - M&I Sweep Account 417,453,117 6.6%
U.S. GOVERNMENT MONEY MARKET FUND
TNT - Miami on behalf of its customers 32,367,291 6.5%
Sunstone Financial Group, Inc. 55,349,754 11.2%
Northern Trust Bank Florida - M&I Sweep Account 43,637,121 8.8%
U.S. GOVERNMENT SELECT MONEY MARKET FUND
Northern Trust Bank Florida - M&I Sweep Account 98,316,333 14.4%
TNT - Miami on behalf of its customers 228,136,679 33.4%
MUNICIPAL MONEY MARKET FUND
TNT - Miami on behalf of its customers 618,709,499 24.1%
Northern Trust Bank Illinois - M&I Sweep Account 188,651,513 7.3%
Northern Trust Bank Florida - M&I Sweep Account 130,073,758 5.1%
CALIFORNIA MUNICIPAL MONEY MARKET FUND
Northern Trust Bank California - M&I Sweep Account 75,290,439 6.9%
FLORIDA INTERMEDIATE TAX-EXEMPT FUND
First Data Investors Services 382,736 9.3%
Group FBO Northern Funds 266,653 6.5%
Auto House Trust Cash Processing Unit - Miami
FIXED INCOME FUND
CCT Combs Funds 5,205,804 7.7%
HIGH YIELD FIXED INCOME FUND
Northern Trust Company Pension Plan 2,366,471 12.9%
STOCK INDEX FUND
CCT Combs Funds 2,249,292 8.3%
NUMBER PERCENTAGE
OF SHARES OF SHARES
SELECT EQUITY FUND
First Data Investors Services Group 1,831,777 12.2%
FBO Northern Funds
TECHNOLOGY FUND
Charles Schwab and Co., Inc. 3,033,911 6.9%
on behalf of its customers
As of April 30, 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.
FINANCIAL STATEMENTS
The audited financial statements and related report of the Trust's
independent auditors, contained in the annual report to shareholders for the
fiscal year ended March 31, 2000 (the "Annual Report") are hereby incorporated
herein by reference. No other part of the Annual Report is incorporated by
reference herein. Copies of the Annual Report may be obtained, without charge,
from the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986,
Chicago, Illinois 60675-5986 or by calling 1-800-595-9111.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Trust's Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
APPENDIX A
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's Ratings Group, Inc. ("S&P") commercial paper rating is
a current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Moody's Investor Service, Inc. ("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.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps Credit Rating Co. ("D&P") for
investment grade commercial paper and short-term debt are "D-1," "D-2" and "D-
3." D&P employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by D&P for
commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors.
Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA ("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 strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong
credit feature.
"F2" - Securities possess good credit quality. This designation indicates
a satisfactory capacity for timely payment of financial commitments, but
the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities possess high default risk. This designation indicates
that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch, Inc. ("TBW") 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
TBW:
"TBW-1" - This designation represents TBW'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 TBW'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 TBW'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 TBW'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 S&P's for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
S&P's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher-rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment
on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to
meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken,
but payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal
("Ba" indicates speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" are of poor standing;
"Ca" represents obligations which are speculative in a high degree;
and "C" represents the lowest rated class of bonds). "Caa," "Ca" and
"C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (i) earnings of projects under construction, (ii) earnings
of projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (vi) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by D&P for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-
free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of
greater economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during
economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations
when due. Debt rated "B" possesses the risk that obligations will not
be met when due. Debt rated "CCC" is well below investment grade and
has considerable uncertainty as to timely payment of principal,
interest or preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or
financial alternatives may be available to allow financial commitments
to be met. Securities rated in this category are not investment
grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of
safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments.
"CC" ratings indicate that default of some kind appears probable, and
"C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates
the highest potential for recovery of amounts outstanding on any
securities involved and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
TBW 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 TBW for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations
with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by TBW to
non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely
payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
----------------------
A S&P's rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. The following summarizes the
ratings used by S&P'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 very strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection that are ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less
well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is
present and although not distinctly or predominantly speculative,
there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack of margins of protection.
Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes.
APPENDIX B
As stated in the Prospectuses, the Funds (other than the Money Market
Funds) may enter into certain futures transactions. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
--------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, by using futures contracts.
