<PAGE>
As filed with the Securities and Exchange Commission on July 12, 2000
Registration Nos. 33-73404
811-8236
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. 33 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 35 /X/
----------------------------
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
Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on July 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Title of Securities Being Registered:
This Post-Effective Amendment No. 33 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.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED JULY 12, 2000
INFORMATION CONTAINED HEREIN PERTAINING TO THE NORTHERN FUNDS AGGRESSIVE GROWTH
FUND IS SUBJECT TO COMPLETION OR AMENDMENT. A POST-EFFECTIVE AMENDMENT TO THE
NORTHERN FUNDS REGISTRATION STATEMENT RELATING TO SHARES OF THE AGGRESSIVE
GROWTH FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SHARES
OF THE AGGRESSIVE GROWTH 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 AGGRESSIVE GROWTH 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
AGGRESSIVE GROWTH FUND
PROSPECTUS DATED SEPTEMBER __, 2000
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in the Fund involves investment risks, including possible
loss of principal.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
RISK/RETURN SUMMARY AGGRESSIVE GROWTH FUND 3
Information about the objectives, principal strategies
and risk characteristics of each Fund. ----------------------------------------------------------
FUND PERFORMANCE 6
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FUND FEES AND EXPENSES 6
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MANAGEMENT OF THE FUND INVESTMENT ADVISER 8
Details that apply to the Fund. ----------------------------------------------------------
ADVISORY FEES 8
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FUND MANAGEMENT 8
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OTHER FUND SERVICES 8
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ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES 9
How to open, maintain and close an account. - Purchasing Shares 9
- Opening an Account 9
- Selling Shares 11
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ACCOUNT POLICIES AND OTHER INFORMATION 13
- Calculating Share Price 13
- Timing of Purchase Requests 13
- Social Security/Tax Identification Number 13
- In-Kind Purchases and Redemptions 13
- Miscellaneous Purchase Information 13
- Timing of Redemption and Exchange Requests 14
- Payment of Redemption Proceeds 14
- Miscellaneous Redemption Information 14
- Exchange Privileges 15
- Telephone Transactions 15
- Making Changes to Your Account Information 15
- Signature Guarantees 15
- Business Day 15
- Early Closings 15
- Authorized Intermediaries 16
- Service Organizations 16
- Shareholder Communications 17
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DIVIDENDS AND DISTRIBUTIONS 17
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TAX CONSIDERATIONS 17
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RISKS, SECURITIES AND TECHNIQUES RISKS, SECURITIES AND TECHNIQUES 19
- Additional Information on Investment Objectives,
Principal Investment Strategies and Related
Risks 19
- Additional Description of Securities and Common
Investment Techniques 22
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FOR MORE INFORMATION ANNUAL/SEMIANNUAL REPORT 30
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STATEMENT OF ADDITIONAL INFORMATION 30
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</TABLE>
Page 2
<PAGE>
RISK/RETURN SUMMARY
AGGRESSIVE GROWTH FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will
invest, under normal market conditions, at least 65% of its total assets in
equity securities of companies which the investment management team believes
exhibit strong growth characteristics.
Using fundamental research and quantitative analysis, the investment management
team buys securities of companies that it believes have favorable growth
characteristics, such as above average sales, earnings growth, and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these characteristics. The team
may also sell securities in order to maintain the desired portfolio composition
for the Fund, which may change in response to market conditions. In doing so,
the investment management team considers such factors as a company's:
- Financial condition (such as debt to equity ratio);
- Market share and competitive leadership of the company's
products;
- Earnings growth relative to relevant competition; and
- Market valuation in comparison to other growth companies and the
stock's own historical norms.
The Fund may invest in companies of any size, but generally expects to invest
primarily in small and mid-size companies. At times the Fund may make
significant investments in initial public offerings ("IPOs"). An IPO is a
company's first offering of stock to the public. The Fund may from time to time
emphasize particular companies or market segments, such as technology, in
attempting to achieve its investment objective. Many of the companies in which
the Fund invests retain their earnings to finance current and future growth and
pay little or no dividends. Although the Fund primarily invests in the stocks of
U.S. companies, it may invest to a limited extent in the securities of foreign
issuers either directly or indirectly (for example through American Depository
Receipts).
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the Fund.
RISKS. These primary investment risks apply to the Fund: stock, small cap/mid
cap stock, technology, IPO, currency, country, foreign regulatory and portfolio
turnover risks.
Page 3
<PAGE>
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.
- SMALL CAP/MID CAP STOCK RISK is the risk that stocks of mid-sized and
smaller companies may be subject to more abrupt or erratic market movements
than stocks of larger, more established companies. Mid-sized and small
companies may have limited product lines or financial resources, or may be
dependent upon a small or inexperienced management group. In addition,
these stocks typically are traded in lower volume, and their issuers
typically are subject to greater degrees of changes in their earnings and
prospects.
- TECHNOLOGY STOCK RISK is the risk that stocks of technology companies may
be subject to greater price volatility than stocks of companies in other
sectors. Technology companies may produce or use products or services that
prove commercially unsuccessful, become obsolete or become adversely
impacted by government regulation. Technology securities may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
- IPO RISK is the risk that the market value of IPO shares will fluctuate
considerably due to factors such as the absence of a prior public market,
unseasoned trading, the small number of shares available for trading and
limited information about the issuer. The purchase of IPO shares may
involve high transaction costs. IPO shares are subject to market risk and
liquidity risk. When the Fund's asset base is small, a significant portion
of the Fund's performance could be attributable to investments in IPOs,
because such investments would have a magnified impact on the Fund. As the
Fund's assets grow, the effect of the Fund's investments in IPOs on the
Fund's performance probably will decline, which could reduce the Fund's
performance.
- CURRENCY RISK is the potential for price fluctuations in the dollar value
of foreign securities because of changing currency exchange rates.
- COUNTRY RISK is the potential for price fluctuations in foreign securities
because of political, financial and economic events in foreign countries.
Investment of more than 25% of the Fund's total assets in securities of
issuers located in one country will subject the Fund to increased country
risk with respect to the particular country.
- FOREIGN REGULATORY RISK is the risk that a foreign security could lose
value because of less stringent foreign securities regulations and
accounting and disclosure standards.
Page 4
<PAGE>
- PORTFOLIO TURNOVER RISK is the risk that high portfolio turnover is likely
to result in increased Fund expenses which may result in lower investment
returns. High portfolio turnover is also likely to result in higher
short-term capital gains taxable to shareholders. It is expected that the
annual portfolio turnover rate of the Fund will exceed 100%.
MORE INFORMATION ABOUT THE RISKS OF INVESTING IN THE FUND IS PROVIDED IN "RISKS,
SECURITIES AND TECHNIQUES" BEGINNING ON PAGE __ OF THIS PROSPECTUS. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DISCUSSED IN THIS SECTION AND "RISKS, SECURITIES
AND TECHNIQUES" BEFORE INVESTING IN THE FUND.
Page 5
<PAGE>
RISK/RETURN SUMMARY
FUND PERFORMANCE
The bar chart and performance table have been omitted because the Fund has been
in operation for less than one calendar year.
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
__.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment)
------------------------------------------------------------------------------
SALES
SALES CHARGE
CHARGE DEFERRED (LOAD)
(LOAD) SALES IMPOSED ON
IMPOSED ON CHARGE REINVESTED REDEMPTION EXCHANGE
FUND PURCHASES (LOAD) DISTRIBUTIONS FEES(1) FEES
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth None None None None None
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<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
----------------------------------------------------------------------------
DISTRIBUTION TOTAL ANNUAL
MANAGEMENT FEES (12b-1) FEES(2) OTHER EXPENSES(3) FUND OPERATING EXPENSES(4)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.20% 0.00% 0.55% 1.75%
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</TABLE>
Footnotes
1. A fee of $15.00 may be applicable for each wire redemption.
2. The Fund does not expect to pay any 12b-1 fees during the current fiscal
year. The maximum distribution fee is 0.25% of the Fund's average net
assets under Northern Funds' Distribution and Service Plan.
3. These expenses include custodian, transfer agency and co-administration
expenses, 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.
4. 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.
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL ANNUAL
FUND MANAGEMENT FEES (12b-1) FEES OTHER EXPENSES FUND OPERATING EXPENSES
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 1.00% 0.00% 0.25% 1.25%
</TABLE>
Page 6
<PAGE>
RISK/RETURN SUMMARY
EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund (without fee waivers and expense reimbursements) with the cost of
investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated (with reinvestment of all dividends and distributions) and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
FUND ONE YEAR 3 YEARS
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<S> <C> <C>
Aggressive Growth $163 $520
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</TABLE>
Page 7
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
The Northern Trust Company ("Northern" or the "Investment Adviser"), an Illinois
state-chartered bank and member of the Federal Reserve System, serves as
investment adviser for the Fund.
The Investment Adviser is located at 50 S. LaSalle Street, Chicago, IL 60675 and
is a wholly-owned subsidiary of Northern Trust Corporation, a bank holding
company. As of 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 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 an annual rate set forth in the table below
(expressed as a percentage of the Fund's respective average daily net assets).
<TABLE>
<CAPTION>
CONTRACTUAL
FUND RATE
---- -----------
<S> <C>
Aggressive Growth 1.20%
</TABLE>
As stated under "Fund Fees and Expenses," the Investment Adviser expects to
waive voluntarily a portion of its advisory fee during the current fiscal year.
The Investment Adviser may discontinue or modify its voluntary limitation in the
future at its discretion.
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 Aggressive Growth Fund is David H. Burshtan,
Vice President of Northern. Mr. Burshtan joined Northern in 1999. From 1995 to
1999, Mr. Burshtan was a portfolio manager for various portfolios with Scudder
Kemper Investments, Inc. From 1993 to 1995, Mr. Burshtan held a variety of
analyst and portfolio management positions with Northern.
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 __ under "Fund Fees
and Expenses."
Page 8
<PAGE>
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 60675-5986
Page 9
<PAGE>
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.
Page 10
<PAGE>
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
Page 11
<PAGE>
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
Page 12
<PAGE>
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.
Page 13
<PAGE>
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 __.
- 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
__.
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.
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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 and 2001, the Fund
will be closed on the following holidays: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
EARLY CLOSINGS. Northern Funds reserves the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. Northern Funds also reserves this right when The
Bond Market Association recommends that securities markets close or close
early.
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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.
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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 will be declared as a dividend and paid
annually. Net realized capital gains may be distributed from time to time during
Northern Funds' fiscal year (but not less frequently than annually).
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."
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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.
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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 IS 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.
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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.
INITIAL PUBLIC OFFERING: An IPO is a company's first offering of stock to the
public.
INVESTMENT STRATEGY. At times, the Fund may make significant
investments in IPOs.
SPECIAL RISKS. IPO shares can be highly unstable because of factors
such as the absence of a prior public market, unseasoned trading, the
small number of shares available for trading and limited information
about the issuer.
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The purchase of IPO shares may involve high transaction costs. IPO
shares are subject to market risk and liquidity risk. When the Fund's
asset base is small, a significant portion of the Fund's performance
could be attributable to investments in IPOs, because such investments
would have a magnified impact on the Fund. As the Fund's assets grow,
the effect of the Fund's investments in IPOs on the Fund's performance
probably will decline, which could reduce the Fund's performance.
Because of the price volatility of IPO shares, the Fund may choose to
hold IPO shares for a very short period of time. This may increase the
turnover of the Fund's portfolio and may lead to increased expenses to
the Fund, such as commissions and transaction costs. By selling
shares, the Fund may realize taxable gains it will subsequently
distribute to shareholders. In addition, the market for IPO shares can
be speculative and/or inactive for extended periods of time. There is
no assurance that the Fund will be able to obtain allocable portions
of IPO shares. The limited number of shares available for trading in
some IPOs may make it more difficult for the Fund to buy or sell
significant amounts of shares without an unfavorable impact on
prevailing prices. Investors in IPO shares can be affected by
substantial dilution in the value of their shares, by sales of
additional shares and by concentration of control in existing
management and principal shareholders. The Fund's investments in IPO
shares may include the securities of "unseasoned" companies (companies
with less than three years of continuous operations), which presents
risks considerably greater than common stocks of more established
companies. These companies may have limited operating histories and
their prospects for profitability may be uncertain. These companies
may be involved in new and evolving businesses and may be vulnerable
to competition and changes in technology, markets and economic
conditions. They may be more dependent on key managers and third
parties and may have limited product lines.
INVESTMENT GRADE SECURITIES. A security is considered investment grade if, at
the time of purchase, it is rated:
- BBB or higher by Standard and Poor's Ratings Services ("S&P");
- Baa or higher by Moody's Investors Service, Inc. ("Moody's");
- BBB or higher by Duff & Phelps Credit Rating Co. ("Duff"); or
- BBB or higher by Fitch IBCA Inc. ("Fitch").
