-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPtFtop07eunDlLRFg6UC3+u8qQQuuTZh8w+GKIQWrvzAR6DrMV8bogD9IRQM45w iYqEMuPFdu/41uZl+sbMtQ== 0000893220-99-001176.txt : 19991018 0000893220-99-001176.hdr.sgml : 19991018 ACCESSION NUMBER: 0000893220-99-001176 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19991015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN FUNDS CENTRAL INDEX KEY: 0000916620 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 033-73404 FILM NUMBER: 99728899 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-08236 FILM NUMBER: 99728900 BUSINESS ADDRESS: STREET 1: 207 E BUFFALO ST STREET 2: STE 400 CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4142715885 MAIL ADDRESS: STREET 1: 207 E BUFFALO ST STREET 2: ST 400 CITY: MILWAUKEE STATE: WI ZIP: 53202 485APOS 1 FORM N-1A NORTHERN FUNDS 1 As filed with the Securities and Exchange Commission on October 15, 1999 Registration Nos. 33-73404 811-8236 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 27 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 29 [X] Northern Funds (Exact Name of Registrant as Specified in Charter) 207 E. Buffalo Street Suite 400 Milwaukee, Wisconsin 53202 (Address of Principal Executive Offices) Registrant's Telephone Number: 1-800-595-9111 Jeffrey A. Dalke, Esquire Drinker Biddle & Reath LLP 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 ____________________ 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. Title of Securities Being Registered: Shares of beneficial interest 2 NORTHERN FUNDS MONEY MARKET FUNDS - - Money Market Fund - - U.S. Government Money Market Fund - - U.S. Government Select Money Market Fund - - Tax-Exempt Money Market Fund - - Municipal Money Market Fund - - California Municipal Money Market Fund FIXED INCOME FUNDS - - U.S. Government Fund - - Short-Intermediate U.S. Government Fund - - Intermediate Tax-Exempt Fund - - California Intermediate Tax-Exempt Fund - - Florida Intermediate Tax-Exempt Fund - - Fixed Income Fund - - Tax-Exempt Fund - - Arizona Tax-Exempt Fund - - California Tax-Exempt Fund - - International Fixed Income Fund - - High Yield Municipal Fund - - High Yield Fixed Income Fund EQUITY FUNDS - - Income Equity Fund - - Stock Index Fund - - Growth Equity Fund - - Select Equity Fund - - MarketPower Fund - - Mid Cap Growth Fund - - Small Cap Index Fund - - Small Cap Fund - - Small Cap Growth Fund - - International Growth Equity Fund - - International Select Equity Fund - - Technology Fund PROSPECTUS DATED NOVEMBER 30, 1999 An investment in a Fund is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in a Fund involves investment risks, including possible loss of principal. Although each of the Money Market Funds seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Money Market Funds. The California Municipal Money Market, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Arizona Tax-Exempt and California Tax-Exempt Funds are not available in certain states. Please call 1-800-595-9111 to determine the availability in your state. Page 1 3 The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. Page 2 4 TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------- PAGE RISK/RETURN SUMMARY INTRODUCTION 6 Information about the objectives, principal - Definitions 6 strategies and risk characteristics of each Fund. - A Word About the Money Market Funds 6 MONEY MARKET FUNDS - Money Market Fund 8 - U.S. Government Money Market Fund 9 - U.S. Government Select Money Market Fund 10 - Tax-Exempt Money Market Fund 11 - Municipal Money Market Fund 12 - California Municipal Money Market Fund 13 ------------------------------------------------------- FIXED INCOME FUNDS - U.S. Government Fund 14 - Short-Intermediate U.S. Government Fund 15 - Intermediate Tax-Exempt Fund 16 - California Intermediate Tax-Exempt Fund 17 - Florida Intermediate Tax-Exempt Fund 18 - Fixed Income Fund 20 - Tax-Exempt Fund 21 - Arizona Tax-Exempt Fund 22 - California Tax-Exempt Fund 24 - International Fixed Income Fund 25 - High Yield Municipal Fund 26 - High Yield Fixed Income Fund 28 ------------------------------------------------------- EQUITY FUNDS - Income Equity Fund 29 - Stock Index Fund 30 - Growth Equity Fund 31 - Select Equity Fund 32 - MarketPower Fund 32 - Mid Cap Growth Fund 33 - Small Cap Index Fund 34 - Small Cap Fund 35 - Small Cap Growth Fund 36 - International Growth Equity Fund 37 - International Select Equity Fund 38 - Technology Fund 39 ------------------------------------------------------- PRINCIPAL INVESTMENT RISKS 40 ------------------------------------------------------- FUND PERFORMANCE - Money Market Fund 44 - U.S. Government Money Market Fund 45 - U.S. Government Select Money Market Fund 46 - Municipal Money Market Fund 47 - California Municipal Money Market Fund 48 - U.S. Government Fund 49 - Intermediate Tax-Exempt Fund 50 - Florida Intermediate Tax-Exempt Fund 51 - Fixed Income Fund 52 - Tax-Exempt Fund 53 - California Tax-Exempt Fund 54
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- --------------------------------------------------------------------------------------------------------------- PAGE ------------------------------------------------------- - International Fixed Income Fund 55 - Income Equity Fund 56 - Stock Index Fund 57 - Growth Equity Fund 58 - Select Equity Fund 59 - Small Cap Fund 60 - International Growth Equity Fund 61 - International Select Equity Fund 62 - Technology Fund 63 ------------------------------------------------------- BROAD-BASED SECURITIES INDICES DESCRIPTIONS 64 ------------------------------------------------------- FUND FEES AND EXPENSES 65 - --------------------------------------------------------------------------------------------------------------- MANAGEMENT OF THE FUNDS INVESTMENT ADVISERS 70 Details that apply to the Funds as a group ------------------------------------------------------- ADVISORY FEES 70 ------------------------------------------------------- FUND MANAGEMENT 71 - Fixed Income Funds 71 - Equity Funds 72 - Other Fund Management Information 73 ------------------------------------------------------- OTHER FUND SERVICES 73 - --------------------------------------------------------------------------------------------------------------- ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES 73 How to open, maintain and close an account. - Purchasing Shares 73 - Opening an Account 73 - Selling Shares 75 ------------------------------------------------------- ACCOUNT POLICIES AND OTHER INFORMATION 77 - Calculating Share Price 77 - Timing of Money Market Fund Purchase Requests 77 - Timing of Non-Money Market Fund Purchase Requests 78 - Social Security/Tax Identification Number 78 - In-Kind Purchases and Redemptions 78 - Miscellaneous Purchase Information 78 - Timing of Redemption and Exchange Requests 79 - Payment of Money Market Fund Redemption Proceeds 79 - Payment of Non-Money Market Fund Redemption Proceeds 79 - Miscellaneous Redemption Information 79 - Exchange Privileges 80 - Telephone Transactions 80 - Making Changes to Your Account Information 80 - Signature Guarantees 80 - Business Day 80 - Early Closings 80 - Authorized Intermediaries 81
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- --------------------------------------------------------------------------------------------------------------- PAGE - --------------------------------------------------------------------------------------------------------------- - Service Organizations 81 - Shareholder Reports 82 ------------------------------------------------------- DIVIDENDS AND DISTRIBUTIONS 82 ------------------------------------------------------- TAX CONSIDERATIONS 83 ------------------------------------------------------- TAX TABLE 84 ------------------------------------------------------- YEAR 2000 ISSUES 85 - --------------------------------------------------------------------------------------------------------------- RISKS, SECURITIES, TECHNIQUES AND FINANCIAL RISKS, SECURITIES AND TECHNIQUES INFORMATION - Additional Information on Principal Investment Strategies and Related Risks 86 - Additional Description of Securities and Common Investment Techniques 91 - Disclaimers 100 ------------------------------------------------------- FINANCIAL INFORMATION - Fund Financial Highlights 103 - --------------------------------------------------------------------------------------------------------------- FOR MORE INFORMATION ANNUAL/SEMIANNUAL REPORT 115 ------------------------------------------------------- STATEMENT OF ADDITIONAL INFORMATION 115 - ---------------------------------------------------------------------------------------------------------------