Interest rate future contracts can also be used by a Fund for non-
hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as 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 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 Advisers. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by the
Investment Advisers. It is also possible that, where a Fund has sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of instruments held in the Fund may decline. If this occurred, the
Fund would lose money on the futures and also experience a decline in value in
its portfolio securities.
When futures are purchased to hedge against a possible increase in
the price of securities or a currency before a Fund is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Investment Adviser may
still not result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
The trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by a Fund is also subject to the
Investment Advisers' ability to predict correctly movements in the direction of
the market. For example, if a particular Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
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 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.
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
--------
The following exhibits are incorporated herein by reference:
(a) (1) Agreement and Declaration of Trust dated October 12, 1993 filed
as Exhibit 1(a) to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, filed on July
29, 1996 ("PEA No. 11").
(2) Amendment No. 1 to Agreement and Declaration of Trust filed as
Exhibit 1(b) to PEA No. 11.
(3) Amendment No. 2 to Agreement and Declaration of Trust filed as
Exhibit 1(c) to PEA No. 11.
(4) Amendment No. 3 to Agreement and Declaration of Trust filed as
Exhibit 1(d) to PEA No. 11.
(5) Amendment No. 4 to Agreement and Declaration of Trust filed as
Exhibit 1(e) to PEA No. 11.
(6) Amendment No. 5 to Agreement and Declaration of Trust dated May
26, 1995 filed as Exhibit 1(f) to Post-Effective Amendment No. 9
to Registrant's Registration Statement on Form N-1A, filed on
June 12, 1996 ("PEA No. 9").
(7) Amendment No. 6 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(g) to Post-Effective Amendment
No. 12 to Registrant's Registration Statement on Form N-1A, filed
on October 30, 1996 ("PEA No. 12").
(8) Amendment No. 7 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(h) to PEA No. 12.
(9) Amendment No. 8 to Agreement and Declaration of Trust dated
February 12, 1996 filed as Exhibit 1(i) to Post-Effective
Amendment No. 15 to Registrant's Registration Statement on Form
N-1A, filed on February 26, 1997 ("PEA No. 15").
(10) Amendment No. 9 to Agreement and Declaration of Trust dated
February 12, 1997 filed as Exhibit 1(j) to Post-Effective
Amendment No. 16 to Registrant's Registration Statement on Form
N-1A, filed on July 31, 1997 ("PEA No. 16").
(11) Amendment No. 10 to Agreement and Declaration of Trust dated
November 18, 1997 filed as Exhibit 1(k) to Post-Effective
Amendment No. 19 to Registrant's Registration Statement on Form
N-1A, filed on March 20, 1998 ("PEA No. 19").
(12) Amendment No. 11 to Agreement and Declaration of Trust dated
September 18, 1998 filed as Exhibit (a)(12) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form
N-1A, filed on May 28, 1999 ("PEA No. 22").
(13) Amendment No. 12 to Agreement and Declaration of Trust dated
November 18, 1998 filed as Exhibit (a)(13) to PEA No. 22.
(14) Amendment No. 13 to Agreement and Declaration of Trust dated
September 15, 1999 filed as Exhibit (a)(14) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form
N-1A, filed on September 17, 1999 ("PEA No. 25").
(15) Amendment No. 14 to Agreement and Declaration of Trust dated
October 1, 1999 filed as Exhibit (a)(15) to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form
N-1A, filed on October 15, 1999 ("PEA No. 27").
(16) Amendment No. 15 to Agreement and Declaration of Trust dated
November 17, 1999 filed as Exhibit (a)(16) to Post-Effective
Amendment No. 28 to Registrant's Registration Statement on Form
N-1A, filed on December 28, 1999 ("PEA No. 28").
(17) Amendment No. 16 to Agreement and Declaration of Trust dated
February 8, 2000 filed as Exhibit (a)(17) to Post-Effective
Amendment No. 30/31 to the Registration Statement on Form N-1A,
filed on February 29, 2000 ("PEA 29").
(18) Amendment No. 17 to Agreement and Declaration of Trust dated
February 8, 2000 filed as Exhibit (a)(18) to PEA 29.
(19) Agreement and Declaration of Trust dated February 7, 2000 filed
as Exhibit (a)(19) to Post-Effective Amendment Nos. 30/31 to
Registrant's Registration Statement on Form N-1A, filed on May
15, 2000 ("PEA 30/31").
(b) (1) By-Laws filed as Exhibit 2 to PEA No. 11.