A security will be considered investment grade if it receives one of the above
ratings, even if it receives a lower rating from other rating organizations.
INVESTMENT STRATEGY. The Fund may invest in fixed income and
convertible securities to the extent consistent with its respective
investment policies. Except as stated in the next section, fixed
income and convertible securities purchased 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
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of its initial investment and any anticipated income or appreciation
will be uncertain. The Fund may also incur additional expenses in
seeking recovery on defaulted securities.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional
investors. Accordingly, the secondary market for such securities is
not as liquid as, and is more volatile than, the secondary market for
higher quality securities. In addition, market trading volume for
these securities is generally lower and the secondary market for such
securities could contract under adverse market or economic conditions,
independent of any specific adverse changes in the condition of a
particular issuer. These factors may have an adverse effect on the
market price and the Fund's ability to dispose of particular portfolio
investments. A less developed secondary market may also make it more
difficult for the Fund to obtain precise valuations of the high yield
securities in its portfolio. Investments in lower quality securities,
whether rated or unrated, will be more dependent on Northern Trust's
credit analysis than would be the case with investments in higher
quality securities.
SMALL CAP INVESTMENTS. Investments in small capitalization companies involve
greater risk and portfolio price volatility than investments in larger
capitalization stocks. Among the reasons for the greater price volatility of
these investments are the less certain growth prospects of smaller firms and the
lower degree of liquidity in the markets for such securities. Small
capitalization companies may be thinly traded and may have to be sold at a
discount from current market prices or in small lots over an extended period of
time. Because of the lack of sufficient market liquidity, the Fund may incur
losses because it will be required to effect sales at a disadvantageous time and
only then at a substantial drop in price. Small capitalization companies include
"unseasoned" issuers that do not have an established financial history; often
have limited product lines, markets or financial resources; may depend on or use
a few key personnel for management; and may be susceptible to losses and risks
of bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitalization
companies may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
TEMPORARY INVESTMENTS. Short-term obligations refer to U.S. government
securities, high-quality money market instruments (including commercial paper
and obligations of foreign and domestic banks such as certificates of deposit,
bank and deposit notes, bankers' acceptances and fixed time deposits) and
repurchase agreements with 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 200%.
ADDITIONAL DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
ASSET-BACKED SECURITIES. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. They represent interests in pools of mortgages or other cash-flow
producing assets such as automobile loans, credit card receivables and other
financial assets. In effect, these securities "pass through" the monthly
payments that individual borrowers make on their mortgages or other assets net
of any fees paid to the issuers. Examples of these include guaranteed mortgage
pass-through certificates, collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs").
INVESTMENT STRATEGY. The Fund may invest in asset-backed securities
rated investment grade (rated BBB or better by S&P, Duff or Fitch, or
Baa or better by Moody's) at the time of purchase. They may also
invest in unrated mortgage-backed securities which the Investment
Adviser believes are of comparable quality.
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SPECIAL RISKS. In addition to credit and market risk, asset-backed
securities involve prepayment risk because the underlying assets
(loans) may be prepaid at any time. The value of these securities may
also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support or the counterparty. Like
other fixed income securities, when interest rates rise, the value of
an asset-backed security generally will decline. However, when
interest rates decline, the value of an asset-backed security with
prepayment features may not increase as much as that of other fixed
income securities. In addition, non-mortgage asset-backed securities
involve certain risks not presented by mortgage-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the underlying collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to
the protection of a number of state and Federal consumer credit laws.
Automobile receivables are subject to the risk that the trustee for
the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing the receivables.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Fund can borrow money and
enter into reverse repurchase agreements. Reverse repurchase agreements involve
the sale of securities held by the Fund subject to the Fund's agreement to
repurchase them at a mutually agreed upon date and price (including interest).
INVESTMENT STRATEGY. The Fund may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of the value
of its total assets. The Fund may also borrow up to an additional 5%
of its total assets for temporary purposes. The Fund may enter into
reverse repurchase agreements when the investment management team
expects that the interest income to be earned from the investment of
the transaction proceeds will be greater than the related interest
expense.
SPECIAL RISKS. Borrowings and reverse repurchase agreements involve
leveraging. If the securities held by the Fund decline in value while
these transactions are outstanding, the net asset value of the Fund's
outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse
repurchase agreements involve the risks that the interest income
earned by the Fund (from the investment of the proceeds) will be less
than the interest expense of the transaction, that the market value of
the securities sold by the Fund 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 its investment
objective, the Fund may invest a portion of its total assets in
custodial receipts.
SPECIAL RISKS. Like other stripped obligations, custodial receipts may
be subject to greater price volatility than ordinary debt obligations
because of the way in which their principal and interest are returned
to investors.
EQUITY SWAPS. Equity swaps allow the parties to the swap agreement to exchange
components of return on one equity investment (e.g., a basket of equity
securities or an index) for a component of return on another non-equity or
equity investment, including an exchange of differential rates of return.
INVESTMENT STRATEGY. The Fund may invest in equity swaps. Equity swaps
may be used to invest in a market without owning or taking physical
custody of securities in circumstances where direct investment may be
restricted for legal reasons or is otherwise impractical. Equity swaps
may also be used for other purposes, such as hedging or seeking to
increase total return.
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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.
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 contracts on domestic or foreign exchanges or boards of trade.
They may be used for hedging purposes, to increase total return or to
maintain liquidity to meet potential shareholder redemptions, invest
cash balances or dividends or minimize trading costs.
The value of the Fund's futures contacts may equal up to 100% of its
total assets. However, the Fund will not purchase or sell a futures
contract unless, after the transaction, the sum of the aggregate
amount of margin deposits on its existing futures positions and the
amount of premiums paid for related options used for non-hedging
purposes is 5% or less of its total assets.
SPECIAL RISKS. Futures contracts and options present the following
risks: imperfect correlation between the change in market value of the
Fund's securities and the price of futures contracts and options; the
possible inability to close a futures contract when desired; losses
due to unanticipated market movements which are potentially unlimited;
and the possible inability of the investment management team to
correctly predict the direction of securities prices, interest rates,
currency exchange rates and other economic factors. Foreign exchanges
or boards of trade generally do not offer the same protections as U.S.
exchanges.
ILLIQUID OR RESTRICTED SECURITIES. Illiquid securities include repurchase
agreements and time deposits with notice/termination dates of more than seven
days, certain variable amount master demand notes that cannot be called within
seven days, certain insurance funding agreements (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.
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SPECIAL RISKS. Because illiquid and restricted securities may be
difficult to sell at an acceptable price, they may be subject to
greater volatility and may result in a loss to the Fund. The practice
of investing in Rule 144A Securities could increase the level of the
Fund's illiquidity during any period that qualified institutional
buyers become uninterested in purchasing these securities.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. 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 its investment objective,
the Fund may invest in securities issued by other investment companies,
including money market funds, index funds, "country funds" (i.e., funds that
invest primarily in issuers located in a specific foreign country or region),
S&P's Depository Receipts ("SPDRs") and similar securities of other issuers.
INVESTMENT STRATEGY. Investments by the Fund in other investment
companies will be subject to the limitations of the 1940 Act. Although
the Fund does not expect to do so in the foreseeable future, the Fund
is authorized to invest substantially all of its assets in a single
open-end investment company or series thereof that has substantially
the same investment objective, policies and fundamental restrictions
as the Fund.
SPECIAL RISKS. As a shareholder of another investment company, the
Fund would be subject to the same risks as any other investor in that
company. In addition, it would bear a proportionate share of any fees
and expenses paid by that company. These would be in addition to the
advisory and other fees paid directly by the Fund.
MORTGAGE DOLLAR ROLLS. A mortgage dollar roll involves the sale by the Fund of
securities for delivery in the future (generally within 30 days). The Fund
simultaneously contracts with the same counterparty to repurchase substantially
similar (same type, coupon and maturity) but not identical securities on a
specified future date. During the roll period, the Fund loses the right to
receive principal and interest paid on the securities sold. However, the Fund
benefits to the extent of any difference between (a) the price received for the
securities sold and (b) the lower forward price for the future purchase and/or
fee income plus the interest earned on the cash proceeds of the securities sold.
INVESTMENT STRATEGY. The Fund may enter into mortgage dollar rolls in
an effort to enhance investment performance. For financial reporting
and tax purposes, the Fund treats mortgage dollar rolls as two
separate transactions: one involving the purchase of a security and a
separate transaction involving a sale. The Fund does not currently
intend to enter into mortgage dollar rolls that are accounted for as a
financing and do not treat them as borrowings.
SPECIAL RISKS. Successful use of mortgage dollar rolls depends upon
the Investment Adviser's ability to predict correctly interest rates
and mortgage prepayments. If the Investment Adviser is incorrect in
its prediction, the Fund may experience a loss. Unless the benefits of
a mortgage dollar roll exceed the income, capital appreciation and
gain or loss due to mortgage prepayments that would have been realized
on the securities sold as part of the roll, the use of this technique
will diminish the Fund's performance.
OPTIONS. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
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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.
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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 its investment
objective, the Fund may purchase stripped securities.
SPECIAL RISKS. Stripped securities are very sensitive to changes in
interest rates and to the rate of principal prepayments. A rapid or
unexpected change in prepayments could depress the price of certain
stripped securities and adversely affect the Fund's total return.
STRUCTURED SECURITIES. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference.
INVESTMENT STRATEGY. The Fund may invest in structured securities to
the extent consistent with its investment objective.
SPECIAL RISKS. The terms of some structured securities may provide
that in certain circumstances no principal is due at maturity and,
therefore, the Fund could suffer a total loss of its investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition,
changes in the interest rates or the value of the security at maturity
may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of
market risk than other types of securities. Structured securities may
also be more volatile, less liquid and more difficult to accurately
price than less complex securities due to their derivative nature.
UNITED STATES GOVERNMENT OBLIGATIONS. These include U.S. Treasury obligations,
such as bills, notes and bonds, which generally differ only in terms of their
interest rates, maturities and time of issuance. These also include obligations
issued or guaranteed by the U.S. government or its agencies and
instrumentalities. Securities guaranteed as to principal and interest by the
U.S. government, its agencies or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or an agency or
instrumentality thereof, and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed.
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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 Adviser to be of comparable
quality to rated instruments eligible for purchase by the Fund.
SPECIAL RISKS. The market values of inverse floaters are subject to
greater volatility than other variable and floating rate instruments
due to their higher degree of leverage. Because there is no active
secondary market for certain variable and floating rate instruments,
they may be more difficult to sell if the issuer defaults on its
payment obligations or during periods when the Fund is not entitled to
exercise their demand rights. As a result, the Fund could suffer a
loss with respect to these instruments.
WARRANTS. A warrant represents the right to purchase a security at a
predetermined price for a specified period of time.
INVESTMENT STRATEGY. The Fund may invest in warrants and similar
rights. The Fund may also purchase bonds that are issued in tandem
with warrants.
SPECIAL RISKS. Warrants are derivative instruments that present risks
similar to options.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD COMMITMENTS. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
INVESTMENT STRATEGY. The Fund may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although
the Fund would generally purchase securities in these transactions
with the intention of acquiring the securities, the Fund may dispose
of such securities prior to settlement if the investment management
team deems it appropriate to do so.
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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.
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FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the Fund's annual reports, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its prior fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Fund and its policies 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
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Subject to Completion
Preliminary Statement of Additional Information, Dated July 12, 2000
Information contained herein pertaining to the Aggressive Growth Fund is subject
to completion or amendment. A post-effective amendment to the registration
statement relating to, among other things, shares of the Aggressive Growth Fund
has been filed with the Securities and Exchange Commission. Shares of the
Aggressive Growth 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 Aggressive Growth 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
AGGRESSIVE GROWTH FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated September ___, 2000 (the
"Additional Statement") is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated September ___, 2000 (the
"Prospectus"). Copies of the Prospectus may be obtained without charge from the
Transfer Agent 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.