Page 5 7 RISK/RETURN SUMMARY INTRODUCTION NORTHERN FUNDS IS A FAMILY OF NO-LOAD MUTUAL FUNDS THAT OFFERS A SELECTION OF FUNDS TO INVESTORS, EACH WITH A DISTINCT INVESTMENT OBJECTIVE AND RISK/REWARD PROFILE. The descriptions on the following pages may help you choose the fund or funds that best fit your investment needs. Keep in mind, however, that no fund can guarantee it will meet its investment objective, and no fund should be relied upon as a complete investment program. This Prospectus describes the six money market, twelve fixed income and twelve equity funds (the "Funds") that make up the Northern Funds family. In addition to the instruments described on the pages below, each Fund may use various investment techniques in seeking its investment objective. You can learn more about these techniques and their related risks by reading "Risks, Securities and Techniques" beginning on page __ of this Prospectus and the Statement of Additional Information. DEFINITIONS CALIFORNIA FUNDS -- California Municipal Money Market Fund, California Intermediate Tax-Exempt Fund and California Tax-Exempt Fund. EQUITY FUNDS -- Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund, MarketPower Fund, Mid Cap Growth Fund, Small Cap Index Fund, Small Cap Fund, Small Cap Growth Fund, International Growth Equity Fund, International Select Equity Fund and Technology Fund. FIXED INCOME FUNDS -- U.S. Government Fund, Short-Intermediate U.S. Government Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, International Fixed Income Fund, High Yield Municipal Fund and High Yield Fixed Income Fund. INTERNATIONAL FUNDS -- International Fixed Income Fund, International Growth Equity Fund and International Select Equity Fund. MONEY MARKET FUNDS -- Money Market Fund, U.S. Government Money Market Fund, U.S. Government Select Money Market Fund, Tax-Exempt Money Market Fund, Municipal Money Market Fund and California Municipal Money Market Fund. MUNICIPAL FUNDS -- Municipal Money Market Fund, California Municipal Money Market Fund and High Yield Municipal Fund. NON-MONEY MARKET FUNDS -- Fixed Income Funds and Equity Funds. TAX-EXEMPT FUNDS -- Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund. A WORD ABOUT THE MONEY MARKET FUNDS The Money Market Funds seek to maintain a stable net asset value of $1.00 per share. Consistent with this policy, each of the Money Market Funds: Page 6 8 RISK/RETURN SUMMARY - - Limits its dollar-weighted average portfolio maturity to 90 days or less; - - Buys securities with remaining maturities of 397 days or less (except for certain variable and floating rate instruments and securities collateralizing repurchase agreements); and - - Invests only in U.S. dollar-denominated securities that represent minimal credit risks. In addition, each Money Market Fund limits its investments to "Eligible Securities" as defined by the Securities and Exchange Commission ("SEC"). Eligible Securities include, generally, securities that either (a) have short-term debt ratings at the time of purchase in the two highest rating categories or (b) are issued or guaranteed by, or otherwise allow a Money Market Fund to demand payment from, an issuer with those ratings. Securities that are unrated (including securities of issuers that have long-term but not short-term ratings) may be deemed to be Eligible Securities if determined to be of comparable quality by The Northern Trust Company ("Northern Trust") under the direction of the Board of Trustees. After its purchase, a portfolio security may be assigned a lower rating or cease to be rated. If this occurs, a Fund may continue to hold the issue if the Investment Adviser believes it is in the best interest of the Fund and its shareholders. Securities in which the Money Market Funds invest may not earn as high a level of income as long-term or lower quality securities, which generally have greater market risk and more fluctuation in market value. In accordance with current SEC regulations, each Money Market Fund will not invest more than 5% of the value of its total assets at the time of purchase in the securities of any single issuer. However, the California Municipal Money Market Fund may invest up to 25% of its total assets in fewer than 5 issuers, and the other Funds may invest up to 25% of their total assets in the securities of a single issuer for up to three Business Days. These limitations do not apply to cash, certain repurchase agreements, U.S. government securities or securities of other investment companies. In addition, securities subject to certain unconditional guarantees and securities that are not "First Tier Securities" as defined by the SEC are subject to different diversification requirements as described in the Statement of Additional Information. Page 7 9 RISK/RETURN SUMMARY MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high-quality money market instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks its objective by investing in a broad range of government, bank and commercial obligations that are available in the money markets, including: - - U.S. dollar-denominated obligations of U.S. banks with total assets in excess of $1 billion (including obligations of foreign branches of such banks); - - U.S. dollar-denominated obligations of foreign commercial banks where such banks have total assets in excess of $5 billion; - - High-quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers; - - Corporate bonds, notes, paper and other instruments that are of high-quality; - - Asset-backed securities; - - Securities issued or guaranteed as to principal and interest by the U.S. government or by its agencies or instrumentalities and custodial receipts with respect thereto; - - U.S. dollar-denominated securities issued or guaranteed by one or more foreign governments or political subdivisions, agencies or instrumentalities; - - Repurchase agreements relating to the above instruments; and - - Municipal securities issued or guaranteed by state or local governmental bodies. RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, credit, prepayment, debt extension, counterparty failure and guarantor risks. See page __ for these risks and primary investment risks common to all Funds. Page 8 10 RISK/RETURN SUMMARY U.S. GOVERNMENT MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high-quality money market instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks its objective by investing in: - Securities issued or guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities; - Repurchase agreements relating to such securities; and - Custodial receipts representing interests in U.S. government securities. RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, prepayment, debt extension, U.S. government securities, counterparty failure and guarantor risks. See page __ for these risks and primary investment risks common to all Funds. Page 9 11 RISK/RETURN SUMMARY U.S. GOVERNMENT SELECT MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high-quality money market instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks its objective by investing exclusively in securities issued or guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities. Under normal market conditions, the Fund will seek to acquire only those U.S. government securities the interest upon which is generally exempt from state income taxation. These securities include obligations issued by the U.S. Treasury and certain U.S. government agencies and instrumentalities, such as the Federal Home Loan Bank and the Federal Farm Credit Bank Funding Corp. When appropriate securities that are exempt from state taxes are unavailable, the Fund may also invest in non-exempt U.S. government securities and cash equivalents including money market funds and time deposits with a maturity of three months or less, and may hold uninvested cash. RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, prepayment, debt extension, U.S. government securities, counterparty failure and guarantor risks. See page __ for these risks and primary investment risks common to all Funds. Page 10 12 RISK/RETURN SUMMARY TAX-EXEMPT MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to provide a high level of income exempt from regular Federal income tax, to the extent consistent with the preservation of capital, by investing primarily in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing primarily in high-quality short-term municipal instruments. The high level of income sought by the Fund is relative to yields currently available in the tax-exempt marketplace. Municipal instruments are debt instruments, the interest on which is, in the opinion of bond counsel or counsel for the issuers, exempt from regular Federal income tax ("municipal instruments"). These may include: - Fixed, variable and floating rate notes and bonds; - Asset-backed securities; - Tax-exempt commercial paper; - Municipal bonds, notes, paper or other instruments; and - Municipal bonds and notes which are guaranteed as to principal and interest or backed by the U.S. government or its agencies or instrumentalities. Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax, will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, credit, prepayment, debt extension, guarantor, concentration and tax risks. See page __ for these risks and primary investment risks common to all Funds. Page 11 13 RISK/RETURN SUMMARY MUNICIPAL MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to provide, to the extent consistent with the preservation of capital and prescribed portfolio standards, a high level of income exempt from regular Federal income tax by investing primarily in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing primarily in high-quality short-term municipal instruments. These may include: - Fixed, variable and floating rate notes and bonds; - Asset-backed securities; - Tax-exempt commercial paper; - Municipal bonds, notes, paper or other instruments; and - Municipal bonds and notes which are guaranteed as to principal and interest or backed by the U.S. government or its agencies or instrumentalities. Under normal circumstances, at least 80% of the Fund's annual gross income will be derived from municipal instruments. Under normal market conditions, investments in taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in taxable instruments. The Fund is not limited in the amount of its assets that may be invested in AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, concentration and tax risks. See page __ for these risks and primary investment risks common to all Funds. Page 12 14 RISK/RETURN SUMMARY CALIFORNIA MUNICIPAL MONEY MARKET FUND INVESTMENT OBJECTIVE The Fund seeks to provide, to the extent consistent with the preservation of capital and prescribed portfolio standards, a high level of income exempt from regular Federal income tax and California state personal income tax. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. The Fund seeks to achieve its objective by investing primarily in high-quality short-term instruments, the interest on which is exempt from regular Federal income tax and California state personal income tax. These may include: - Fixed, variable and floating rate notes and bonds; - Asset-backed securities; - Tax-exempt commercial paper; - Municipal bonds, notes, paper or other instruments; and - Municipal bonds and notes which are guaranteed as to principal and interest or backed by the U.S. government or its agencies or instrumentalities. Under normal circumstances, at least 80% of the Fund's annual gross income will be derived from municipal instruments and at least 65% of the Fund's total assets will be invested in instruments the interest on which is exempt from California state personal income tax ("California municipal instruments"). Under normal market conditions, investments in taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in taxable instruments. The Fund is not limited in the amount of its assets that may be invested in AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. The Fund is "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"). RISKS. These primary investment risks apply to the Fund: stable NAV, interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, concentration and tax and non-diversification risks. See page __ for these risks and primary investment risks common to all Funds. Page 13 15 RISK/RETURN SUMMARY U.S. GOVERNMENT FUND INVESTMENT OBJECTIVE The Fund seeks a high level of current income. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking a high level of current income, the Fund will invest, under normal market conditions, at least 65% of its total assets in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements relating to such securities. These may include: - U.S. Treasury bills, notes and bonds; - Obligations of U.S. government agencies and instrumentalities; - Mortgage-related securities issued or guaranteed by U.S. government agencies and instrumentalities; - Stripped securities evidencing ownership of future interest or principal payments on obligations of the U.S. government, its agencies or instrumentalities; and - Repurchase agreements relating to the above instruments. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between one and ten years. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, prepayment, debt extension, U.S. government securities, counterparty failure, guarantor, derivatives and portfolio turnover risks and portfolio turnover. See page __ for these risks and primary investment risks common to all Funds. Page 14 16 RISK/RETURN SUMMARY SHORT-INTERMEDIATE U.S. GOVERNMENT FUND INVESTMENT OBJECTIVE The Fund seeks to provide a high level of current income. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income, the Fund will invest, under normal market conditions, at least 65% of its total assets in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and repurchase agreements relating to such securities. These may include: - U.S. Treasury bills, notes and bonds; - Obligations of U.S. government agencies and instrumentalities; - Mortgage-related securities issued or guaranteed by U.S. government agencies and instrumentalities; - Stripped securities evidencing ownership of future interest or principal payments on obligations of the U.S. government, its agencies or instrumentalities; and - Repurchase agreements relating to the above instruments. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between two and five years. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, prepayment, debt extension, U.S. government securities, counterparty failure, guarantor and derivatives risks. See page __ for these risks and primary investment risks common to all Funds. Page 15 17 RISK/RETURN SUMMARY INTERMEDIATE TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide a high level of current income exempt from regular Federal income tax by investing in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax, the Fund may invest in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purpose of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between three and ten years. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration and tax risks. See page __ for these risks and primary investment risks common to all Funds. Page 16 18 RISK/RETURN SUMMARY CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide high current income exempt from regular Federal income tax and California state personal income tax by investing in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax and California state personal income tax, the Fund may invest in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. In addition, under normal market conditions at least 65% of the Fund's total assets will be invested in California municipal instruments. Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between three and ten years. The Fund is "non-diversified" under the 1940 Act. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration, tax and non-diversification risks. See page __ for these risks and primary investment risks common to all Funds. Page 17 19 RISK/RETURN SUMMARY FLORIDA INTERMEDIATE TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide high current income exempt from regular Federal income tax by investing in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax, the Fund may invest in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. In addition, under normal market conditions, at least 65% of the Fund's total assets will be invested in municipal instruments issued by the state of Florida and its municipalities, counties and other taxing districts, as well as other securities exempt from the Florida intangibles tax ("Florida municipal instruments"). Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between three and ten years. The Fund is "non-diversified" under the 1940 Act. Page 18 20 RISK/RETURN SUMMARY RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration, tax and non-diversification risks. See page __ for these risks and primary investment risks common to all Funds. Page 19 21 RISK/RETURN SUMMARY FIXED INCOME FUND INVESTMENT OBJECTIVE The Fund seeks a high level of current income. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income, the Fund will invest, under normal market conditions, in a broad range of bonds and other fixed income securities. These may include: - Obligations of the U.S. government, its agencies or instrumentalities; - Obligations of state, local and foreign governments; - Obligations of domestic and foreign banks and corporations; - Zero coupon bonds, debentures, convertible debentures and preferred stock; - Mortgage and other asset-backed securities; - Stripped securities evidencing ownership of future interest or principal payments on debt obligations; and - Repurchase agreements relating to the above instruments. Although the Fund invests primarily in investment grade domestic debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest to a limited extent in obligations of foreign issuers and in securities that are below investment grade ("junk bonds"). In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between seven and twelve years. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor and derivatives risks. See page __ for these risks and primary investment risks common to all Funds. Page 20 22 RISK/RETURN SUMMARY TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide a high level of current income exempt from regular Federal income tax by investing in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax, the Fund may invest in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. Under normal market conditions, investment in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between ten and thirty years. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration, tax and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 21 23 RISK/RETURN SUMMARY ARIZONA TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide high current income exempt from regular Federal income tax and Arizona state personal income tax by investing in municipal instruments. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax and Arizona state personal income tax, the Fund may invest, under normal market conditions, at least 80% of its total assets in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. In addition, under normal market conditions, at least 65% of the Fund's total assets will be invested in instruments the interest on which is exempt from Arizona state personal income tax ("Arizona municipal instruments"). Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between ten and thirty years. The Fund is "non-diversified" under the 1940 Act. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration, tax and non-diversification risks. See page __ for these risks and primary investment risks common to all Funds. Page 22 24 RISK/RETURN SUMMARY CALIFORNIA TAX-EXEMPT FUND INVESTMENT OBJECTIVE The Fund seeks to provide high current income exempt from regular Federal income tax and California state personal income tax. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax and California state personal income tax, the Fund may invest in a broad range of municipal instruments. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies, and other financial institutions. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from tax-exempt municipal instruments. Interest earned by the Fund on AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax will not be deemed to have been derived from municipal instruments for the purposes of determining whether the Fund meets this policy. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. In addition, under normal market conditions, at least 65% of the Fund's total assets will be invested in California municipal instruments. Under normal market conditions, investments in AMT obligations and taxable instruments will not exceed 20% of the value of the total assets of the Fund. During temporary defensive periods, however, all or any portion of the Fund's assets may be held uninvested or invested in AMT obligations and taxable instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the Fixed Income Fund. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between ten and thirty years. The Fund is "non-diversified" under the 1940 Act. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, concentration, tax and non-diversification risks. See page __ for these risks and primary investment risks common to all Funds. Page 23 25 RISK/RETURN SUMMARY INTERNATIONAL FIXED INCOME FUND INVESTMENT OBJECTIVE The Fund seeks to maximize total return consistent with reasonable risk. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking to maximize total return, the Fund will invest, under normal market conditions, at least 65% of its total assets in bonds and other fixed income securities of foreign issuers. These may include: - Obligations of foreign governments, their agencies or instrumentalities; - Obligations of supranational organizations (such as the World Bank); - Obligations of foreign corporations and banks; - Zero coupon bonds, debentures, convertible debentures and preferred stock of foreign issuers; and - Mortgage and other asset-backed securities of foreign issuers. The Fund will invest in the securities of issuers located in at least three different foreign countries. Although the Fund primarily invests in mature markets (such as Germany and Japan), it may also invest in emerging markets (such as Argentina and China) depending upon the Fund management team's outlook for the relative economic growth, expected inflation and other economic and political prospects of each country or region. It is expected that during the current fiscal year a substantial portion of the Fund's assets will be invested in foreign governmental obligations because such obligations represent a substantial portion of the non-U.S. fixed income market. The Fund may also invest a portion of its assets in domestic obligations, including obligations of the U.S. government, its agencies and instrumentalities and repurchase agreements collateralized by such obligations. It may also invest in the obligations of domestic banks and corporations, zero coupon bonds, debentures and convertible debentures, and mortgage and other asset-backed securities. Although the Fund invests primarily in investment grade debt obligations (i.e., obligations rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), it may invest a portion of its assets in obligations that are below investment grade ("junk bonds"). In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund's dollar-weighted average maturity will, under normal market conditions, range between three and eleven years. The Fund is "non-diversified" under the 1940 Act. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, credit, prepayment, debt extension, counterparty failure, guarantor, derivatives, non-diversification, currency, country, foreign regulatory and concentration risks. See page __ for these risks and primary investment risks common to all Funds. Page 24 26 RISK/RETURN SUMMARY HIGH YIELD MUNICIPAL FUND INVESTMENT OBJECTIVE The Fund seeks a high level of current income exempt from regular Federal income tax. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking high current income exempt from regular Federal income tax, the Fund will invest, under normal market conditions, at least 65% of its total assets in municipal securities that are of low, medium or upper medium quality. These may include: - General obligation bonds secured by the issuer's full faith, credit and taxing power; - Revenue obligation bonds payable from the revenues derived from a particular facility or class of facilities; - Industrial development bonds; - Moral obligation bonds; - Tax-exempt derivative instruments; - Stand-by commitments; and - Municipal instruments backed by letters of credit, insurance or other forms of credit enhancement issued by domestic or foreign banks, insurance companies and other financial companies. Upper medium quality securities are rated A by a Nationally Recognized Statistical Rating Organization, and medium quality securities are rated BBB or Baa by a Nationally Recognized Statistical Rating Organization. Lower quality securities, also commonly referred to as "junk bonds," are rated BB, Ba or lower by a Nationally Recognized Statistical Rating Organization. Unrated securities will be of comparable quality. Lower quality securities tend to offer higher yields than higher rated securities with similar maturities. However, lower rated securities are considered speculative and generally involve greater price volatility and greater risk of loss than higher rated securities. Medium quality securities, although considered investment grade, are also considered to have speculative characteristics. There is no minimum rating for a municipal instrument purchased or held by the Fund, and the Fund may purchase securities that are in default. Although the Fund primarily invests in low, medium or upper medium quality securities, it may invest a portion (or, during temporary defensive periods, all) of its assets in securities of higher quality. Under normal market conditions, at least 80% of the Fund's annual gross income will be derived from municipal securities. Under normal market conditions, investments in taxable instruments will not exceed 20% of the value of the total assets of the Fund; during temporary defensive periods, however, all or any portion of a Fund's assets may be held uninvested or invested in such instruments. Taxable investments will consist exclusively of those instruments that may be purchased by the High Yield Fixed Income Fund. The Fund is not limited in the amount of its assets that may be invested in AMT obligations ("private activity bonds") the interest on which may be treated as an item of tax preference to shareholders under the Federal alternative minimum tax. For shareholders subject to AMT, some portion of the Fund's dividends may be subject to Federal tax to the extent the Fund invests in AMT obligations. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. Page 25 27 RISK/RETURN SUMMARY The Fund does not have any portfolio maturity limitation, and may invest its assets from time to time primarily in instruments with short, medium or long maturities. The instruments held by the Fund are considered speculative, and an investment in the Fund presents substantial risks in relation to a fund that invests only in grade instruments. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, prepayment, debt extension, counterparty failure, guarantor, derivatives, non-investment grade and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 26 28 RISK/RETURN SUMMARY HIGH YIELD FIXED INCOME FUND INVESTMENT OBJECTIVE The Fund seeks a high level of current income. In doing so, the Fund may also consider the potential for capital appreciation. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund will invest, under normal market conditions, at least 65% of its total assets in rated and unrated lower quality securities. These may include: - Obligations of U.S. and foreign corporations and banks; - Obligations of foreign, state and local governments; - Obligations of the U.S. government, its agencies or instrumentalities; - Senior and subordinated bonds and debentures; - Mortgage and other asset-related securities; - Zero coupon, pay-in-kind and capital appreciation bonds; - Convertible securities, preferred stock, structured securities and loan participations; - Equity securities when the Fund holds debt or preferred stock of the issuer; and - Repurchase agreements relating to the above instruments. Lower quality securities, also commonly referred to as "junk bonds," are rated BB, Ba or lower by a Nationally Recognized Statistical Rating Organization. Unrated securities will be determined to be of comparable quality by Northern Trust. Lower rated securities tend to offer higher yields than higher rated securities with similar maturities. However, lower rated securities are considered speculative and generally involve greater price volatility and greater risk of loss than higher rated securities. There is no minimum rating for a security purchased or held by the Fund, and the Fund may purchase securities that are in default. Although the Fund invests primarily in lower quality fixed income securities, it may invest a portion (or, during temporary defensive periods, all) of its assets in securities of higher quality. Although the Fund