(2) Amendment to the By-Laws dated August 4, 1994 filed as Exhibit
2(a) to PEA No. 11.
(3) Amendment No. 2 to the By-Laws dated May 22, 1997 filed as
Exhibit 2(b) to PEA No. 16.
(4) Amendment No. 3 to the By-Laws dated September 15, 1999 filed as
Exhibit (b)(4) to PEA No. 27.
(5) By-Laws filed as Exhibit (b)(5) to PEA 30/31.
(6) Amendment No. 1 to By-Laws adopted on May 2, 2000 filed as
Exhibit (b)(6) to PEA 30/31.
(c) None.
(d) (1) Investment Advisory and Ancillary Services Agreement between
Registrant and The Northern Trust Company dated April 1, 1994
("Investment Advisory Agreement") filed as Exhibit 5 to PEA No.
11.
(2) Addendum No. 1 to the Investment Advisory Agreement dated
November 29, 1994 filed as Exhibit 5(a) to PEA No. 11.
(3) Addendum No. 2 to the Investment Advisory Agreement dated
March 29, 1996 filed as Exhibit 5(b) to PEA No. 9.
(4) Addendum No. 3 to the Investment Advisory Agreement dated August
7, 1996 filed as Exhibit 5(c) to PEA No. 12.
(5) Addendum No. 4 to the Investment Advisory Agreement dated March
24, 1997 filed as Exhibit 5(d) to PEA No. 16.
(6) Addendum No. 5 to the Investment Advisory Agreement dated
February 12, 1997 filed as Exhibit 5(e) to PEA No. 19.
(7) Addendum No. 6 to the Investment Advisory Agreement dated
November 18, 1997 filed as Exhibit 5(f) to PEA No. 19.
(8) Assumption Agreement between The Northern Trust Company and
Northern Trust Quantitative Advisors, Inc. dated April 1, 1998
filed as exhibit 5(g) to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, filed on July
31, 1998 ("PEA No. 20").
(9) Addendum No. 7 to the Investment Advisory Agreement dated
December 21, 1998 filed as Exhibit (d)(9) to PEA No. 22.
(10) Addendum No. 8 to the Investment Advisory Agreement dated
September 15, 1999 filed as Exhibit (d)(10) to PEA No. 27.
(11) Addendum No. 9 to the Investment Advisory Agreement dated
December 28, 1999 filed as Exhibit (d)(11) to PEA No. 28.
(12) Addendum No. 10 to the Investment Advisory Agreement dated
February 8, 2000 filed as Exhibit (d)(12) to PEA 30/31.
(e) (1) Distribution Agreement between Registrant and Northern Funds
Distributors, LLC dated October 1, 1999 filed as Exhibit (e)(1)
to PEA No. 27.
(2) Amended and Restated Schedule A to the Distribution Agreement
dated February 8, 2000 filed as Exhibit (e)(3) to PEA No. 30/31.
(f) None.
(g) (1) Custodian Agreement between Registrant and The Northern Trust
Company dated April 1, 1994 ("Custodian Agreement") filed as
Exhibit 8(a) to PEA No. 11.
(2) Addendum No. 1 to the Custodian Agreement dated November 29, 1994
filed as Exhibit 8(d) to PEA No. 11.
(3) Addendum No. 2 to the Custodian Agreement dated March 29, 1996
filed as Exhibit 8(f) to PEA No. 9.
(4) Addendum No. 3 to the Custodian Agreement dated August 7, 1996
filed as Exhibit 8(i) to PEA No. 12.
(5) Addendum No. 4 to the Custodian Agreement dated August 7, 1996
filed as Exhibit 8(j) to PEA No. 12.
(6) Addendum No. 5 to the Custodian Agreement dated March 24, 1997
filed as Exhibit 8(n) to PEA No. 16.
(7) Addendum No. 6 to the Custodian Agreement dated February 12, 1997
filed as Exhibit 8(l) to PEA No. 19.
(8) Addendum No. 7 to the Custodian Agreement dated November 18, 1997
filed as Exhibit 8(o) to PEA No. 19.
(9) Addendum No. 8 to the Custodian Agreement dated December 21, 1998
filed as Exhibit (g)(12) to PEA No. 22.
(10) Addendum No. 9 to the Custodian Agreement dated September 15,
1999 filed as Exhibit (g)(13) to PEA No. 27.