----------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
An investment in the Fund is not a deposit of any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves investment risks,
including possible loss of principal.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
ADDITIONAL INVESTMENT INFORMATION.............................................1
CLASSIFICATION AND HISTORY...............................................1
INVESTMENT OBJECTIVE AND POLICIES........................................1
INVESTMENT RESTRICTIONS.................................................16
ADDITIONAL TRUST INFORMATION.................................................18
TRUSTEES AND OFFICERS...................................................18
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN........................26
CO-ADMINISTRATORS AND DISTRIBUTOR.......................................28
SERVICE ORGANIZATIONS...................................................30
COUNSEL AND AUDITORS....................................................30
IN-KIND PURCHASES AND REDEMPTIONS.......................................30
AUTOMATIC INVESTING PLAN................................................31
DIRECTED REINVESTMENTS..................................................31
REDEMPTIONS AND EXCHANGES...............................................31
RETIREMENT PLANS........................................................31
EXPENSES................................................................32
GENERAL INFORMATION.....................................................33
NET ASSET VALUE..............................................................34
TAXES........................................................................35
FEDERAL - GENERAL INFORMATION...........................................35
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS...............................36
DESCRIPTION OF SHARES........................................................36
OTHER INFORMATION............................................................40
APPENDIX A..................................................................A-1
APPENDIX B..................................................................B-1
</TABLE>
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ADDITIONAL INVESTMENT INFORMATION
CLASSIFICATION AND HISTORY
The Trust is an open-end, management investment company. The Fund is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund is a series of the Trust that was formed as a
Delaware business trust on February 7, 2000 under an Agreement and Declaration
of Trust (the "Trust Agreement").
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective, strategies and risks of
the Fund as set forth in the Prospectus. The investment objective of the Fund
may be changed without the vote of the majority of the Fund's outstanding
shares. Except as expressly noted below, the Fund's investment policies may be
changed without shareholder approval. In addition to the instruments discussed
below and in the Prospectus, the Fund may purchase other types of financial
instruments, however designated, whose investment and credit quality
characteristics are determined by the Northern Trust Company ("Northern" or the
"Investment Adviser") to be substantially similar to those of any other
investment otherwise permitted by the Fund's investment policies.
AGGRESSIVE GROWTH FUND seeks long term capital appreciation by investing
primarily in equity securities of companies which the management team
believes exhibit strong growth characteristics. Any income received is
incidental to this objective.
AMERICAN DEPOSITORY RECEIPTS. The Fund may invest in ADRs. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying foreign securities and are denominated in U.S.
dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder information
that a sponsored depository is required to provide under its contractual
arrangement with the issuer.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Fund may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other financial
assets. Asset-backed securities represent interests in "pools" of assets in
which payments of both interest and principal on the securities are made
periodically, thus in effect "passing through" such payments made by the
individual borrowers on the assets that underlie the securities, net of any fees
paid to the issuer or guarantor of the securities. The average life of
asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
If an asset-backed security is purchased at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Conversely, if an asset-backed security is purchased at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will decrease, yield to maturity. In calculating the 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 Fund may include collateralized
mortgage obligations ("CMOs") issued by private companies. CMOs provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect
to be taxed as pass-through entities known as real estate mortgage investment
conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date. The relative
payment rights of the
<PAGE>
various CMO classes may be structured in a variety of ways. The Fund will not
purchase "residual" CMO interests, which normally exhibit greater price
volatility.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as
to the timely payment of principal and interest by GNMA and backed by the full
faith and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States, but are supported by the right
of the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "PCs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
BANK AND DEPOSIT NOTES. Bank notes rank junior to deposit liabilities of
the bank and PARI PASSU with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance sheet, while
deposit notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation
only to the extent of $100,000 per depositor per bank.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the
Fund is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by, changes in the holdings of specific issuers, changes in country and
currency weightings, cash requirements for redemption of shares and by
requirements which enable the Fund to receive favorable tax treatment. The Fund
had not commenced operations during the fiscal year ended March 31, 2000.
The Fund is not restricted by policy with regard to portfolio turnover and
will make changes in its investment portfolio from time to time as business and
economic conditions as well as market prices may dictate.
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COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT AND TIME
DEPOSITS. Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Fixed time deposits are bank obligations payable at a stated
maturity date and bearing interest at a fixed rate. Fixed time deposits may be
withdrawn on demand by the investor, but may be subject to early withdrawal
penalties that vary depending upon market conditions and the remaining maturity
of the obligation. There are no contractual restrictions on the right to
transfer a beneficial interest in a fixed time deposit to a third party.
The Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs"), which are
U.S. dollar-denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the United States.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
In selecting convertible securities, the Investment Adviser will consider,
among other factors: an evaluation of the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of the
Fund's portfolio as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in lower quality convertible securities are subject
to a significant risk of a change in the credit rating or financial condition of
the issuing entity. Investments in convertible securities of medium or lower
-3-
<PAGE>
quality are also likely to be subject to greater market fluctuation and to
greater risk of loss of income and principal due to default than investments of
higher quality fixed-income securities. Such lower quality securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher quality securities, which react more to fluctuations in the general
level of interest rates. The Fund will generally reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on the Fund of any single investment, it does not reduce the
overall risk of investing in lower quality securities.
CURRENCY SWAPS. The Fund may enter into currency swaps, which involve the
exchange of the rights of the Fund and another party to make or receive payments
in specific currencies.
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"). The Fund may also invest in EDRs and
Global Depository Receipts ("GDRs"). EDRs and GDRs are receipts issued by a
non-U.S. financial institution evidencing ownership of underlying foreign or
U.S. securities and are usually denominated in foreign currencies. EDRs and GDRs
may not be denominated in the same currency as the securities they represent.
Generally, EDRs and GDRs are designed for use in the foreign securities markets.
EQUITY SWAPS. The Fund may enter into equity swap contracts to invest in a
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise
impracticable. Equity swaps may also be used for hedging purposes or to seek to
increase total return. The counterparty to an equity swap contract will
typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Fund the amount, if any, by which the notional amount of the
equity swap contract would have increased in value had it been invested in
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Fund may agree to pay to the
counterparty the amount, if any, by which that notional amount would have
decreased in value had it been invested in the stocks. Therefore, the return to
the Fund on any equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the
notional amount. In other cases, the counterparty and the Fund may each agree to
pay the other the difference between the relative investment performances that
would have been achieved if the notional amount of the equity swap contract had
been invested in different stocks (or indices of stocks).
The Fund will enter into equity swaps only on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of an equity swap contract or periodically during its term.
Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that the Fund is contractually obligated to make. If
the other party to an equity swap defaults, the Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid
-4-
<PAGE>
assets to cover the Fund's potential exposure, the Trust and its Investment
Adviser believe that transactions do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions.
The Fund will not enter into any equity swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either A, or A-1 or better by 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, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Adviser is incorrect in
their forecasts of market values, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible loss
on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fund is authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather may allow the Fund to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, the
Fund may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
In addition, when the Investment Adviser anticipates that a particular
foreign currency may decline substantially relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. Similarly, when the securities held by the Fund create a
short position in a foreign currency, the Fund may enter into a forward contract
to buy, for a fixed amount, an amount of foreign currency approximating the
short position. The Fund's net long and short foreign currency exposure will not
exceed its total asset value. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
The Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
Liquid assets equal to the amount of the Fund's assets that could be
required to consummate forward contracts will be segregated except to the extent
the contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price that is (i) no higher than the Fund's price to sell the
currency or (ii) greater than the Fund's price to sell the currency provided the
Fund segregates liquid assets in the amount of the difference. A forward
contract to buy a foreign currency is "covered" if the Fund holds a forward
contract (or put option) permitting the Fund to sell the same currency at a
price that is (i) as high as or higher than the Fund's price to buy the currency
or (ii) lower than the Fund's price to buy the currency provided the Fund
segregates liquid assets in the amount of the difference.
FOREIGN SECURITIES. The Fund may invest a portion of its assets in such
securities, including eurodollar convertible securities, which are fixed income
securities that are issued in U.S. dollars outside the United States and are
convertible into or exchangeable for equity securities of the same or a
different issuer.
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<PAGE>
Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded outside
the United States and in investments denominated in foreign currencies. Market
risk involves the possibility that stock prices will decline over short or even
extended periods. The stock markets tend to be cyclical, with periods of
generally rising prices and periods of generally declining prices. These cycles
will affect the value of the Fund that invests in foreign stocks. The holdings
of the Fund that invests in fixed income securities will be sensitive to changes
in interest rates and the interest rate environment. Generally, the prices of
bonds and debt securities fluctuate inversely with interest rate changes. In
addition, the performance of investments in securities denominated in a foreign
currency will depend on the strength of the foreign currency against the U.S.
dollar and the interest rate environment in the country issuing the currency.
Absent other events which could otherwise affect the value of a foreign security
(such as a change in the political climate or an issuer's credit quality),
appreciation in the value of the foreign currency generally can be expected to
increase the value of a foreign currency-denominated security in terms of U.S.
dollars. A rise in foreign interest rates or decline in the value of the foreign
currency relative to the U.S. dollar generally can be expected to depress the
value of a foreign currency-denominated security.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments also
involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
The Fund may invest in foreign debt, including the securities of foreign
governments. Several risks exist concerning such investments, including the risk
that foreign governments may default on their obligations, may not respect the
integrity of such debt, may attempt to renegotiate the debt at a lower rate, and
may not honor investments by United States entities or citizens.
Although the Fund may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, the Fund's net asset value to
fluctuate as well. Currency exchange rates can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. To the extent that the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, are
denominated in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries. The Fund is also subject to the possible imposition of exchange
control regulations or freezes on the convertibility or currency.
Dividends and interest payable on the Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax law, they may reduce the net return to the shareholders. See "Taxes."
To the extent consistent with its investment objective, the Fund may also
invest in obligations of the World Bank which are supported by subscribed, but
unpaid, commitments of its member countries. There is no assurance that these
commitments will be undertaken or complied with in the future.
Countries in which the Fund may invest (to the extent permitted by 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.
-6-
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The end of the Cold War, the reunification of Germany, the accession of new
Western European members to the European Economic and Monetary Union and the
aspirations of Eastern European states to join and other political and social
events in Europe have caused considerable economic, social and political
dislocation. In addition, events in the Japanese economy, as well as social and
political developments there have affected Japanese securities and currency
markets, and the relationship of the Japanese yen with other currencies and with
the U.S. dollar. Future political, economic and social developments in Japan and
in the Asia/Pacific regional context can be expected to produce continuing
effects on securities and currency markets.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. The Fund may realize a capital
gain or loss in connection with these transactions.
When the Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments until three days prior to the settlement date, or will otherwise
cover its position. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining the Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
futures contracts and may purchase and sell call and put options on futures
contracts for hedging purposes, for speculative purposes (to seek to increase
total return), or for liquidity management purposes. When used as a hedge, the
Fund may sell a futures contract in order to offset a decrease in the market
value of its portfolio securities that might otherwise result from a market
decline or currency exchange fluctuations. The Fund may do so either to hedge
the value of its portfolio of securities as whole, or to protect against
declines, occurring prior to sales of securities, in the value of the securities
to be sold. Conversely, the Fund may purchase a futures contract as a hedge in
anticipation of purchases of securities. In addition, the Fund may utilize
futures contracts in anticipation of changes in the composition of its portfolio
holdings.
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, persons who trade foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC")
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided them by the National Futures Association or any
domestic futures exchange. In particular, the Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance 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.
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In connection with the Fund's position in a futures contract or related
option, the Fund will segregate liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
The Trust intends to comply with the regulations of the CFTC exempting the
Fund from registration as a "commodity pool operator."
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The Fund may enter
into interest rate swaps, interest rate floors or caps for hedging purposes and
not for speculation. The 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 the Fund with another party of its 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 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 the 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 Adviser
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 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 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 Fund.
The 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, 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.
INVESTMENT COMPANIES. With respect to the investments of the Fund in the
securities of other investment companies, such investments will be limited so
that, as determined after a purchase is made, either (a) not more than 3% of the
total outstanding stock of such investment company will be owned by the Fund,
the Trust as a whole and their affiliated persons (as defined in the 1940 Act)
or (b) (i) not more than 5% of the value of the total assets of the Fund will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate securities of
investment companies as a group; and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund.
Certain investment companies whose securities are purchased by the Fund may
not be obligated to redeem such securities in an amount exceeding 1% of the
investment company's total outstanding securities during any period of less than
30 days. Therefore, such securities that exceed this amount may be illiquid.
If required by the 1940 Act, the Fund expects to vote the shares of other
investment companies that are held by it in the same proportion as the vote of
all other holders of such securities.
The Fund may invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policy and restrictions as the Fund. However, the Fund
currently intends to limit its investments in securities issued by other
investment companies to the extent described above. The Fund may adhere to more
restrictive limitations with respect to its investments in securities issued by
other
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investment companies if required by the Securities and Exchange Commission (the
"SEC") or deemed to be in the best interests of the Trust.
As noted in the Prospectus, the Fund may invest in World Equity Benchmark
Shares ("WEBS"), Standard & Poor's Depository Receipts ("SPDRs") and similar
securities of other investment companies, subject to the restrictions set forth
above.