invests primarily in the debt obligations of domestic issuers, it may invest to a limited extent in the obligations of foreign issuers. In selecting securities for the Fund, the investment management team uses a relative value approach, emphasizing sectors and securities believed to provide more than adequate compensation for the risks assumed. In determining whether a particular sector or security provides relative value, the investment management team analyzes various economic and market information, including economic growth, interest and inflation rates, deficit levels, the shape of the yield curve, sector and quality spreads and risk premiums. It also uses proprietary valuation models to analyze and compare expected returns and assumed risks. The Fund does not have any portfolio maturity limitation, and may invest its assets from time to time primarily in instruments with short, medium or long maturities. The instruments held by the Fund are considered speculative, and an investment in the Fund presents substantial risks in relation to a fund that invests only in investment grade instruments. RISKS. These primary investment risks apply to the Fund: interest rate/maturity, prepayment, debt extension, counterparty failure, guarantor, derivatives, non-investment grade and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 27 29 RISK/RETURN SUMMARY INCOME EQUITY FUND INVESTMENT OBJECTIVE The Fund seeks to provide a high level of current income with long-term capital appreciation as a secondary objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund will, under normal market conditions, invest at least 65% of its total assets in a mix of income-producing equity securities, including common and preferred stocks and convertible securities. Using fundamental research and quantitative analysis, the investment management team selects securities based on factors such as: - Current income; - Prospects for growth; and - Capital appreciation potential. The Fund may also invest up to 35% of its total assets in a broad range of fixed income securities that are permissible investments for the Fixed Income Fund. Although the convertible securities and fixed income securities in which the Fund may invest will generally be investment grade domestic securities (i.e., rated within the top four rating categories by a Nationally Recognized Statistical Rating Organization or of comparable quality as determined by Northern Trust), the Fund may invest up to 35% of its total assets in convertible and fixed income securities that are below investment grade ("junk bonds") and may invest to a limited extent in the securities of foreign issuers. RISKS. This primary investment risk applies to the Fund: stock. See page __ for this risk and primary investment risks common to all Funds. Page 28 30 RISK/RETURN SUMMARY STOCK INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to provide investment results approximating the aggregate price and dividend performance of the securities included in the Standard & Poor's ("S&P") 500 Composite Stock Price Index ("S&P 500(R) Index"). The S&P 500(R) Index is an unmanaged index which includes 500 companies operating across a broad spectrum of the U.S. economy, and its performance is widely considered representative of the U.S. stock market as a whole. The companies chosen for inclusion in the Index tend to be leaders in important industries within the U.S. economy. However, companies are not selected by S&P for inclusion because they are expected to have superior stock price performance relative to the market in general or other stocks in particular. S&P does not endorse any stock in the Index. It is not a sponsor of the Stock Index Fund and is not affiliated with the Fund in any way. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. Under normal market conditions, the Fund will invest at least 65% of its total assets in the equity securities of the companies that make up the S&P 500(R) Index, in approximately the same proportions as they are represented in the Index. The Fund is passively managed, which means it tries to duplicate the investment composition and performance of the S&P 500(R) Index using sophisticated computer programs and statistical procedures. As a result, the investment management team does not use traditional methods of fund investment management for this Fund, such as selecting securities on the basis of economic, financial and market analysis. Because the Fund will have fees and transaction expenses (while the Index has none), returns are likely to be below those of the Index. Under normal market conditions, it is expected that the quarterly performance of the Fund will be within a .95 correlation with the S&P 500(R) Index, before expenses. RISKS. This primary investment risk applies to the Fund: stock. See page __ for this risk and primary investment risks common to all Funds. Page 29 31 RISK/RETURN SUMMARY GROWTH EQUITY FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation. Any income received is incidental to this objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will invest, under normal market conditions, at least 65% of its total assets in the equity securities of a broad mix of companies. Such companies generally will have market capitalizations in excess of $750 million. Although the Fund primarily invests in the common, preferred and convertible stocks of U.S. companies, it may invest to a limited extent in the stocks of foreign issuers. Using fundamental research and quantitative analysis, the investment management team selects stocks believed to have favorable growth characteristics. In determining whether a company has favorable growth characteristics, the investment management team analyzes factors such as: - Sales and earnings growth; - Return on equity; - Financial condition (such as debt to equity ratio); and - Market share and product leadership. RISKS. This primary investment risk applies to the Fund: stock. See page __ for this risk and primary investment risks common to all Funds. Page 30 32 RISK/RETURN SUMMARY SELECT EQUITY FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation. Any income received is incidental to this objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will invest, under normal market conditions, at least 65% of its total assets in the equity securities of a select mix of companies. Such companies generally will have market capitalizations in excess of $750 million. Although the Fund primarily invests in the common, preferred and convertible stocks of U.S. companies, it may invest to a limited extent in the securities of foreign issuers. Using fundamental research and quantitative analysis, the investment management team selects stocks believed to have favorable growth characteristics. In determining whether a company has favorable growth characteristics, the investment management team analyzes factors such as: - Sales and earnings growth; - Return on equity; and - Financial condition (such as debt to equity ratio). The Fund may from time to time, emphasize particular companies or market segments in attempting to achieve its investment objective. Many of the companies in which the Fund invests retain their earnings to finance current and future growth. These companies generally pay little or no dividends. RISKS. This primary investment risk applies to the Fund: stock. See page __ for this risk and primary investment risks common to all Funds. Page 31 33 RISK/RETURN SUMMARY MARKETPOWER 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, under normal market conditions, invest primarily in the equity securities of a concentrated group of companies believed to have significant "market power," that is, companies possessing dominant market share and other characteristics, including patents, strong brand names and economies of scale, which allow these companies to protect that share. The Fund will normally concentrate its investments in the equity securities of 20 to 40 such companies with market capitalization in excess of $300 million. Using fundamental research and quantitative analysis, the investment management team first screens a broad universe of companies in order to identify a group of firms with "market power" characteristics. From this group, the management team then employs further analysis to select a narrower group of companies expected to achieve superior returns but whose stock is deemed to be undervalued relative to the market. Once a company's stock is selected for inclusion, the investment management team monitors its continued appropriateness for the Fund. The management team might decide to sell, for example, in the event of a strategic shift by a company from its core earnings strength, the erosion of a firm's market power, the identification of a more attractive investment opportunity, or the determination that a firm's full valuation has been achieved. Although the Fund invests primarily in the securities of U.S. companies, it may invest to a limited extent in the stocks of foreign issuers. The Fund is "non-diversified" under the 1940 Act. RISKS. These primary investment risks apply to the Fund: stock and non-diversification. See page __ for these risks and primary investment risks common to all Funds. Page 32 34 RISK/RETURN SUMMARY MID CAP 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 the equity securities of companies with market capitalizations, at the time of purchase, that are within the range of the Standard & Poor's MidCap 400 Stock Index. Using fundamental research and quantitative analysis, the investment management team selects stocks of mid-sized companies that it believes have demonstrated above average sales, earnings growth and return on equity relative to their peers. In doing so, the investment management team considers factors such as a company's: - Financial condition (such as debt to equity ratio); - Market share and product leadership; - Earnings growth relative to relevant competitors; - Market valuation in comparison to securities of other mid cap companies and the stock's own historical norms; and - Price trends. As of __________, 1999, the approximate market capitalization range of the companies included in the S&P MidCap 400 Index was between $____ million and $____ billion. However, the Fund is not limited to the stocks included in the S&P MidCap 400 Index and may invest in other stocks that meet the Investment Adviser's criteria discussed above. 