(11) Addendum No. 10 to the Custodian Agreement dated December 28,
1999 filed as Exhibit (g)(14) to PEA No. 28.
(12) Foreign Custody Agreement between the Registrant and The Northern
Trust Company dated April 1, 1994 filed as Exhibit 8(g) to PEA
No. 11.
(13) Addendum No. 1 to the Foreign Custody Agreement dated April 1,
1998 filed as Exhibit 8(p) to PEA No. 19.
(14) Addendum No. 2 to the Foreign Custody Agreement dated February 8,
2000 filed as Exhibit (g)(15) to PEA 30/31.
(15) Foreign Custody Monitoring Agreement between the Registrant and
The Northern Trust Company dated February 18, 1998 filed as
exhibit 8(r) to PEA No. 20.
(h) (1) Transfer Agency Agreement between Registrant and The Northern
Trust Company dated April 1, 1994 ("Transfer Agency Agreement")
filed as Exhibit 8(b) to PEA No. 11.
(2) Addendum No. 1 to the Transfer Agency Agreement dated November
29, 1994 filed as Exhibit 8(c) to PEA No. 11.
(3) Addendum No. 2 to the Transfer Agency Agreement dated March 29,
1996 filed as Exhibit 8(e) to PEA No. 9.
(4) Addendum No. 3 to the Transfer Agency Agreement dated August 7,
1996 filed as Exhibit 8(h) to PEA No. 12.
(5) Addendum No. 4 to the Transfer Agency Agreement dated March 24,
1997 filed as Exhibit 8(m) to PEA No. 16.
(6) Addendum No. 5 to the Transfer Agency Agreement dated February
12, 1997 filed as Exhibit 8(k) to PEA No. 19.
(7) Addendum No. 6 to the Transfer Agency Agreement dated November
18, 1997 filed as Exhibit 8(q) to PEA No. 19.
(8) Addendum No. 7 to the Transfer Agency Agreement dated December
21, 1998 filed as Exhibit (h)(11) to PEA No. 22.
(9) Addendum No. 8 to the Transfer Agency Agreement dated September
15, 1999 filed as Exhibit (h)(9) to PEA No. 27.
(10) Addendum No. 9 to the Transfer Agency Agreement dated December
28, 1999 filed as Exhibit (h)(10) to PEA No. 28.
(11) Addendum No. 10 to the Transfer Agency Agreement dated February
8, 2000 filed as Exhibit (h)(15) to PEA 30/31.
(12) Amended and Restated Service Plan, adopted as of April 1, 1999
and most recently revised as of September 15, 1999, and Related
Agreement filed as Exhibit (h)(11) to PEA No. 27.
(13) Co-Administration Agreement among Registrant, First Data Investor
Services Group, Inc. and The Northern Trust Company dated October
1, 1999 filed as Exhibit (h)(12) to PEA No. 27.
(14) Amended and Restated Schedule A to the Co-Administration
Agreement dated February 8, 2000 filed as Exhibit (h)(16) to PEA
30/31.
(15) Agreement and Plan of Reorganization, Conversion and Termination
dated February 8, 2000 filed as Exhibit (h)(14) to PEA 29.
(i) None.
(j) None.
(k) None.
(l) (1) Purchase Agreement between Registrant and The Northern Trust
Company dated March 31, 1994 filed as Exhibit 13(a) to PEA No.
11.
(2) Purchase Agreement between Registrant and Miriam M. Allison dated
March 14, 1994 filed as Exhibit 13(b) to PEA No. 11.
(3) Purchase Agreement between Registrant and Miriam M. Allison dated
March 31, 1998 for shares of the Mid Cap Growth Fund filed as
Exhibit (l)(3) to PEA No. 22.
(4) Purchase Agreement between Registrant and Miriam M. Allison dated
December 31, 1998 for shares of the High Yield Fixed Income Fund
filed as Exhibit (l)(4) to PEA No. 22.
(5) Purchase Agreement between Registrant and Miriam M. Allison dated
December 31, 1998 for shares of the High Yield Municipal Fund
filed as Exhibit (l)(5) to PEA No. 22.
(6) Purchase Agreement between Registrant and Miriam M. Allison dated
September 3, 1999 for shares of the Small Cap Index Fund filed as
Exhibit (l)(6) to PEA No. 27.