WEBS are shares of an investment company that invests substantially all of
its assets in securities included in the Morgan Stanley Capital International
Index ("MSCI") indices for specified countries. WEBS are listed on the American
Stock Exchange (the "AMEX"), and were initially offered to the public in 1996.
The market prices of WEBS are expected to fluctuate in accordance with both
changes in the net asset values of their underlying indices and supply and
demand of WEBS on the AMEX. To date WEBS have traded at relatively modest
discounts and premiums to their net asset values. However, WEBS have a limited
operating history, and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the AMEX
necessary to maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting WEBS
should occur in the future, the liquidity and value of the Fund's shares could
also be substantially and adversely affected, and the Fund's ability to provide
investment results approximating the performance of securities in the Morgan
Stanley Capital International Europe, Australia and Far East Index ("MSCI EAFE")
index could be impaired. If such disruptions were to occur, the Fund could be
required to reconsider the use of WEBS as part of its investment strategy.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
AMEX). The UIT will issue SPDRs in aggregations know as "Creation Units" in
exchange for a "Fund Deposit" consisting of (i) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
S&P 500 Index, (ii) a cash payment equal to a pro rata portion of the dividends
accrued on the UIT's portfolio securities since the last dividend payment by the
UIT, net of expenses and liabilities, and (iii) a cash payment or credit
("Balancing Amount") designed to equalize the net asset value of the S&P 500
Index and the net asset value of a Fund Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Fund Deposit required of
an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Fund could result in losses on SPDRs. Trading in
SPDRs involves risks similar to those risks involved in the writing of options
on securities.
MISCELLANEOUS. Securities may be purchased on margin only to obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities. The Fund will not engage in selling securities short. The Fund may,
however, make short sales against the box although the Fund has no current
intention to do so in the coming year. "Selling short against the box" involves
selling a security that the Fund owns for delivery at a specified date in the
future.
MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage "dollar rolls" in
which the Fund sells securities for delivery in the future (generally within 30
days) and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity), but not identical securities on a
specified future date. During the roll period, the Fund loses the right to
receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of the Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in
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instruments that are permissible investments for the Fund. The Fund will hold
and maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Fund treats mortgage dollar
rolls as two separate transaction; one involving the purchase of a security and
a separate transaction involving a sale. The Fund does not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following. If the
broker-dealer to whom the Fund sells the security becomes insolvent, the Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which the Fund is
required to repurchase may be worth less than an instrument which the Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Investment Adviser's ability to manage the Fund's interest rate and mortgage
prepayments exposure. For these reasons, there is no assurance that mortgage
dollar rolls can be successfully employed.
OPTIONS. The Fund may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, foreign and domestic securities indices, financial instruments,
foreign currencies or the yield differential between two securities ("yield
curve options"), and may or may not be listed on a domestic or foreign
securities exchange and may or may not be issued by the Options Clearing
Corporation. A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price prior to the expiration of the option,
regardless of the market price of the security or currency. The premium paid to
the writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price prior to the expiration date
of the option, regardless of the market price of the security or currency. In
contrast to an option on a particular security, options on an index provide the
holder with the right to make or receive a cash settlement upon exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price of
the option expressed in dollars, times a specified multiple.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options may be more volatile than the underlying
instruments and, therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
instruments themselves.
The Fund will write call options only if they are "covered." In the case of
a call option on a security or currency, the option is "covered" if the Fund
owns the security or currency underlying the call or has an absolute and
immediate right to acquire that instrument without additional cash consideration
(or, if additional cash consideration is required, liquid assets in such amount
are segregated) upon conversion or exchange of other securities held by it. For
a call option on an index, the option is covered if the Fund maintains with its
custodian securities comprising the index or liquid assets equal to the contract
value. A call option is also covered if the Fund holds a call on the same
instrument or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the Fund
segregates liquid assets in the amount of the difference. The Fund will write
put options only if they are "secured" by segregated liquid assets in an amount
not less than the exercise price of the option at all times during the option
period.
With respect to yield curve options, a call (or put) option is covered if
the Fund holds another call (or put) option on the spread between the same two
securities and maintains in a segregated account liquid assets sufficient to
cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
The Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase a security or currency subject to a secured
put option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an
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option of the same series (i.e., same underlying security or currency, exercise
price and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying instrument from being called, to permit the sale of the
underlying instrument or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. There is no assurance that a liquid secondary market will exist for
any particular option. An option writer, unable to effect a closing purchase
transaction, will not be able to sell the underlying security or currency (in
the case of a covered call option) or liquidate the segregated assets (in the
case of a secured put option) until the option expires or the optioned security
or currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the instrument during such period.
When the Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If the Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange (an "Exchange"), may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities or currencies; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading value; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in equity real estate
investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may subject
the Fund to certain risks. REITs may be affected by changes in the value of the
underlying property owned by the trusts. REITs are dependent upon specialized
management skill, may not be diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation and the possibility of failing to
qualify for the beneficial tax treatment available to REITs under the Internal
Revenue Code of 1986, as amended, and to maintain exemption from the 1940 Act.
As a shareholder in a REIT, the Fund would bear, along with other shareholders,
its pro rata portion of the REIT's operating expenses. These expenses would be
in addition to the advisory and other expenses the Fund bears directly in
connection with its own operations.
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio securities
from financial institutions subject to the seller's agreement to repurchase them
at a mutually agreed upon date and price ("repurchase agreements"). Repurchase
agreements are considered to be loans under the 1940 Act. Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after the Fund's acquisition of the securities and normally will be within a
shorter period of time.
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Securities subject to repurchase agreements are held either by the Trust's
custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Fund may use the proceeds of reverse repurchase
agreements to purchase other securities either maturing, or under an agreement
to resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
repurchase price. The Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will segregate liquid assets in an amount at least equal
to the market value of the securities, plus accrued interest, subject to the
agreement.
RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Adviser
believes that smaller companies can provide greater growth potential than
larger, more mature firms, investing in the securities of such companies also
involves greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks and stocks of recently organized companies have been more
volatile in price than the larger capitalization stocks included in the S&P 500
Index. Among the reasons for this greater price volatility are the lower degree
of market liquidity (the securities of companies with small stock market
capitalizations may trade less frequently and in limited volume) and the greater
sensitivity of small companies to changing economic conditions. For example,
these companies are associated with higher investment risk due to the greater
business risks of small size and limited product lines, markets, distribution
channels and financial and managerial resources.
The values of small company stocks will frequently fluctuate independently
of the values of larger company stocks. Small company stocks may decline in
price as large company stock prices rise, or rise in price as large company
stock prices decline. You should, therefore, expect that the net asset value of
the Fund's shares will be more volatile than, and may fluctuate independently
of, broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.
RISKS RELATED TO MEDIUM AND LOWER QUALITY SECURITIES. Investments in medium
and lower quality securities present special risk considerations. Medium quality
securities, although considered investment grade, are also considered to have
speculative characteristics. Lower quality securities are considered
predominately speculative by traditional investment standards. In some cases,
these obligations may be highly speculative and have poor prospects for reaching
investment grade standard. While any investment carries some risk, certain risks
associated with lower quality securities are different from those for
investment-grade securities. The risk of loss through default is greater because
lower quality securities are usually unsecured and are often subordinate to an
issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities may be quite volatile
and may result in wider fluctuations of the Fund's net asset value per share.
There remains some uncertainty about the performance level of the market
for lower quality securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the markets for lower quality securities (resulting in a greater number of
bond defaults) and the value of lower quality securities held in a portfolio of
investments.
The economy and interest rates can affect lower quality securities
differently than other securities. For example, the prices of lower quality
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher quality investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in
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turn, would adversely affect their ability to service their principal and
interest payment obligations, meet projected business goals and obtain
additional financing.
The market value of lower quality securities tends to reflect individual
corporate developments to a greater extent than that of higher quality
securities which react primarily to fluctuations in the general level of
interest rates. Lower quality securities are often issued in connection with a
corporate reorganization or restructuring or as a part of a merger, acquisition,
takeover or similar event. They are also issued by less established companies
seeking to expand. Such issuers are often highly leveraged, may not have
available to them more traditional methods of financing and are generally less
able than more established or less leveraged entities to make scheduled payments
of principal and interest in the event of adverse economic developments or
business conditions.
A holder's risk of loss from default is significantly greater for lower
quality securities than is the case for holders of other debt securities because
such securities are generally unsecured and are often subordinated to the rights
of other creditors of the issuers of such securities. Investment by the Fund in
defaulted securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the Fund of its initial investment
and any anticipated income or appreciation will be uncertain. The Fund may also
incur additional expenses in seeking recovery on defaulted securities. If an
issuer of a security defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty would likely result in
increased volatility for the market prices of lower quality securities as well
as the Fund's net asset value. In general, both the prices and yields of lower
quality securities will fluctuate.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as liquid as, and
is more volatile than, the secondary market for higher quality securities. In
addition, market trading volume for high yield fixed income securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the market price and the Fund's ability to dispose of
particular portfolio investments. A less developed secondary market may also
make it more difficult for the Fund to obtain precise valuations of the high
yield securities in its portfolio.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower quality
convertible securities held by the Fund, especially in a thinly traded market.
Illiquid or restricted securities held by the Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
The credit ratings assigned by a rating agency evaluate the safety of a
rated security's principal and interest payments, but do not address market
value risk and, therefore, may not fully reflect the true risks of an
investment. Because the ratings of the rating agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the Investment Adviser performs its own analysis of the
issuers whose lower quality securities the Fund holds. Because of this, the
Fund's performance may depend more on its Investment Adviser's credit analysis
than is the case of mutual funds investing in higher quality securities.
SECURITIES LENDING. Collateral for loans of portfolio securities made by
the Fund may consist of cash, cash equivalents, securities issued or guaranteed
by the U.S. Government or its agencies or (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
the Fund lends its securities, it continues to receive dividends and interest on
the securities loaned and may simultaneously earn interest on the investment of
the cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by the Fund if a material event affecting the investment
is to occur.
STRIPPED SECURITIES. The Treasury Department has facilitated transfers of
ownership of zero coupon securities by accounting separately for the beneficial
ownership of particular interest coupon and principal payments on Treasury
securities through the Federal Reserve book-entry record-keeping system. The
Federal Reserve program as established
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by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities." The Fund may purchase
securities registered in the STRIPS program. Under the STRIPS program, the Fund
is able to have their beneficial ownership of zero coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidences of ownership of the underlying U.S. Treasury
securities.
In addition, the Fund may acquire U.S. Government obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
purposes. The Trust is unaware of any binding legislative, judicial or
administrative authority on this issue.
The Prospectus discusses other types of stripped securities that may be
purchased by the Fund, including stripped mortgage-backed securities ("SMBS").
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal.
However, in some instances, one class will receive some of the interest and most
of the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a risk that the initial investment will not be fully recouped. SMBS
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
may be considered liquid under guidelines established by the Trust's Board of
Trustees if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the net asset
value per share.
SUPRANATIONAL BANK OBLIGATIONS. The Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development (the "World Bank")). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations that may be acquired by the Fund include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, FNMA, GNMA, General Services
Administration, Central Bank for Cooperatives, FHLMC, Federal Intermediate
Credit Banks and Maritime Administration.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies or instrumentalities are also deemed to include (i) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government or any agency or instrumentality
thereof, and (ii) participations in loans made to foreign government; or their
agencies that are so guaranteed.
To the extent consistent with its respective investment objective, the Fund
may invest in a variety of U.S. Treasury obligations and obligations issued by
or guaranteed by the U.S. Government or its agencies and instrumentalities. Not
all U.S. Government obligations carry the same credit support. No assurance can
be given that
-14-
<PAGE>
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 Fund, the Investment
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instruments are
subject to demand features, will monitor their financial status and ability to
meet payment on demand. In determining weighted average portfolio maturity, an
instrument may, subject to applicable SEC regulations, be deemed to have a
maturity shorter than its nominal maturity based on the period remaining until
the next interest rate adjustment or the time the Fund can recover payment of
principal as specified in the instrument. Where necessary to ensure that a
variable or floating rate instrument meets the Fund's quality requirements, the
issuer's obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Variable and floating rate instruments eligible for purchase by the Fund
include variable amount master demand notes, which permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate, and 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 Fund may deem the maturity of variable and floating rate
instruments to be less than their stated maturities based on their variable and
floating rate features and/or their put features. Unrated variable and floating
rate instruments will be determined by the Investment Adviser to be of
comparable quality at the time of purchase to rated instruments which may be
purchased by the Fund.
Variable and floating rate instruments including inverse floaters held by
the Fund will be subject to the Fund's limitation on illiquid investments,
absent a reliable trading market, when the Fund may not demand payment of the
principal amount within seven days.