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. S&P does not endorse any stock in the Index. It is not a sponsor of the Mid Cap Growth Fund and is not affiliated with the Fund in any way. RISKS. These primary investment risks apply to the Fund: stock, mid cap stock and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 33 35 RISK/RETURN SUMMARY SMALL CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to provide investment results approximating the aggregate price and dividend performance of the securities included in the Russell 2000 Index. The Russell 2000 Index is a market value-weighted index which includes stocks of the smallest 2,000 companies in the Russell 3000 Index. The Russell 3000 Index consists of stocks of the 3,000 largest U.S. companies based on market capitalization. The Russell 2000 Index is widely considered representative of smaller company stock performance as a whole. The companies in the Russell 2000 Index are selected according to their total market capitalization. However, companies are not selected by Frank Russell & Company ("Russell") for inclusion in the Index because they are expected to have superior stock price performance relative to the stock market in general or other stocks in particular. Russell does not endorse any stock in the Index. It is not a sponsor of the Small Cap Index Fund and is not affiliated with the Fund in any way. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. Under normal market conditions, the Fund will invest at least 65% of its total assets in the securities included in the Russell 2000 Index. These will be selected on the basis of such factors as market capitalization and liquidity. Although the Fund attempts to mirror the aggregate investment characteristics of the Russell 2000 Index as a whole, the number of issues held by the Fund will be determined by the Fund's liquidity and size. The Fund is passively managed, which means it tries to duplicate the investment composition and performance of the Russell 2000 Index by using sophisticated computer programs and statistical procedures. As a result, the investment management team does not use traditional methods of fund investment management for the Fund, such as selecting securities on the basis of economic, financial and market analysis. Because the Fund will have fees and transaction expenses (while the Index has none), returns are likely to be below those of the Index. Under normal market conditions, it is expected that the quarterly performance of the Fund will be within a .95 correlation with the Russell 2000 Index, before expenses. RISKS. These primary investment risks apply to the Fund: stock and small cap stock risks. See page __ for these risks and primary investment risks common to all Funds. Page 34 36 RISK/RETURN SUMMARY SMALL CAP FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation. Any income received is incidental to this objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will invest, under normal market conditions, at least 65% of its total assets in the equity securities of small companies. At the time of purchase, these companies will have market capitalizations that are at or below the median capitalization of stocks listed on the New York Stock Exchange. Using fundamental research and quantitative analysis, the investment management team selects small capitalization stocks of companies which it believes are worth more than is indicated by current market prices. In determining whether a stock is attractively priced, the investment management team analyzes factors such as: - The relationship between price, book value, earnings and sales; - Trading volume; and - Bid-ask spreads. 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. RISKS. These primary investment risks apply to the Fund: stock and small cap stock risks. See page __ for these risks and primary investment risks common to all Funds. Page 35 37 RISK/RETURN SUMMARY SMALL CAP 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 the equity securities of companies with market capitalizations that are, at the time of purchase, within the range of the Russell 2000 Index. Using fundamental research and quantitative analysis, the investment management team selects stocks of small companies that it believes have demonstrated above average sales, earnings growth and return on equity relative to their peers. In doing so, the investment management team considers factors such as a company's: - Financial condition (such as debt to equity ratio); - Market share and product leadership; - Earnings growth relative to relevant competitors; - Market valuation in comparison to securities of other small cap companies and the stock's own historical norms; and - Price trends. As of __________, 1999, the approximate market capitalization range of the companies included in the Russell 2000 Index was between $____ million and $____ billion. However, the Fund is not limited to the stocks included in the Russell 2000 Index and may invest in other stocks that meet the Investment Adviser's criteria discussed above. 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. Russell does not endorse any stock in the Index. It is not a sponsor of the Small Cap Growth Fund and is not affiliated with the Fund in any way. RISKS. These primary investment risks apply to the Fund: stock, small cap stock and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 36 38 RISK/RETURN SUMMARY INTERNATIONAL GROWTH EQUITY FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation. Any income received is incidental to this objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will invest, under normal market conditions, at least 65% of its total assets in the equity securities of a broad mix of foreign companies. Such companies generally will have market capitalizations in excess of $750 million. Using fundamental research and quantitative analysis, the investment management team selects stocks of foreign companies believed to have favorable growth characteristics, low debt ratios and above-average returns and equity. In doing so, the investment management team analyzes factors such as: - Sales and earnings growth; - Return on equity; - Financial condition (such as debt to equity ratio); and - Market share and product leadership. The Fund will invest in equity securities of issuers located in at least three different foreign countries. The Fund may invest in mature markets (such as Germany and Japan) and it may also invest in emerging markets (such as Argentina and China). In determining whether to invest in a particular country or region, the investment management team looks at a number of factors, including a country's (or region's): - Prospects for growth; - Expected level of inflation; - Government policies influencing business conditions; - Outlook for currency relationships; and - Range of investment opportunities available to international investors. RISKS. These primary investment risks apply to the Fund: stock, currency, country, foreign regulatory, concentration and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 37 39 RISK/RETURN SUMMARY INTERNATIONAL SELECT EQUITY FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation. Any income received is incidental to this objective. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking long-term capital appreciation, the Fund will invest, under normal market conditions, at least 65% of its total assets in the equity securities of a select mix of foreign companies. Such companies generally will have market capitalizations in excess of $750 million. Using fundamental research and quantitative analysis, the investment management team selects stocks of foreign companies believed to have favorable growth characteristics. In doing so, the investment management team analyzes factors such as: - Sales and earnings growth; - Return on equity; - Financial condition (such as debt to equity ratio); and Market share and product leadership. The Fund will invest in equity securities of issuers located in at least three different foreign countries. The Fund may invest in mature markets (such as Germany and Japan) and it may also invest in emerging markets (such as Argentina and China). In determining whether to invest in a particular country or region, the investment management team looks at a number of factors, including a country's (or region's): - Prospects for economic growth; - Expected level of inflation; - Government policies influencing business conditions; - Outlook for currency relationships; and - Range of investment opportunities available to international investors. The Fund may, from time to time, emphasize particular companies or market segments in attempting