(7) Purchase Agreement between Registrant and The Northern Trust
Company dated September 3, 1999 for shares of the Income Equity
Fund, Stock Index Fund, Growth Equity Fund, Technology Fund,
International Growth Equity Fund and Small Cap Index Fund filed
as Exhibit (l)(7) to PEA No. 27.
(8) Purchase Agreement between Registrant and Martin C. Gawne dated
September 30, 1999 for shares of the Small Cap Growth Fund filed
as Exhibit (l)(8) to PEA No. 27.
(9) Purchase Agreement between Registrant and Martin C. Gawne dated
September 30, 1999 for shares of the Short-Intermediate U.S.
Government Fund filed as Exhibit (l)(9) to PEA No. 27.
(10) Purchase Agreement between Registrant and Martin C. Gawne dated
September 30, 1999 for shares of the California Intermediate Tax-
Exempt Fund filed as Exhibit (l)(10) to PEA No. 27.
(11) Purchase Agreement between Registrant and Martin C. Gawne dated
September 30, 1999 for shares of the Arizona Tax-Exempt Fund
filed as Exhibit (l)(11) to PEA No. 27.
(12) Purchase Agreement between Registrant and The Northern Trust
Company dated October 1, 1999 for shares of the U.S. Government
Fund, Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt
Fund, California Tax-Exempt Fund, International Fixed Income
Fund, Arizona Tax-Exempt Fund, California Intermediate Tax-Exempt
Fund and Short-Intermediate U.S. Government Fund filed as Exhibit
(l)(12) to PEA No. 27.
(13) Purchase Agreement between Registrant and the Northern Trust
Company dated February 14, 2000 for shares of the Market Power
Fund filed as Exhibit (l)(13) to PEA No. 30/31.
(14) Purchase Agreement between Registrant and Brian R. Curran dated
May 8, 2000 for shares of the Global Communications Fund filed
as Exhibit (l)(14) to PEA No. 30/31.
(15) Purchase Agreement between Registrant and the Northern Trust
Company dated February 14, 2000 for shares of the Tax-Exempt
Money Market Fund filed as Exhibit (l)15) to PEA No. 30/31.
(m) Amended and Restated Distribution and Service Plan, adopted April
1, 1994 and most recently revised as of September 15, 1999, and
Related Agreement filed as Exhibit (m) to PEA No. 27.
(n) None.
(o) (1) Code of Ethics of Trust filed as Exhibit (o)(1) to PEA 30/31.
(2) Code of Ethics of Investment Advisor filed as Exhibit (o)(2) to
PEA 30/31.
The following exhibits to the Registration Statement are filed herewith
electronically pursuant to EDGAR rules:
(a) (20) Amendment No. 18 to Agreement and Declaration of Trust dated May
2, 2000.
(j) (1) Consent of Drinker Biddle & Reath LLP.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
ITEM 25. INDEMNIFICATION
Section 7 of the Investment Advisory and Ancillary Services Agreement
between the Registrant and The Northern Trust Company ("Northern") provides for
indemnification of Northern or, in lieu thereof, contribution by Registrant, in
connection with certain claims and liabilities to which Northern, in its
capacity as Registrant's Adviser, may be subject. A copy of the Investment
Advisory and Ancillary Services Agreement is incorporated by reference herein as
Exhibit (d)(1).
Article 10 of the Co-Administration Agreement dated October 1, 1999
among the Registrant, The Northern Trust Company and First Data Investor
Services Group, Inc. provides that Registrant will indemnify The Northern Trust
Company and First Data Investor Services Group, Inc. (each a "Co-Administrator")
against all claims except those resulting from the willful misfeasance, bad
faith or negligence of such Co-Administrator, or the Co-Administrator's breach
of confidentiality. A copy of the Co-Administration Agreement is incorporated
by reference herein as Exhibit (h)(11).
Section 3.1 of the Distribution Agreement between the Registrant and
Northern Funds Distributors, LLC provides for indemnification of Northern Funds
Distributors, LLC, in connection with certain claims and liabilities to which
Northern Funds Distributors, LLC, in its capacity as Registrant's Distributor,
may be subject. A copy of the Distribution Agreement is incorporated by
reference herein as Exhibit (e)(1).
In addition, Section 6.3 of Registrant's Agreement and Declaration of
Trust, a copy of which is incorporated by reference herein as Exhibit (a)(1),
provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall
be subject to any personal liability whatsoever to any
person in connection with property of the Trust or the acts,
obligations or affairs of the Trust or any Series thereof.