WARRANTS. The Fund may invest in warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying shares. The purchase of warrants
involves the risk that the Fund could lose the purchase value of a warrant if
the right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which the Fund invests, are dependent on a variety of
factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, 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
the Fund undergoes a rating revision, the Fund may continue to hold the security
if the Investment Adviser determines such retention is warranted.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, the Fund may invest in
zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form
-15-
<PAGE>
of debt securities that have been stripped of their unmatured interest coupons,
the coupons themselves or receipts or certificates representing interests in
such stripped debt obligations or coupons. The market prices of zero coupon
bonds, capital appreciation bonds and PIK securities generally are more volatile
than the market prices of interest bearing securities and are likely to respond
to a greater degree to changes in interest rates than interest bearing
securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, the Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, the Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Fund nonetheless is required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, the Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the Fund.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions enumerated
below which may be changed with respect to the Fund only by a vote of the
holders of a majority of the Fund's outstanding shares.
The Fund may not:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of
the Fund to the extent permitted by law.
(2) Purchase or sell real estate or real estate limited partnerships, but
this restriction shall not prevent the Fund from investing directly or
indirectly in portfolio instruments secured by real estate or
interests therein or acquiring securities of real estate investment
trusts or other issuers that deal in real estate.
(3) Invest in commodities or commodity contracts, except that the Fund may
invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control.
(5) Act as underwriter of securities, except as the Fund may be deemed to
be an underwriter under the Securities Act of 1933 (the "1933 Act") in
connection with the purchase and sale of portfolio instruments in
accordance with its investment objective and portfolio management
policies.
(6) Purchase securities (other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations) if, such purchase would
cause 25% or more in the aggregate of the market value of the total
assets of
-16-
<PAGE>
the Fund to be invested in the securities of one or more issuers
having their principal business activities in the same industry. For
the purposes of this restriction, state and municipal governments and
their agencies and authorities are not deemed to be industries; as to
utility companies, the gas, electric, water and telephone businesses
are considered separate industries; personal credit finance companies
and business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be in
the industries of their parents if their activities are primarily
related to financing the activities of their parents.
(7) Borrow money, except that to the extent permitted by applicable law
(a) the Fund may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts
up to 33 1/3% of its total assets (including the amount borrowed) or
such other percentage permitted by law, (b) the Fund may borrow up to
an additional 5% of its total assets for temporary purposes, (c) the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, and (d) the
Fund may purchase securities on margin. If due to market fluctuations
or other reasons the Fund's borrowings exceed the limitations stated
above, the Trust will promptly reduce the borrowings of the Fund in
accordance with the 1940 Act. In addition, as a matter of fundamental
policy, the Fund will not issue senior securities to the extent such
issuance would violate applicable law.
(8) Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.
(9) Notwithstanding any of the Fund's other fundamental investment
restrictions (including, without limitation, those restrictions
relating to issuer diversification, industry concentration and
control), the Fund may: (a) purchase securities of other investment
companies to the full extent permitted under Section 12 or any other
provision of the 1940 Act (or any successor provision thereto) or
under any regulation or order of the SEC; and (b) invest all or
substantially all of its assets in a single open-end investment
company or series thereof with substantially the same investment
objective, policies and fundamental restrictions as the Fund.
For the purposes of Investment Restrictions (1) and (7) above, the Fund
expects 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 14, 2000, the Fund
had not filed such an application.
Except as otherwise provided in Investment Restriction (6), for the purpose
of such restriction in determining industry classification with respect to the
Fund, the Trust intends to use the industry classification titles in the
Bloomberg Industry Group Classification. Securities held in escrow or separate
accounts in connection with the Fund's investment practices described in this
Additional Statement and in the Prospectus are not deemed to be mortgaged,
pledged or hypothecated for purposes of the foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the Fund's total assets.
Each Investment Restriction which involves a maximum percentage (other than
the restriction set forth above in Investment Restriction (7)) will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of the Fund. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (7), the
Fund 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.
-17-
<PAGE>
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
The business and affairs of the Trust and the Fund are managed under
the direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a management advisory
4200 Commerce Court services and private investment company) since January 1996;
Suite 300 Chairman, Hussman International, Inc. (a refrigeration company)
Lisle, IL 60532 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, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a financial advisor) since
Sears Tower, Suite 9650 July 1993; Vice President and Treasurer of Sears, Roebuck and Co.
233 S. Wacker Drive (a retail corporation) from February 1989 to July 1993; Member of
Chicago, IL 60606 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.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a financial
400 Skokie Blvd., Suite 300 services company) from 1985 to 1996; Vice Chairman and
Northbrook, IL 60062 Director of G.D. Searle & Co. (manufacture and sale of food
products and pharmaceuticals) from 1977 to 1985 and
President of G.D. Searle & Co. prior thereto. Trustee:
Northern Institutional Funds.
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C. (an accounting firm)
1534 Basswood Circle from 1966 to 1989. Financial Consultant, Ernst & Young LLP
Glenview, IL 60025 (an accounting firm) from 1992 to 1993 and 1997. Trustee:
Northern Institutional Funds.
Mr. John W. English 67 Trustee Private Investor; Vice President and Chief Investment
50-H New England Ave. Officer of The Ford Foundation (a charitable trust) from
P.O. Box 640 1981 to 1993. Director: the University of Iowa Foundation,
Summit, NJ 07902-0640 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, Jr. * 69 Trustee Senior Vice President and Senior Fiduciary Officer of The
703 Prospect Avenue Northern Trust Company from 1990 to 1993. Trustee: Northern
Winnetka, IL 60093 Institutional Funds.
Ms. Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an Illinois
420 N. Wabash Avenue not-for-profit corporation) from 1993 to present; Director
Suite 204 of Business Transformation from 1992 to 1993, and Midwestern
Chicago, IL 60611 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.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation (philanthropic
Suite 2222 organization) since November 1997; Vice Chairman and Chief
20 South Clark Street Administrative Officer of Sara Lee Corporation (a consumer
Chicago, IL 60603 product company) from November 1994 to October 1997; Vice
Chairman and Chief Financial and Administrative Officer of
Sara Lee Corporation (a consumer product company) from July
1993 to November 1994. Director: Payless Shoe Source, Inc.,
(a retail shoe store business); True North Communications,
Inc. (a global advertising and communications holding
company); American General Corporation (a diversified
financial services company); GATX Corporation (a railroad
holding company); Bassett Furniture Industries, Inc. (a
furniture manufacturer) Trustee: Northern Institutional
Funds.
Mary Jacobs Skinner, Esq.*** 42 Trustee Partner in the law firm of Sidley & Austin. Trustee:
One First National Plaza Northern Institutional Funds.
Chicago, IL 06063
Mr. William H. Springer 71 Chairman and Vice Chairman of Ameritech (a telecommunications holding
701 Morningside Drive Trustee company) from February 1987 to August 1992; Vice Chairman,
Lake Forest, IL 60045 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 Officer, UNext.com (a provider
737 N. Michigan Avenue of educational services via the internet) since 1999;
Suite 1405 Managing Director of Tandem Partners, Inc. (a privately held
Chicago, IL 60611 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.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Stephen Timbers**** 55 Trustee President of Northern Trust Global Investments, a division
50 South LaSalle Street, B-3 of Northern Trust Corporation and Executive Vice President,
Chicago, IL 60675 The Northern Trust Company since 1998; President, Chief
Executive Officer and Director of Zurich Kemper Investments
(a financial services company) from 1996 to 1998; President,
Chief Operating Officer and Director of Kemper Corporation
(a financial services company) from 1992 to 1996; President
and Director of Kemper Funds (a registered investment
company) from 1990 to 1998. Director: LTV Corporation (a
steel producer) and Northern Trust Investments, Inc.
("NTI") (previously known as Northern Trust Quantitative
Advisors, Inc.) Trustee: Northern Institutional Funds.
Mr. Archibald E. King 42 Vice President Senior Vice President and other positions at The Northern
50 South LaSalle Street Trust Company (since 1979).
Chicago, IL 60675
Mr. Lloyd A. Wennlund 42 Vice President Senior Vice President and other positions at The Northern
50 South LaSalle Street Trust Company, President of Northern Trust Securities, Inc.,
Chicago, IL 60675 and Managing Executive, Mutual Funds for Northern Trust
Global Investments (since 1989).
Mr. Brian R. Curran 32 Vice President Director of Fund Administration at PFPC (formerly FDISG)
4400 Computer Drive and Treasurer (since 1997); Director of Fund Administration at State
Westborough, MA 01581 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. Anderson 27 Assistant Client Treasury Manager of Mutual Fund Administration at
4400 Computer Drive Treasurer PFPC (since August 1998); Manager of Fund Administration at
Westborough, MA 01581 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).
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH TRUST DURING THE PAST 5 YEARS
---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Jeffrey A. Dalke, Esq. 49 Secretary Partner in the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard, Esq. 52 Assistant Vice President at PFPC (formerly FDISG) (since 1998);
4400 Computer Drive Secretary Attorney Consultant for Fidelity Management & Research
Westborough, MA 01581 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 Department at PFPC
4400 Computer Drive Secretary (formerly FDISG) (since 1994).
Westborough, MA 01581
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law firm
provides legal services to Northern Trust Corporation.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust Corporation
and/or Northern and Northern Trust Investments, Inc. (previously known as
Northern Trust Quantitative Advisers, Inc. and referred to as NTI).
Certain of the Trustees and officers and the organizations with which they
are associated have had in the past, and may have in the future, transactions
with the Investment Adviser, PFPC, Northern Funds Distributors, LLC ("NFD") and
their respective affiliates. The Trust has been advised by such Trustees and
officers that all such transactions have been and are expected to be in the
ordinary course of business and the terms of such transactions, including all
loans and loan commitments by such persons, have been and are expected to be
substantially the same as the prevailing terms for comparable transactions for
other customers. As a result of the responsibilities assumed by the Trust's
service providers under the Trust's Advisory Agreement, Transfer Agency
Agreement, Custodian Agreement, Foreign Custodian Agreement, Co-Administration
Agreement and Distribution Agreement, the Trust itself requires no employees.