to achieve its investment objective. Many of the companies in which the Fund invests retain their earnings to finance current and future growth. These companies pay little or no dividends. RISKS. These primary investment risks apply to the Fund: stock, currency, country, foreign regulatory, concentration and portfolio turnover risks. See page __ for these risks and primary investment risks common to all Funds. Page 38 40 RISK/RETURN SUMMARY TECHNOLOGY FUND INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation by investing principally in equity securities and securities of companies that develop, produce or distribute products and services related to technology. PRINCIPAL INVESTMENT STRATEGIES AND RISKS INVESTMENT STRATEGIES. In seeking to achieve its investment objective, the Fund will invest, under normal market conditions, at least 65% of its total assets in securities of companies principally engaged in technology business activities. In considering whether an issuer is principally engaged in technology business activities, Northern Trust may consider, among other things, whether it is listed on the Morgan Stanley High-Technology 35 Index (the "Morgan Stanley Index"), the Hambrecht and Quist Technology Index (the "H&Q Index"), the SoundView Technology Index (the "SoundView Index"), the technology grouping of the S&P 500(R) Index or any other comparable technology index. Using fundamental research and quantitative analysis, the investment management team selects stocks of technology companies believed to have the potential to outperform the technology sector over the next one- to two-year period. In doing so, the investment management team selects investments based on factors such as: - Financial condition (such as debt to equity ratio); - Market share; - Product leadership or market niches; - Earnings growth rates compared with relevant competitors; - Market valuation compared to securities of other technology-related companies and the stock's own historical norms; and - Price trends. Companies in which the Fund may invest include businesses related to the following products and services: industrial and business machines; communications; computers, software and peripheral products; electronics; electronic media; environmental services; internet; office equipment and supplies; television and video equipment and services; and satellite technology and equipment. It is expected that more than 25% of the Fund's total assets will normally be invested in technology companies which develop or sell computers, software and peripheral products. The Fund may invest in both small and large technology companies, without regard to their size. Although the Fund primarily invests in the stocks of U.S. companies, it may invest to a limited extent in the securities of foreign issuers. RISKS. These primary investment risks apply to the Fund: stock, small cap stock and technology stock risks. See page __ for these risks and primary investment risks common to all Funds. Page 39 41 RISK/RETURN SUMMARY PRINCIPAL INVESTMENT RISKS All investments carry some degree of risk which will affect the value of a Fund's investments, its investment performance and the price of its shares. As a result, loss of money is a risk of investing in each Fund. AN INVESTMENT IN EACH OF THE FUNDS IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET FUNDS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUNDS. The following summarizes the principal risks that apply to the Funds and may result in a loss of your investment. RISKS THAT APPLY TO ALL FUNDS - - MARKET RISK is the risk that the value of the securities in which a Fund invests may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be temporary or last for extended periods. - - MANAGEMENT RISK is the risk that a strategy used by the investment management team may fail to produce the intended results. - - LIQUIDITY RISK is the risk that a Fund will not be able to pay redemption proceeds within the time periods described in this Prospectus because of unusual market conditions, an unusually high volume of redemption requests or other reasons. - - YEAR 2000 RISK is the risk that a Fund's operations or value will be adversely affected by the "Year 2000 Problem." This risk may be of greater significance with respect to a Fund's investments in the securities of foreign issuers. (For more information, please see "Year 2000 Issues" on page __.) RISK THAT APPLIES TO THE MONEY MARKET FUNDS - - STABLE NAV RISK is the risk that the Money Market Funds will not be able to maintain a net asset value per share of $1.00 at all times. RISKS THAT APPLY PRIMARILY TO THE MONEY MARKET AND FIXED INCOME FUNDS - - INTEREST RATE/MATURITY RISK is the risk that during periods of rising interest rates, a Fund's yield (and the market value of its securities) will tend to be lower than prevailing market rates; in periods of falling interest rates, a Fund's yield (and the market value of its securities) will tend to be higher. The magnitude of these changes will often be greater for longer-term fixed income securities (which are more likely to be held by the Fixed Income Funds) than shorter-term securities. - - CREDIT (OR DEFAULT) RISK is the risk that an issuer of fixed income securities held by a Fund may default on its obligation to pay interest and repay principal. Generally, the lower the credit rating of a security, the greater the risk that the issuer of the security will default on its obligation. High quality and investment grade securities are generally believed to have relatively low degrees of credit risk. - - PREPAYMENT (OR CALL) RISK is the risk that an issuer will exercise its right to pay principal on an obligation held by a Fund (such as an asset-backed security) earlier than expected. This may happen during a period of declining interest rates. Under these circumstances, a Fund may be unable to recoup all of its initial investment and will suffer from having to reinvest in lower yielding securities. The loss of higher yielding securities and the reinvestment at lower interest rates can reduce the Fund's income, total return and share price. - - DEBT EXTENSION RISK is the risk that an issuer will exercise its right to pay principal on an obligation held by a Fund (such as an asset-backed security) later than expected. This may happen during a period of rising interest Page 40 42 RISK/RETURN SUMMARY rates. Under these circumstances, the value of the obligation will decrease and the Fund will suffer from the inability to invest in higher yielding securities. - - U.S. GOVERNMENT SECURITIES RISK is the risk that the U.S. government will not provide financial support to U.S. government agencies, instrumentalities or sponsored enterprises if it is not obligated to do so by law. - - COUNTERPARTY FAILURE RISK is the risk that an issuer of a security, or a bank or other financial institution that has entered into a repurchase agreement, may default on its payment obligations. - - GUARANTOR (OR CREDIT ENHANCEMENT) RISK is the risk that changes in credit quality of a U.S. or foreign bank, insurance company or other financial institution could cause a Fund's investments in securities backed by guarantees, letters of credit, insurance or other credit enhancements issued by such bank or institution to decline in value. RISK THAT APPLIES PRIMARILY TO THE FIXED INCOME FUNDS - - DERIVATIVES RISK is the risk that loss may result from a Fund's investments in options, futures, swaps, structured securities and other derivative instruments, which may be leveraged. RISKS THAT APPLY PRIMARILY TO THE TAX-EXEMPT AND MUNICIPAL FUNDS - - CONCENTRATION RISK is the risk that a Fund may be more sensitive to an adverse economic, business or political development if it invests more than 25% of its assets in the municipal instruments of issuers in the same state, in municipal instruments the interest upon which is paid solely from revenues of similar projects, or in industrial development bonds. - - TAX RISK is the risk that future legislative or administrative changes or court decisions may materially affect the ability of a Fund to pay tax-exempt dividends. RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL FIXED INCOME FUND, THE CALIFORNIA FUNDS, THE FLORIDA INTERMEDIATE TAX-EXEMPT FUND, THE ARIZONA TAX-EXEMPT FUND AND THE MARKETPOWER FUND - - NON-DIVERSIFICATION RISK is the risk that a non-diversified Fund may be more susceptible to adverse developments affecting any single issuer, and more susceptible to greater losses because of these developments. RISK THAT APPLIES PRIMARILY TO THE HIGH YIELD MUNICIPAL AND HIGH YIELD FIXED INCOME FUNDS - - NON-INVESTMENT GRADE (OR "JUNK BOND") RISK may impact the value of non-investment grade securities held by a Fund. Generally, these securities, commonly known as "junk bonds," are subject to greater credit risk, price volatility and risk of loss than investment grade securities. In addition, there may be less of a market for them, which could make it harder to sell them at an acceptable price. These and related risks mean that a Fund may not achieve the expected income from non-investment grade securities and that its share price may be adversely affected by declines in the value of these securities. RISK THAT APPLIES PRIMARILY TO THE EQUITY FUNDS - - STOCK RISK is the risk that stock prices have historically risen and fallen in periodic cycles. As of the date of this Prospectus, U.S. stock markets and certain foreign stock markets were trading at or close to record high levels. There is no guarantee that such