The Trust shall indemnify and hold each Shareholder harmless
from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or
having been a Shareholder, and shall reimburse such
Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or
in the case of a corporation or other entity, its corporate
or other general successor) out of the property of the Trust
for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. The
indemnification and reimbursement required by the preceding
sentence shall be made only out of assets of the one or more
Series whose Shares were held by said Shareholder at the
time the act or event occurred which gave rise to the claim
against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust or any Series thereof to
indemnify or reimburse a Shareholder in any appropriate
situation even though not specifically provided herein.
Section 6.4 of Registrant's Agreement and Declaration of Trust, a copy
of which is incorporated by reference herein as Exhibit (a)(1), provides for
indemnification of Trustees and officers, as follows:
6.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify each of its Trustees and officers and
persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the
Trust has any interest as a shareholder, creditor or
otherwise (hereinafter referred to as a "Covered Person")
against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and expenses, including reasonable
accountants' and counsel fees, incurred by any Covered
Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in
which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by
reason of being or having been such a Trustee or officer,
director or trustee, except that no Covered Person shall be
indemnified against any liability to the Trust or its
Shareholders to which such Covered Person would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in
the conduct of such Covered Person's office (such willful
misfeasance, bad faith, gross negligence or reckless
disregard being referred to herein as "Disabling Conduct").
Expenses, including accountants' and counsel fees so
incurred by any such Covered Person (but excluding amounts
paid in satisfaction of judgments, in compromise or as fines
or penalties), may be paid from time to time by the Trust in
advance of the final disposition of any such action, suit or
proceeding upon receipt of (a) an undertaking by or on
behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that
indemnification of such expenses is not authorized under
this Article VI and either (b) such Covered Person provides
security for such undertaking, (c) the Trust is insured
against losses arising by reason of such payment, or (d) a
majority of a quorum of disinterested, non-party Trustees,
or independent legal counsel in a written opinion,
determines, based on a review of readily available facts,
that there is reason to believe that such Covered Person
ultimately will be found entitled to indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Northern Trust Company, Registrant's investment adviser, is a full
service commercial bank and also provides a full range of trust and fiduciary
services. Set forth below is a list of all of the directors, senior officers
and those officers primarily responsible for Registrant's affairs of The
Northern Trust Company and, with respect to each such person, the name and
business address of the company (if any) with which such person has been
connected at any time within the last two fiscal years, as well as the capacity
in which such person was connected.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Gregg D. Behrens
Executive Vice President None
J. David Brock
Executive Vice President None
Duane L. Burnham Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Chairman of the
150 Field Drive Board and Director
Suite 160
Lake Forest, IL 60045
Sara Lee Corp. Director
Three First National Plaza
Chicago, IL 60602
Dr. Dolores E. Cross Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Morris Brown College President (6/99)
Administration Building, 2nd Floor President -
643 Martin Luther King Jr. Drive Elect (10/98)
Atlanta, GA 30314
Chicago State University Former President
95th Street at King Drive
Chicago, IL 60643
General Electric Company Former President
3135 Easton Turnpike GE Fund
Fairfield, CT 06432
The Graduate School and University Center GE Fund
The City University of New York Distinguished
33 W. 42nd Street, Room 1400 N Professor of
New York, NY 10036 Leadership and Diversity
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Susan Crown Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Henry Crown & Co. Vice President
222 North LaSalle Street
Suite 2000
Chicago, IL 60601
Baxter International Director
One Baxter Parkway
Deerfield, IL 60015
Illinois Tool Works Director
3600 West Lake Ave
Glenview, IL 60025-5811
John R. Goodwin NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director, Chief
Chicago, IL 60675 Investment Officer
Robert S. Hamada Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
The University of Chicago Dean and Edward
Graduate School of Business Eagle Brown
1101 East 58th Street Distinguished
Chicago, IL 60637 Service Professor of
Finance
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Barry G. Hastings Northern Trust Corporation President and Chief
President and Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director
Northern Trust of California Corporation Director
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Vice Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Mayer, Brown & Platt Partner
190 South LaSalle Street, 38th Fl.
Chicago, IL 60603
Zenith Electronics Director
1000 Milwaukee Ave.
Glenview, IL 60025
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Dreyer's Grand Ice Cream, Inc. Director