Each officer holds comparable positions with 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
-22-
<PAGE>
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,
Aggressive Growth Fund and Global Communications Fund, which did not commence
operations during the fiscal year ended March 31, 2000:
<TABLE>
<CAPTION>
Money U.S. Government U.S. Government Tax-Exempt Municipal
Market Money Market Select Money Money Money
Fund Fund Market Fund Market Fund Market Fund
---- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 N/A $ 0
William H. Springer** 420 36 29 N/A 189
Richard G. Cline** 420 37 29 N/A 189
Edward J. Condon, Jr.** 420 37 29 N/A 189
John W. English** 420 37 29 N/A 189
Sandra Polk Guthman** 420 37 29 N/A 189
Richard P. Strubel** 420 37 29 N/A 189
Wesley M. Dixon, Jr. 9,798 1,090 936 N/A 4,692
William J. Dolan, Jr. 10,218 1,127 966 N/A 4,881
Raymond E. George, Jr. 9,730 1,072 918 N/A 4,621
Michael E. Murphy 9,798 1,090 936 N/A 4,692
Mary Jacobs Skinner 10,218 1,127 965 N/A 4,881
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
California California
Municipal Short-Intermediate Intermediate Intermediate
Money Market U.S. Government Government Tax-Exempt Tax-Exempt
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 36 29 5 55 6
Richard G. Cline** 36 29 5 55 6
Edward J. Condon, Jr.** 36 29 5 55 6
John W. English** 36 29 5 55 6
Sandra Polk Guthman** 36 29 5 55 6
Richard P. Strubel** 36 29 5 55 6
Wesley M. Dixon, Jr. 972 821 65 1,237 81
William J. Dolan, Jr. 1,008 849 70 1,292 88
Raymond E. George, Jr. 973 817 70 1,251 88
Michael E. Murphy 972 821 65 1,237 81
Mary Jacobs Skinner 1,008 849 70 1,292 88
<CAPTION>
Florida
Intermediate Fixed Arizona California Global
Tax-Exempt Income Tax-Exempt Tax-Exempt Tax-Exempt Fixed Income
Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 3 48 43 10 1 1
Richard G. Cline** 3 48 43 10 1 1
Edward J. Condon, Jr.** 3 48 43 10 1 1
John W. English** 3 48 43 10 1 1
Sandra Polk Guthman** 3 48 43 10 1 1
Richard P. Strubel** 3 48 43 10 1 1
Wesley M. Dixon, Jr. 264 1,067 955 65 393 230
William J. Dolan, Jr. 267 1,114 997 70 403 232
Raymond E. George, Jr. 263 1,084 972 70 395 230
Michael E. Murphy 264 1,066 955 65 393 230
Mary Jacobs Skinner 267 1,114 997 70 403 232
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
High Yield High Yield Income Stock Growth
Municipal Fixed Income Equity Equity Equity
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 1 8 18 35 81
Richard G. Cline** 1 8 18 35 81
Edward J. Condon, Jr.** 1 8 18 35 81
John W. English** 1 8 18 35 81
Sandra Polk Guthman** 1 8 18 35 81
Richard P. Strubel** 1 8 18 35 81
Wesley M. Dixon, Jr. 224 333 541 802 1,826
William J. Dolan, Jr. 225 340 558 837 1,907
Raymond E. George, Jr. 225 338 544 821 1,840
Michael E. Murphy 224 333 541 802 1,826
Mary Jacobs Skinner 225 340 558 837 1,907
<CAPTION>
Small
Select Equity Mid Cap Small Cap Small Cap Cap Growth
Fund Growth Fund Index Fund Value Fund Fund
---- ----------- ---------- --------- ----
<S> <C> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer** 19 20 10 20 3
Richard G. Cline** 19 20 10 20 3
Edward J. Condon, Jr.** 19 20 10 20 3
John W. English** 19 20 10 20 3
Sandra Polk Guthman** 19 20 10 20 3
Richard P. Strubel** 19 20 10 20 3
Wesley M. Dixon, Jr. 617 535 130 753 33
William J. Dolan, Jr. 636 555 140 773 35
Raymond E. George, Jr. 617 551 140 733 35
Michael E. Murphy 617 535 130 753 33
Mary Jacobs Skinner 636 555 140 773 35
<CAPTION>
Total
International International Compensation
Growth Equity Select Equity Technology from Fund
Fund Fund Fund Complex*
---- ---- ---- --------
<S> <C> <C> <C> <C>
Steven Timbers $ 0 $ 0 $ 0 $ 0
William H. Springer** 38 13 73 1,250
Richard G. Cline** 38 13 73 1,250
Edward J. Condon, Jr.** 38 13 73 1,250
John W. English** 38 13 73 1,250
Sandra Polk Guthman** 38 13 73 1,250
Richard P. Strubel** 38 13 73 1,250
Wesley M. Dixon, Jr. 893 483 1,415 31,250
William J. Dolan, Jr. 931 496 1,488 32,500
Raymond E. George, Jr. 906 481 1,465 31,250
Michael E. Murphy 893 483 1,415 31,250
Mary Jacobs Skinner 931 496 1,488 32,500
</TABLE>
* Fund complex includes thirty-three investment portfolios of the Trust and
twenty portfolios of Northern
-25-
<PAGE>
Institutional Funds, a separately registered investment company.
** Became a Trustee of the Trust on March 28, 2000 and only received fees
during the fiscal year ended March 31, 2000 for the March 28, 2000 Special
Meeting of the Board of Trustees.
The Trust does not provide pension or retirement benefits to its Trustees.
The Trust, its Investment Adviser and principal underwriter have adopted
codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940 Act. The
Codes of Ethics permit personnel, subject to the Codes of Ethics and their
provisions, to invest in securities, including securities that may be purchased
or held by the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern, a wholly-owned subsidiary of Northern Trust Corporation, a bank
holding company, is one of the nation's leading providers of trust and
investment management services. Northern is one of the strongest banking
organizations in the United States. Northern believes it has built its
organization by serving clients with integrity, a commitment to quality, and
personal attention. Its stated mission with respect to all its financial
products and services is to achieve unrivaled client satisfaction. With respect
to such clients, the Trust is designed to assist (i) defined contribution plan
sponsors and their employees by offering a range of diverse investment options
to help comply with 404(c) regulation and may also provide educational material
to their employees, (ii) employers who provide post-retirement Employees'
Beneficiary Associations ("VEBA") and require investments that respond to the
impact of federal regulations, (iii) insurance companies with the day-to-day
management of univested cash balances as well as with longer-term investment
needs, and (iv) charitable and not-for-profit organizations, such as endowments
and foundations, demanding investment management solutions that balance the
requirement for sufficient current income to meet operating expenses and the
need for capital appreciation to meet future investment objectives. NTI, also a
wholly-owned subsidiary of Northern Trust Corporation, serves as investment
adviser principally to defined benefit and defined contribution plans and
manages over 60 equity and bond commingled and common trust funds. As of 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 Agreement with the Trust, the Investment Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Fund, and also provides certain ancillary services.
The Investment Adviser is also responsible for monitoring and preserving the
records required to be maintained under the regulations of the SEC (with certain
exceptions unrelated to its activities for Northern Funds). In making investment
recommendations for the Fund, investment advisory personnel may not inquire or
take into consideration whether issuers of securities proposed for purchase or
sale for the Fund's accounts are customers of Northern's commercial banking
department. These requirements are designed to prevent investment advisory
personnel for the Fund from knowing which companies have commercial business
with Northern and from purchasing securities where they know the proceeds will
be used to repay loans to the bank.
The Trust's Investment Advisory and Ancillary Services Agreement with the
Investment Adviser (the "Advisory Agreement") has been approved by the Board of
Trustees, including the "non-interested" Trustees, and the initial shareholder
of the Trust. The Advisory Agreement provides that in executing portfolio
transactions and in selecting brokers or dealers (i) with respect to common and
preferred stocks, the Investment Adviser shall use its best judgment to obtain
the best overall terms available, and (ii) with respect to other securities, the
Investment Adviser shall attempt to obtain best net price and execution.
Transactions on U.S. stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers.
In assessing the best overall terms available for any transaction, the
Investment Adviser is to consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available and in
selecting the broker or dealer to execute a particular transaction, the
Investment Adviser may consider the brokerage and research
-26-
<PAGE>
services provided to the Fund and/or other accounts over which the Investment
Adviser or an affiliate of the Investment Adviser exercises investment
discretion. A broker or dealer providing brokerage and/or research services may
receive a higher commission than another broker or dealer would receive for the
same transaction. These brokerage and research services may include industry and
company analyses, portfolio services, quantitative data, market information
systems and economic and political consulting and analytical services.
Supplemental research information so received is in addition to, and not in
lieu of, services required to be performed by the Investment Adviser and does
not reduce the advisory fees payable to the Investment Adviser by the Fund. The
Trustees will periodically review the commissions paid by the Fund to consider
whether the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Fund. It is possible that
certain of the supplemental research or other services received will primarily
benefit one or more other investment companies or other accounts for which
investment discretion is exercised. Conversely, the Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company.
Transactions on foreign stock exchanges involve payment for brokerage
commissions which are generally fixed. Over-the-counter issues, including
corporate debt and government securities, are normally traded on a "net" basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. With respect to over-the-counter
transactions, the Investment Adviser will normally deal directly with dealers
who make a market in the instruments involved except in those circumstances
where more favorable prices and execution are available elsewhere. The cost of
foreign and domestic securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Investment Adviser
believes such practice to be in the Fund's interests.
Northern's investment advisory duties for the Trust are carried out through
its Trust Department. On occasions when an Investment Adviser deems the purchase
or sale of a security to be in the best interests of the Fund as well as other
fiduciary or agency accounts managed by it (including any other portfolio,
investment company or account for which an Investment Adviser acts as adviser),
the Agreement provides that the Investment Adviser, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect to
other securities. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Investment Adviser in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Fund and other accounts
involved. In some instances, this procedure may adversely affect the size of the
position obtainable for the Fund or the amount of the securities that are able
to be sold for the Fund. To the extent that the execution and price available
from more than one broker or dealer are believed to be comparable, the Agreement
permits the Investment Adviser, at its discretion but subject to applicable law,
to select the executing broker or dealer on the basis of the Investment
Adviser's opinion of the reliability and quality of the broker or dealer.
The Advisory Agreement provides that the Investment Adviser may render
similar services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that the Trust will
indemnify the Investment Adviser against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.
From time to time, the Investment Adviser may voluntarily waive a portion
or all of its fees otherwise payable to it with respect to the Fund.
Under its Transfer Agency Agreement with the Trust, Northern has
undertaken, among other things, to perform the following services: (i) answer
shareholder inquiries and respond to requests for information regarding the
Trust; (ii) process purchase and redemption transactions; (iii) establish and
maintain shareholder accounts and
-27-
<PAGE>
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 the Fund.
Northern maintains custody of the assets of the Fund pursuant to the terms
of its Custodian Agreement with the Trust. Under this agreement, Northern (i)
holds the Fund's cash and securities, (ii) maintains such cash and securities in
separate accounts in the name of the Fund, (iii) makes receipts and
disbursements of funds on behalf of the Fund, (iv) receives, delivers and
releases securities on behalf of the Fund, (v) collects and receives all income,
principal and other payments in respect of the Fund's investments held by
Northern under the agreement, and (vi) maintains the accounting records of
Northern Funds. Northern may employ one or more subcustodians under the Custody
Agreement, provided that Northern shall, subject to certain monitoring
responsibilities, have no more responsibility or liability to the Trust on
account of any action or omission of any subcustodian so employed than such
subcustodian has to Northern and that the responsibility or liability of the
subcustodian to Northern shall conform to the resolution of the Trustees of the
Trust authorizing the appointment of the particular subcustodian. Northern may
also appoint an agent to carry out such of the provisions of the Custody
Agreement as Northern may from time to time direct.
As compensation for the services rendered to the Fund under the Custodian
Agreement, and the assumption by Northern of certain related expenses, Northern
is entitled to payment from the Fund as follows: (a) a basic custodial fee of
(i) $18,000 annually for the Fund, plus (ii) 1/100th of 1% annually of the
Fund's average daily net assets to the extent they exceed $100 million, plus (b)
a basic accounting fee of (i) $25,000 annually for the Fund, plus (ii) 1/100th
of 1% annually of the Fund's average daily net assets to the extent they exceed
$50 million, plus (c) a fixed dollar fee for each trade in portfolio securities,
plus (d) a fixed dollar fee for each time that Northern as Custodian receives or
transmits funds via wire, plus (e) reimbursement of expenses incurred by
Northern as Custodian for telephone, postage, courier fees, office supplies and
duplicating. The fees referred to in clauses (c) and (d) are subject to annual
upward adjustments based on increases in the Consumer Price Index for All Urban
Consumers, provided that Northern may permanently or temporarily waive all or
any portion of any upward adjustment.
Northern's fees under the Custodian Agreement are subject to reduction
based on the Fund's daily uninvested cash balances (if any).
Unless sooner terminated, the Trust's Advisory Agreement, Transfer Agency
Agreement and Custodian Agreement will continue in effect with respect to the
Fund until March 31, 2001, and thereafter for successive 12-month periods,
provided that the continuance is approved at least annually (i) by the vote of a
majority of the Trustees who are not parties to the agreement or "interested
persons" (as such term is defined in the 1940 Act) of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval and (ii)
by the Trustees or by the vote of a majority of the outstanding shares of the
Fund (as defined under "Description of Shares"). Each agreement is terminable at
any time without penalty by the Trust (by specified Trustee or shareholder
action) on 60 days' written notice to Northern and by Northern on 60 days'
written notice to the Trust.
In the Advisory Agreement, Northern agrees that the name "Northern" may be
used in connection with the Trust's business on a royalty-free basis. Northern
has reserved to itself the right to grant the non-exclusive right to use the
name "Northern" to any other person. The Advisory Agreement provides that at
such time as the Agreement is no longer in effect, the Trust will cease using
the name "Northern."
CO-ADMINISTRATORS AND DISTRIBUTOR
Northern and PFPC, 4400 Computer Drive, Westborough, Massachusetts 01581,
act as co-administrators for the Fund under a Co-Administration Agreement with
the Trust. Subject to the general supervision of the Trust's Board of Trustees,
Northern and PFPC (the "Co-Administrators") provide supervision of all aspects
of the Trust's non-investment advisory operations and perform various corporate
secretarial, treasury and blue sky services, including but not limited to: (i)
maintaining office facilities and furnishing corporate officers for the Trust;
(ii)
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<PAGE>
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 the Fund, computed daily and
payable monthly, at an annual rate of 0.15% of the average daily net assets of
the Fund.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until September 30, 2001, and thereafter for successive one-year terms
with respect to the Fund, provided that the Agreement is approved annually (i)
by the Board of Trustees or (ii) by the vote of a majority of the outstanding
shares of such Fund (as defined below under "Description of Shares"), provided
that in either event the continuance is also approved by a majority of the
Trustees who are not parties to the Agreement and who are not interested persons
(as defined in the 1940 Act) of any party thereto, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Co-Administration
Agreement is terminable at any time after September 30, 2001 without penalty by
the Trust on at least 60 days written notice to the Co-Administrators. Each
Co-Administrator may terminate the Co-Administration Agreement with respect to
itself at any time after September 30, 2001 without penalty on at least 60
days' written notice to the Trust and the other Co-Administrator.