5929 College Ave.
Oakland, CA 94618
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Arthur L. Kelly Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
KEL Enterprises L.P. Managing Partner
Two First National Plaza
20 S. Clark St., Suite 2222
Chicago, IL 60603
Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
A.G Deere & Company Director
John Deere Road
Moline, IL 61265
Thyssen Industries AG
Am Thyssenhaus 1
45128 Essen
Germany
Frederick A. Krehbiel Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Molex Incorporated Chairman, CEO and
2222 Wellington Court Director
Lisle, IL 60532-1682
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Frederick A. Krehbiel Nalco Chemical Company Director
(continued) One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
Devry, Inc. Director
One Tower Lane
Suite 1000
Oak Brook Terrace, IL 60181
John V.N. McClure None
Executive Vice President
James J. Mitchell, III The Northern Trust Company Director
Executive Vice President of New York
40 Broad Street
8th Floor
New York, NY 10004
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Chairman, Chief
One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Edward J. Mooney Morton International, Inc. Director
(continued) 100 North Riverside Plaza
Chicago, IL 60606
FMC Corp. Director
200 E. Randolph Drive
Chicago IL 60601
J. Terrance Murray None
Executive Vice President
William A. Osborn Northern Trust Corporation Director
Chairman and Chief 50 South LaSalle Street
Executive Officer Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Sheila A. Penrose Northern Trust Global Director
President - Advisors, Inc.
Corporate and Institutional 29 Federal Street
Services and Executive Stamford, CT 06901
Vice President
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President and Chief Chicago, IL 60675
Financial Officer
Northern Investment Corporation President and,
50 South LaSalle Street Director
Chicago IL 60675
Northern Trust Global Director
Advisors, Inc.
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
Stephen N. Potter NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Peter L. Rossiter None
Executive Vice President
and General Counsel
Lee Selander Northern Trust Retirement Manager
Executive Vice President Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Jean Sheridan None
Executive Vice President
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Harold B. Smith Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Illinois Tool Works Inc. Chairman of the
3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and Director
W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202
William D. Smithburg Northern Trust Corporation Director
Chairman 50 South LaSalle Street
Director Chicago, IL 60675
The Quaker Oats Company Retired Chairman,
321 North Clark Street President and
Chicago, IL 60610 Chief Executive Officer
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
10275 W. Higgins Road
Suite 200
Rosemont, IL 60018
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
James M. Snyder NTQA Chairman, CEO and
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Global Advisors, Inc. Director
29 Federal Street
Stamford, CT 06901
Mark Stevens None
Executive Vice President
Bide L. Thomas Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
MYR Group Inc. Director
<F1>(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008
<F1> Name change
Stephen B. Timbers Northern Trust Global
Director
President- Northern Trust Advisors, Inc.
Global Investments and 29 Federal Street
Executive Vice President Stamford, CT 06901
LTV Steel Co. Director
200 Public Square
Cleveland, OH 44114-2308
Zurich-Kemper Investments Former
222 S. Riverside Plaza President and
Chicago, IL 60606 Chief Executive Officer
(January 1996 -
December 1997)
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
------------------------------- --------------------------- ---------------------------
Stephen B. Timbers NTQA Director
(continued) 50 S. LaSalle Street
Chicago, IL 60675
William S. Trukenbrod None
Executive Vice President
Frederick Waddell None
Executive Vice President
Jeffrey H. Wessel NTQA President,
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Northern Trust Global Advisors, Inc Director
29 Federal Street
Stamford, CT 06901
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITER
(a) None
(b) To the best of Registrant's knowledge, the directors and
executive officers of Northern Funds Distributors, LLC, distributor for
Registrant, are as follows:
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
------------------- --------------------- ---------------
Jane Haegele Director None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
Philip H. Rinnander President and Secretary None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
Jason A. Greim Vice President and Treasurer None
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428
(c) None
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute books of
the Registrant are in the physical possession of Drinker Biddle & Reath LLP, One
Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103.
Records relating to PFPC, Inc.' s (formerly First Data Investor Services Group,
Inc.) functions as co-administrator for the Registrant are located at 101
Federal Street, Boston, Massachusetts 02110. Records relating to Northern Funds
Distributors, LLC's functions as distributor, for the Registrant are located at
Four Falls Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428-
2961. All other accounts, books and other documents required to be maintained
under Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are in the physical possession of The Northern Trust
Company, 50 S. LaSalle Street, Chicago, Illinois 60675 or 801 S. Canal Street,
Chicago, Illinois 60607 (relating to transfer agent).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 32 to
its Registration Statement under Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 32 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois on the 6th day of
July 2000.
NORTHERN FUNDS
By: /s/ Archibald E. King
---------- ----------------------------------
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 32 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
Name Title Date
/<F1>/ Richard G. Cline<F1> Trustee July 6, 2000
---------------------------
Richard G. Cline
/<F1>/ Edward J. Condon, Jr.<F1> Trustee July 6, 2000
---------------------------
Edward J. Condon, Jr.
/<F1>/ Wesley M. Dixon, Jr.<F1> Trustee July 6, 2000
---------------------------
Wesley M. Dixon, Jr.
/<F1>/ William J. Dolan, Jr.<F1> Trustee July 6, 2000
---------------------------
William J. Dolan, Jr.
/<F1>/ John W. English<F1> Trustee July 6, 2000
---------------------------
John W. English
/<F1>/ Raymond E. George, Jr.<F1> Trustee July 6, 2000
---------------------------
Raymond E. George, Jr.
/<F1>/ Sandra Polk Guthman<F1> Trustee July 6, 2000
---------------------------
Sandra Polk Guthman
/<F1>/ Michael E. Murphy <F1> Trustee July 6, 2000
------------------------
Michael E. Murphy
/<F1>/ Mary Jacobs Skinner<F1> Trustee July 6, 2000
---------------------------
Mary Jacobs Skinner
/<F1>/ William H. Springer<F1> Trustee July 6, 2000
---------------------------
William H. Springer
/<F1>/ Richard P. Strubel<F1> Trustee July 6, 2000
---------------------------
Richard P. Strubel
/<F1>/ Stephen B. Timbers <F1> Trustee July 6, 2000
-------------------------
Stephen B. Timbers
/s/ Archibald E. King Vice President July 6, 2000
---------------------------
Archibald E. King
/s/ Brian R. Curran Treasurer July 6, 2000
--------------------------- (Chief Financial
Brian R. Curran and Accounting
Officer)
<F1>By: /s/ Brian R. Curran
----------------------
Brian R. Curran,
Attorney-in-fact
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a Trustee
of Northern Funds, a business trust organized under the laws of the state of
Delaware (the "Trust"), does hereby make, constitute and appoint Jylanne M.
Dunne, Archibald E. King III, Lloyd A. Wennlund, Brian R. Curran, Jeffrey A.
Dalke and Linda J. Hoard, and each of them, attorneys-in-fact and agents of the
undersigned with full power and authority of substitution and resubstitution, in
any and all capacities, to execute for and on behalf of the undersigned any and
all filings and amendments to the Registration Statement on Form N-1A relating
to the shares of the Trust and any other documents and instruments incidental
thereto, and to deliver and file the same, with all exhibits thereto, and all
documents and instruments in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
that said attorneys-in-fact and agents, and each of them, deem advisable or
necessary to enable the Trust to effectuate the intents and purposes hereof, and
the undersigned hereby fully ratifies and confirms all that said attorneys-in-
fact and agents, or any of them, or their or his or her substitute or
substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed his or her name this 2nd
day of May 2000.
/s/Richard G. Cline /s/Sandra Polk Guthman
----------------------- -----------------------
Richard G. Cline Sandra Polk Guthman
/s/Edward J. Condon, Jr. /s/Michael E. Murphy
----------------------- -----------------------
Edward J. Condon, Jr. Michael E. Murphy
/s/Wesley M. Dixon, Jr. /s/Mary Jacobs Skinner
----------------------- -----------------------
Wesley M. Dixon, Jr. Mary Jacobs Skinner
/s/William J. Dolan, Jr. /s/William H. Springer
----------------------- -----------------------
William J. Dolan, Jr. William H. Springer
/s/John W. English /s/Richard P. Strubel
----------------------- -----------------------
John W. English Richard P. Strubel
/s/Raymond E. George, Jr. /s/Stephen B. Timbers
----------------------- -----------------------
Raymond E. George, Jr. Stephen B. Timbers
NORTHERN FUNDS
EXHIBIT INDEX
(a) (20) Amendment No. 18 to Agreement and Declaration of Trust
dated May 2, 2000.
(j) (1) Consent of Drinker Biddle & Reath LLP.