The Trust may terminate the Co-Administration Agreement prior to September
30, 2001 in the event that the Trust or its shareholders incur damages in excess
of $100,000 as a result of the willful misfeasance, bad faith or negligence of
the Co-Administrators, or the reckless disregard of their duties under the
Agreement. The Trust may also terminate the Co-Administration Agreement prior to
September 30, 2001 in the event that the Co-Administrators fail to meet one of
the performance standards set forth in the Agreement.
The Trust has also entered into a Distribution Agreement under which NFD,
as agent, sells shares of each Fund on a continuous basis. NFD pays the cost of
printing and distributing prospectuses to persons who are not shareholders of
the Trust (excluding preparation and typesetting expenses) and of certain other
distribution efforts. No compensation is payable by the Trust to NFD for such
distribution services. NFD is a wholly-owned subsidiary of Provident
Distributors, Inc. ("PDI"). PDI, based in King of Prussia, Pennsylvania, is an
independently owned and operated broker-dealer.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD, or NFD's breach of confidentiality.
Under a Service Mark License Agreement with NFD, Northern Trust Corporation
agrees that the name "Northern Funds" may be used in connection with the Trust's
business on a royalty-free basis. Northern Trust Corporation has reserved to
itself the right to grant the non-exclusive right to use the name "Northern
Funds" to any
-29-
<PAGE>
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 Fund's Prospectus, the Fund may enter into agreements from
time to time with Service Organizations providing for support and/or
distribution services to customers of the Service Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Fund may pay Service
Organizations up to 0.25% (on an annualized basis) of the average daily net
asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(i) processing dividend and distribution payments from the Fund; (ii) providing
information periodically to customers showing their share positions; (iii)
arranging for bank wires; (iv) responding to customer inquiries; (v) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (vi) forwarding shareholder
communications; (vii) assisting in processing share purchase, exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Fund. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Fund's arrangements with Service Organizations under the agreements are
governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans, the
Board of Trustees reviews, at least quarterly, a written report of the amounts
expended in connection with the Fund's arrangements with Service Organizations
and the purposes for which the expenditures were made. In addition, the Fund's
arrangements with Service Organizations must be approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable likelihood that
their arrangements with Service Organizations will benefit the Fund and its
shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to the Fund must be approved by the holders of a majority of
the outstanding shares of the Fund involved. So long as the Distribution and
Service Plan is in effect, the selection and nomination of the members of the
Board of Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Trust will be committed to the discretion of such disinterested Trustees.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103, serves as counsel to the
Trust.
Arthur Anderson LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603 serve as auditors for the Trust.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of the Fund may, in the discretion of Northern, be made
in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact the Transfer Agent. In connection with an in-kind securities payment,
the Fund will require, among other things, that the securities be valued on the
day of purchase in accordance with the pricing methods used by the Fund and that
the Fund receive satisfactory assurances that it will have good and marketable
title to the securities received by it; that the securities be in proper form
for transfer to the Fund; and that adequate information be provided concerning
the basis and other tax matters relating to the securities.
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<PAGE>
Although the Fund generally will redeem shares in cash, the Fund reserves
the right to pay redemptions by a distribution in-kind of securities (instead of
cash) from the Fund. The securities distributed in-kind would be readily
marketable and would be valued for this purpose using the same method employed
in calculating the Fund's net asset value per share. If a shareholder receives
redemption proceeds in-kind, the shareholder should expect to incur transaction
costs upon the disposition of the securities received in the redemption.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This may
help investors reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher share prices. In order to
be effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. Dollar Cost Averaging does not assure a profit
and does not protect against losses in a declining market. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent a
loss if an investor ultimately redeems shares at a price which is lower than
their purchase price. An investor may want to consider his or her financial
ability to continue purchases through periods of low price levels.
DIRECTED REINVESTMENTS
In addition to having your income dividends and/or capital gains
distributions reinvested in shares of the Fund from which such distributions are
paid, you may elect the directed reinvestment option and have dividends and
capital gains distributions automatically invested in another Northern Fund.
Reinvestments can only be directed to an existing Northern Funds account (which
must meet the minimum investment requirement). Directed reinvestments may be
used to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account. Directed reinvestments from a qualified plan
account to a regular account may have adverse tax consequences including
imposition of a penalty tax and, therefore, you should consult your own tax
adviser before commencing these transactions.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares of
the Fund involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Fund involved in the request are priced will be processed on the next
Business Day in the manner described above.
The Trust may redeem shares involuntarily to reimburse the Fund for any
loss sustained by reason of the failure of a shareholder to make full payment
for shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Fund's Prospectus from time to time. The Trust
reserves the right on 60 days' written notice, to redeem the shares held in any
account if at the time of redemption, the net asset value of the remaining
shares in the account falls below $1,000. Such involuntary redemptions will not
be made if the value of shares in an account falls below the minimum solely
because of a decline in the Fund's net asset value. The Trust may also redeem
shares involuntarily if the redemption is appropriate to carry out the Trust's
responsibilities under the 1940 Act (see, e.g., "Amortized Cost Valuation").
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions
-31-
<PAGE>
can be obtained from Northern. To invest through any of the tax-sheltered
retirement plans, please call Northern for information and the required separate
application. To determine whether the benefits of a tax-sheltered retirement
plan are available and/or appropriate, a shareholder should consult with a tax
adviser.
EXPENSES
Except as set forth above and in this Additional Statement, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern and PFPC, brokerage fees
and commissions, fees for the registration or qualification of Fund shares under
federal or state securities laws, expenses of the organization of the Trust,
taxes, interest, costs of liability insurance, fidelity bonds, indemnification
or contribution, any costs, expenses or losses arising out of any liability of,
or claim for damages or other relief asserted against the Trust for violation of
any law, legal, tax and auditing fees and expenses, expenses of preparing and
printing prospectuses, statements of additional information, proxy materials,
reports and notices and the printing and distributing of the same to the Fund's
shareholders and regulatory authorities, compensation and expenses of its
Trustees, payments to Service Organizations, fees of industry organizations such
as the Investment Company Institute, and miscellaneous and extraordinary
expenses incurred by the Trust.
The Trust and PFPC intend to voluntarily reimburse a portion of the Fund's
expenses and/or reduce their advisory and co-administrative fees from the Fund
during the current fiscal year. The result of these reimbursements and fee
reductions will be to increase the performance of the Fund during the periods
for which the reductions and reimbursements are made.
The Fund calculates its total return on an "average annual total return"
basis for various periods. Average annual total return reflects the average
annual percentage change in value of an investment in the Fund over the
measuring period. Total returns may also be calculated on an "aggregate total
return" basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return reflect changes in the price of the shares and assume
that any dividends and capital gain distributions made by the Fund during the
period are reinvested in the shares of the Fund. When considering average total
return figures for periods longer than one year, it is important to note that
the annual total return of the Fund for any one year in the period might have
been more or less than the average for the entire period. The Fund may also
advertise from time to time the total return on a year-by-year or other basis
for various specific periods by means of quotations, charts, graphs or
schedules.
The Fund calculates its "average annual total return" by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
N
P (1+T) = ERV
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in
years.
The Fund calculates its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = T = [(ERV/P)]-1
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<PAGE>
The yield of the Fund is computed based on the Fund's net income during a
specified 30-day (or one month) period. More specifically, the Fund's yield is
computed by dividing the per share net income during the relevant period by the
net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis.
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.
GENERAL INFORMATION
Any fees imposed by Northern or other Service Organizations on their
customers in connection with investments in the Fund are not reflected in the
Trust's calculations of performance for the Fund.
The Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze the Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
The performance of the Fund may be compared to those of other mutual funds
with similar investment objectives and to stock, bond and other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or to the S&P 500 Index, the S&P MidCap 400 Index, the Russell
2000 or 1000 Small Stock Index, the Consumer Price Index or the Dow Jones
Industrial Average. Performance data as reported in national financial
publications such as MONEY, FORBES, BARRON'S, THE WALL STREET JOURNAL and THE
NEW YORK TIMES, or in publications of a local or regional nature, may also be
used in comparing the performance of the Fund. From time to time, the Fund may
also quote the mutual fund ratings of Morningstar, Inc. and other services in
their advertising materials.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. The Fund may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the Fund. The
Fund may also compare performance to that of other compilations or indices that
may be developed and made available in the future.
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
investment in the Fund, but also of the additional Fund shares received through
reinvestment.
-33-
<PAGE>
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Fund (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments), economic and political conditions, the
relationship between sectors of the economy and the economy as a whole, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of Northern as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Fund may also include in advertisements, sales literature,
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of the Fund. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternative to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may include lists of representative clients of Northern.
Materials may refer to the CUSIP numbers of the Fund and may illustrate how to
find the listings of the Fund in newspapers and periodicals. Materials may also
include discussions of other Funds, products, and services.
The Fund may quote various measures of volatility and benchmark correlation
in advertising. In addition, the Fund may compare these measures to those of
other funds. Measures of volatility seek to compare the historical share price
fluctuations or total returns to those of a benchmark. Measures of benchmark
correlation indicate how valid a comparative benchmark may be. Measures of
volatility and correlation may be calculated using averages of historical data.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in the Fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
The Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Fund may include
information regarding the background and experience of its portfolio managers.
NET ASSET VALUE
Securities held by the Fund that are listed on a recognized U.S. or foreign
securities exchange are valued at the last quoted sales price on the securities
exchange on which the securities are primarily traded, except that securities
listed on an exchange in the United Kingdom are valued at the average of the
closing bid and ask prices. If securities listed on a U.S. exchange are not
traded on a valuation date, they will be valued at the last quoted bid price. If
securities traded on a foreign securities exchange are not traded on a valuation
date, they will be valued at the most recent quoted sales price. Securities that
are traded in the U.S. over-the-counter markets, absent a last quoted sales
price, are valued at the last quoted bid price. Securities which are traded in
the foreign over-the-counter markets are valued at the last sales price, except
that such securities traded in the United Kingdom are valued at the average of
the closing bid and ask prices. Any securities for which no current quotations
are readily available are valued at fair value as determined in
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<PAGE>
good faith by Northern under the supervision of the Board of Trustees. Temporary
short-term investments are valued at amortized cost which Northern has
determined, pursuant to Board authorization, approximates market value.
Securities may be valued on the basis of prices provided by independent pricing
services when those prices are believed to reflect the fair market value of the
securities.
Northern is not required to calculate the net asset value of the Fund on
days during which no shares are tendered to the Fund for redemption and no
orders to purchase or sell shares are received by the Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
The discussions of Federal and state tax consequences in the Prospectus and
this Additional Statement are based on the Internal Revenue Code of 1986, as
amended (the "Code") and the laws and regulations issued thereunder as in effect
on the date of this Additional Statement. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
The Fund intends to qualify as a regulated investment company under Part I
of Subchapter M of Subtitle A, Chapter 1 of the Code. As a regulated investment
company, the Fund is generally exempt from Federal income tax on its net
investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, the Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of the
Fund's total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is taxable
to shareholders as long-term capital gain, regardless of the length of time the
shareholder has held the shares, whether such gain was recognized by the Fund
prior to the date on which a shareholder acquired shares of the Fund and whether
the distribution was paid in cash or reinvested in shares. In addition,
investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that have been paid
with respect to such shares.
Dividends and distributions from the Fund will generally be taxable to you
in the tax year in which they are paid, with one exception. Dividends and
distributions declared by the Fund in October, November or December and paid in
January are taxed as though they were paid by December 31.
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<PAGE>
In the case of corporate shareholders, distributions of the Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Fund may constitute "qualifying dividends."
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
all distributions (whether or not derived from exempt-interest income) would be
taxable as ordinary income to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Fund may be subject
to the tax laws of such states or localities.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments and
futures contacts and options that may be engaged in by the Fund, and investments
in passive foreign investment companies ("PFICs"), are complex and, in some
cases, uncertain. Such transactions and investments may cause the Fund to
recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as
ordinary income.
In addition, in the case of any shares of a PFIC in which the Fund invests,
the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in different investment portfolios.
The Trust may hereafter create series in addition to the Trust's existing
series, which represent interests in thirty-three portfolios.
Under the terms of the Trust Agreement, each share of the Fund has a par
value of $.0001, represents a proportionate interest in the 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 the Fund, shareholders of each class of the
Fund are entitled to share pro rata in the net assets belonging to that class
available for distribution. Shares do not have any preemptive or conversion
rights. The right of redemption is described under "Redeeming and Exchanging
Shares" in the Prospectus. In addition, pursuant to the terms of the 1940 Act,
the right of a shareholder to redeem shares and the date of payment by the Fund
may be suspended for more than seven days (i) for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or trading in the markets the Fund normally utilizes is closed or is
restricted as determined by the SEC, (ii) during any emergency, as determined by
the SEC, as a result of which it is not reasonably practicable for the Fund to
dispose of instruments owned by it or fairly to determine the value of its net
assets, or (iii) for such other period as the SEC may by order permit for the
protection of the shareholders of the Fund. The Trust may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions. 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 the
Fund's shares if such shares have an aggregate value
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<PAGE>
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 Fund are not issued.
The proceeds received by the Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to and
constitute the underlying assets of that Fund. The underlying assets of the Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect to that Fund and with a share of the general liabilities
of the Trust. Expenses with respect to the portfolios of Northern Funds are
normally allocated in proportion to the net asset value of the respective
portfolios except where allocations of direct expenses can otherwise be fairly
made.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each investment
portfolio of the trust entitled to vote on a matter will vote in the aggregate
and not by portfolio, except as required by law or when the matter to be voted
on affects only the interests of shareholders of a particular portfolio.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement, a
distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees are exempt from the separate
voting requirements stated above.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees
without the vote or consent of shareholders, either to one vote for each share
or to one vote for each dollar of net asset value represented by such shares on
all matters presented to shareholders, including the election of Trustees (this
method of voting being referred to as "dollar-based voting"). However, to the
extent required by the 1940 Act or otherwise determined by the Trustees, series
and classes of the Trust will vote separately from each other. Shareholders of
the Trust do not have cumulative voting rights in the election of Trustees and,
accordingly, the holders of more than 50% of the aggregate voting power of the
Trust may elect all of the Trustees, irrespective of the vote of the other
shareholders. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meeting. To the extent required by law, the Trust will assist in shareholder
communications in connection with a meeting called by shareholders. The
shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder approval
(except as stated in the next paragraph), to cause the Trust, or any series
thereof, to merge or consolidate with any corporation, association, trust or
other organization or sell or exchange all or substantially all of the property
belonging to the Trust, or any series thereof. In addition, the Trustees,
without shareholder approval, may adopt a "master-feeder" structure by investing
substantially all of the assets of a series of the Trust in the securities of
another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with the
merger, consolidation, termination or other reorganization of the Trust or any
series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
--------- ----------
<S> <C> <C>
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 Group FBO Northern Funds 382,736 9.3%
Auto House Trust Cash Processing Unit - Miami 266,653 6.5%
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%
SELECT EQUITY FUND
First Data Investors Services Group FBO Northern Funds 1,831,777 12.2%
TECHNOLOGY FUND
Charles Schwab and Co., Inc. on behalf of its customers 3,033,911 6.9%
</TABLE>
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.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Trust's prospectuses.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
-40-
<PAGE>
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.
-41-
<PAGE>
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.
A-1
<PAGE>
"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.
A-2
<PAGE>
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.
A-3
<PAGE>
"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.
A-4
<PAGE>
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.
A-5
<PAGE>
"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.
A-6
<PAGE>
"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.
A-7
<PAGE>
APPENDIX B
As stated in the Prospectus, the Fund may enter into certain futures
transactions. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, by using futures contracts.
Interest rate future contracts can also be used by a Fund for
non-hedging (speculative) purposes to increase total return.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected by
the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
B-1
<PAGE>
II. INDEX FUTURES CONTRACTS
GENERAL. A stock or bond index assigns relative values to the stocks
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as the S&P 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the S&P's 100 or indexes based on an
industry or market indexes, such as the S&P 100 or indexes based on an industry
or market segment, such as oil and gas stocks. Futures contracts are traded on
organized exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract. To the extent
consistent with its investment objective, a Fund may also engage in
transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
A Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
Index futures contracts may also be used by a Fund for non-hedging
(speculative) purposes to increase total return.
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
A Fund may also use futures contracts on foreign currencies for
non-hedging (speculative) purposes to increase total return.
IV. MARGIN PAYMENTS
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially, a
Fund will be required to deposit with the broker or in a segregated account with
a custodian or sub-custodian an amount of liquid assets, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." For example, when a particular Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund
will be entitled to receive from the broker a variation margin payment equal to
that increase in value. Conversely, where the Fund has purchased a futures
contract and the price of the future contract has declined in response to a
decrease in the underlying instruments, the position would be less valuable and
the Fund would be required to make a variation margin payment to the broker.
Prior to expiration of the futures contract, Northern or NTI may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which
B-2
<PAGE>
will operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by a
Fund, even if the futures are used for hedging (non-speculative) purposes. One
risk arises because of the imperfect correlation between movements in the price
of the futures and movements in the price of the instruments which are the
subject of the hedge. The price of the future may move more than or less than
the price of the instruments being hedged. If the price of the futures moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Fund involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the futures, or if otherwise deemed to be appropriate by the
Investment Adviser. Conversely, a Fund may buy or sell fewer futures contracts
if the volatility over a particular time period of the prices of the instruments
being hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Investment
Adviser. It is also possible that, where a Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of instruments held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value in its
portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Investment Adviser may
still not result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
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Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by a Fund is also subject to the Investment
Advisers' ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
Futures purchased or sold by a Fund (and related options) may be
traded on foreign exchanges. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or subject
to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures of
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, the
investments of a Fund in foreign futures, or foreign options transactions may
not be provided the same protections in respect to transactions on United States
futures exchanges. In addition, the price of any foreign futures or foreign
options contract and, therefore the potential profit and loss thereon may be
affected by any variance in the foreign exchange rate between the time an order
is placed and the time it is liquidated, offset or exercised.
VI. OPTIONS ON FUTURES CONTRACTS
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example, in
anticipation of a decline in interest rates, a Fund may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities which the Fund intends to
purchase. Similarly, if the value of the securities held by a Fund is expected
to decline as a result of an increase in interest rates, the Fund might purchase
put options or sell call options on futures contracts rather than sell futures
contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). See "Risks of Transactions
in Futures Contracts" above. In addition, the purchase or sale of an option also
entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or
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<PAGE>
upon the price of the securities being hedged, an option may or may not be less
risky than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
VII. OTHER MATTERS
Each Fund intends to comply with the regulations of the CFTC exempting
it from registration as a "Commodity Pool Operator." Accounting for futures
contracts will be in accordance with generally accepted accounting principles.
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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
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Registrant's Registration Statement on Form N-1A,
filed on July 31, 1997 ("PEA No. 16").
(11) Amendment No. 10 to Agreement and Declaration of
Trust dated November 18, 1997 filed as Exhibit 1(k)
to Post-Effective Amendment No. 19 to Registrant's
Registration Statement on Form N-1A, filed on March
20, 1998 ("PEA No. 19").
(12) Amendment No. 11 to Agreement and Declaration of
Trust dated September 18, 1998 filed as Exhibit
(a)(12) to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A,
filed on May 28, 1999 ("PEA No. 22").
(13) Amendment No. 12 to Agreement and Declaration of
Trust dated November 18, 1998 filed as Exhibit
(a)(13) to PEA No. 22.
(14) Amendment No. 13 to Agreement and Declaration of
Trust dated September 15, 1999 filed as Exhibit
(a)(14) to 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. 29 to the
Registration Statement on Form N-1A, filed on
February 29, 2000 ("PEA No. 29").
(18) Amendment No. 17 to Agreement and Declaration of
Trust dated February 8, 2000 filed as Exhibit (a)(18)
to PEA No. 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
Nos. 30/31").
(20) Amendment No. 18 to Agreement and Declaration of
Trust dated May 2, 2000 filed as Exhibit (a)(20) to
Post-Effective Amendment No. 32 to
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Registrant's Registration Statement on Form N-1A,
filed on July 6, 2000 ("PEA No. 32").
(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 No. 30/31.
(6) Amendment No. 1 to By-Laws adopted on May 2, 2000
filed as Exhibit (b)(6) to PEA Nos. 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
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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 Nos. 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 Nos. 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.
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(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 Nos.
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.
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(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 Nos. 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 Nos. 30/31.
(15) Agreement and Plan of Reorganization, Conversion and
Termination dated February 8, 2000 filed as Exhibit
(h)(14) to PEA No. 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.
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(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 MarketPower Fund filed as Exhibit
(l)(13) to PEA Nos. 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
Nos. 30/31.
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(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 Nos. 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 Nos. 30/31.
(2) Code of Ethics of Investment Adviser filed as Exhibit
(o)(2) to PEA Nos. 30/31.
The following exhibits to the Registration Statement are filed herewith
electronically pursuant to EDGAR rules:
(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
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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,
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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.
C-10
<PAGE>
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.
C-11
<PAGE>
<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
C-12
<PAGE>
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
C-13
<PAGE>
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 Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Vice Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Mayer, Brown & Platt Partner
190 South LaSalle Street, 38th Fl.
Chicago, IL 60603
Zenith Electronics Director
1000 Milwaukee Ave.
Glenview, IL 60025
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Dreyer's Grand Ice Cream, Inc. Director
5929 College Ave.
Oakland, CA 94618
C-14
<PAGE>
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
C-15
<PAGE>
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
C-16
<PAGE>
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
C-17
<PAGE>
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
C-18
<PAGE>
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 and 50 South LaSalle Street
Director Chicago, IL 60675
The Quaker Oats Company Retired
321 North Clark Street Chairman,
Chicago, IL 60610 President and
Chief Executive
Officer
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
10275 W. Higgins Road
Suite 200
Rosemont, IL 60018
C-19
<PAGE>
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
*(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008
* Name change
Stephen B. Timbers Northern Trust Global Director
President - Northern Trust Advisors, Inc.
Global Investments and 29 Federal Street
Executive Vice President Stamford, CT 06901
LTV Steel Co. Director
200 Public Square
Cleveland, OH 44114-2308
Zurich-Kemper Investments Former
222 S. Riverside Plaza President and
Chicago, IL 60606 Chief Executive Officer
(January 1996 -
December 1997)
C-20
<PAGE>
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:
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
---------------- ----------------- ----------
<S> <C> <C>
Jane Haegele Director None
3200 Horizon Drive
King of Prussia, PA 19406
Philip H. Rinnander President and Secretary None
3200 Horizon Drive
King of Prussia, PA 19406
C-21
<PAGE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
---------------- ----------------- ----------
<S> <C> <C>
Jason A. Greim Vice President and Treasurer None
3200 Horizon Drive
King of Prussia, PA 19406
</TABLE>
(c) None
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute books of
the Registrant are in the physical possession of Drinker Biddle & Reath LLP,
One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania
19103-6996. 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 3200 Horizon Drive, King of Prussia, PA 19406. All
other accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are in the physical possession of The Northern Trust Company, 50
S. LaSalle Street, Chicago, Illinois 60675 or 801 S. Canal Street, Chicago,
Illinois 60607 (relating to transfer agent).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 33 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 12th 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. 33 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/*/ Richard G. Cline* Trustee July 12, 2000
-------------------------------------
Richard G. Cline
/*/ Edward J. Condon, Jr.* Trustee July 12, 2000
-------------------------------------
Edward J. Condon, Jr.
/*/ Wesley M. Dixon, Jr.* Trustee July 12, 2000
-------------------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee July 12, 2000
-------------------------------------
William J. Dolan, Jr.
/*/ John W. English* Trustee July 12, 2000
-------------------------------------
John W. English
/*/ Raymond E. George, Jr.* Trustee July 12, 2000
-------------------------------------
Raymond E. George, Jr.
/*/ Sandra Polk Guthman* Trustee July 12, 2000
-------------------------------------
Sandra Polk Guthman
/*/ Michael E. Murphy* Trustee July 12, 2000
-------------------------------------
Michael E. Murphy
/*/ Mary Jacobs Skinner* Trustee July 12, 2000
-------------------------------------
Mary Jacobs Skinner
/*/ William H. Springer* Trustee July 12, 2000
-------------------------------------
William H. Springer
/*/ Richard P. Strubel* Trustee July 12, 2000
-------------------------------------
Richard P. Strubel
/*/ Stephen B. Timbers* Trustee July 12, 2000
-------------------------------------
Stephen B. Timbers
<PAGE>
/s/ Archibald E. King Vice President and July 12, 2000
------------------------------------- Acting Chief Executive
Archibald E. King Officer
/s/ Brian R. Curran Treasurer July 12, 2000
------------------------------------- (Chief Financial
Brian R. Curran and Accounting
Officer)
*By: /s/ Brian R. Curran
--------------------------------
Brian R. Curran,
Attorney-in-fact
</TABLE>
<PAGE>
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
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(j)(1) Consent of Drinker Biddle & Reath LLP.