levels will continue. RISK THAT APPLIES PRIMARILY TO THE SMALL CAP INDEX, SMALL CAP, SMALL CAP GROWTH AND TECHNOLOGY FUNDS - - SMALL CAP STOCK RISK is the risk that stocks of smaller companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, or may be dependent upon a small or inexperienced management group. In Page 41 43 RISK/RETURN SUMMARY addition, small cap stocks typically are traded in lower volume, and their issuers typically are subject to greater degrees of changes in their earnings and prospects. RISK THAT APPLIES PRIMARILY TO THE MID CAP GROWTH FUND - - MID CAP STOCK RISK is the risk that stocks of mid-sized companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Mid-sized companies may have limited product lines or financial resources, and may be dependent upon a particular niche of the market. RISK THAT APPLIES PRIMARILY TO THE TECHNOLOGY FUND - - TECHNOLOGY STOCK RISK is the risk that stocks of technology companies may be subject to greater price volatility than stocks of companies in other sectors. Technology companies may produce or use products or services that prove commercially unsuccessful, become obsolete or become adversely impacted by government regulation. Technology securities may experience significant price movements caused by disproportionate investor optimism or pessimism. RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL FUNDS While foreign securities may offer special investment opportunities, they also involve special risks not typically associated with investments in U.S. companies or issuers. These risks normally will be greatest when a Fund invests in emerging markets. These risks include: - - CURRENCY RISK is the potential for price fluctuations in the dollar value of foreign securities because of changing currency exchange rates. - - COUNTRY RISK is the potential for price fluctuations in foreign securities because of political, financial and economic events in foreign countries. - - 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. - - CONCENTRATION RISK is the risk that investment of more than 25% of a Fund's total assets in securities of issuers located in one country will subject the Fund to increased country risk with respect to the particular country. OTHER RISKS - - PORTFOLIO TURNOVER RISK is the risk that high portfolio turnover is likely to result in increased Fund expenses and higher short-term capital gains taxable to shareholders. For the last fiscal year, the annual portfolio turnover rates of the U.S. Government Fund, Tax-Exempt Fund, Mid Cap Growth Fund, International Growth Equity Fund and International Select Equity Fund exceeded 100%. It is expected that the annual portfolio turnover rates of the High Yield Municipal Fund, High Yield Fixed-Income Fund and Small Cap Growth Fund may also exceed 100%. More information about the risks of investing in the Funds 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 a Fund. Page 42 44 RISK/RETURN SUMMARY FUND PERFORMANCE The bar charts and tables below provide an indication of the risks of investing in a Fund by showing: (a) changes in the performance of a Fund from year to year; and (b) how the average annual returns of a Fund compare to those of a broad-based securities market index. For a description of each broad-based securities market index please see page __. The bar charts and tables assume reinvestment of dividends and distributions. A Fund's past performance is not necessarily an indication of how the Fund will perform in the future. Performance reflects expense limitations that were in effect during the periods presented. If expense limitations were not in place, a Fund's performance would have been reduced. The Mid Cap Growth, High Yield Municipal, High Yield Fixed Income and Small Cap Index Funds commenced operations on March 31, 1998, December 31, 1998, December 31, 1998 and September 3, 1999, respectively. The Short-Intermediate U.S. Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and Small Cap Growth Funds commenced operations on October 1, 1999. The Tax-Exempt Money Market and MarketPower Funds had not commenced operations as of the date of this Prospectus. The bar chart and performance table have been omitted for these Funds because the Funds have been in operation for less than one calendar year. Page 43 45 RISK/RETURN SUMMARY MONEY MARKET FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 5.71% 1996: 5.08% 1997: 5.25% 1998: 5.19%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE (for the periods ended December 31, 1998) Best Quarter Return: Q2 `95 1.44% Worst Quarter Return: Q2 `96 1.22%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
1-Year Since Inception ------ --------------- MONEY MARKET FUND (Inception 4/11/94) 5.19% 5.15%
The 7-day yield for the Fund as of December 31, 1998: 4.81%. You may call 1-800-595-9111 to obtain the current 7-day yield. Page 44 46 RISK/RETURN SUMMARY U.S. GOVERNMENT MONEY MARKET FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 5.62% 1996: 4.96% 1997: 5.14% 1998: 5.11%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q2 `95 1.42% Worst Quarter Return: Q4 `98 1.18%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
1-Year Since Inception ------ --------------- U.S. GOVERNMENT MONEY MARKET FUND (Inception 4/11/94) 5.11% 5.05%
The 7-day yield for the Fund as of December 31, 1998: 4.56%. You may call 1-800-595-9111 to obtain the current 7-day yield. Page 45 47 RISK/RETURN SUMMARY U.S. GOVERNMENT SELECT MONEY MARKET FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 5.75% 1996: 5.09% 1997: 5.21% 1998: 5.03%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q2 `95 1.45% Worst Quarter Return: Q4 `98 1.17%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
1-Year Since Inception ------ --------------- U.S. GOVERNMENT SELECT MONEY MARKET FUND (Inception 12/12/94) 5.03% 5.27%
The 7-day yield for the Fund as of December 31, 1998: 4.50%. You may call 1-800-595-9111 to obtain the current 7-day yield. Page 46 48 RISK/RETURN SUMMARY MUNICIPAL MONEY MARKET FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 3.64% 1996: 3.18% 1997: 3.27% 1998: 3.09%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q2 `95 0.95% Worst Quarter Return: Q1 `98 0.73%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
1-Year Since Inception ------ --------------- MUNICIPAL MONEY MARKET FUND (Inception 4/11/94) 3.09% 3.21%
The 7-day yield for the Fund as of December 31, 1998: 3.21%. You may call 1-800-595-9111 to obtain the current 7-day yield. Page 47 49 RISK/RETURN SUMMARY CALIFORNIA MUNICIPAL MONEY MARKET FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 3.77% 1996: 3.20% 1997: 3.28% 1998: 2.85%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q2 `95 0.98% Worst Quarter Return: Q3 `98 0.68%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
1-Year Since Inception ------ --------------- CALIFORNIA MUNICIPAL MONEY MARKET FUND (Inception 11/29/94) 2.85% 3.29%
The 7-day yield for the Fund as of December 31, 1998: 2.98%. You may call 1-800-595-9111 to obtain the current 7-day yield. Page 48 50 RISK/RETURN SUMMARY U.S. GOVERNMENT FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 12.59% 1996: 3.05% 1997: 7.24% 1998: 7.53%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q3 '98 4.46% Worst Quarter Return: Q1 '96 (1.07)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- U.S. GOVERNMENT FUND (Inception 4/1/94) 7.53% 6.32% LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX 8.49% 7.22%
Page 49 51 RISK/RETURN SUMMARY INTERMEDIATE TAX-EXEMPT FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 11.91% 1996: 3.36% 1997: 5.84% 1998: 5.15%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q1 '95 4.51% Worst Quarter Return: Q1 '96 (0.25)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- INTERMEDIATE TAX-EXEMPT FUND (Inception 4/1/94) 5.15% 5.43% LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX 5.84% 6.20%
Page 50 52 RISK/RETURN SUMMARY FLORIDA INTERMEDIATE TAX-EXEMPT FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1997: 7.64% 1998: 5.68%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q3 '98 3.22% Worst Quarter Return: Q1 '97 (0.12)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- FLORIDA INTERMEDIATE TAX-EXEMPT FUND (Inception 8/15/96) 5.68% 6.78% LEHMAN BROTHERS MUTUAL FUND FLORIDA INTERMEDIATE TAX-EXEMPT INDEX 6.44% 6.67% LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE MUNICIPAL INDEX 6.30% 6.97%
Page 51 53 RISK/RETURN SUMMARY FIXED INCOME FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 18.80% 1996: 2.61% 1997: 9.24% 1998: 8.00%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q2 '95 6.62% Worst Quarter Return: Q1 '96 (2.85)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- FIXED INCOME FUND (Inception 4/1/94) 8.00% 8.02% LEHMAN BROTHERS GOVERNMENT/ CORPORATE BOND INDEX 9.47% 8.42%
Page 52 54 RISK/RETURN SUMMARY TAX-EXEMPT FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 17.37% 1996: 2.83% 1997: 8.71% 1998: 5.84%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q1 '95 6.59% Worst Quarter Return: Q1 '96 (2.11)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- TAX-EXEMPT FUND (Inception 4/1/94) 5.84% 6.98% LEHMAN BROTHERS MUNICIPAL BOND INDEX 6.48% 7.84%
Page 53 55 RISK/RETURN SUMMARY CALIFORNIA TAX-EXEMPT FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1998: 6.42%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q3 '98 4.40% Worst Quarter Return: Q4 '98 (0.16)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- CALIFORNIA TAX-EXEMPT FUND (Inception 4/8/97) 6.42% 10.00% LEHMAN BROTHERS CALIFORNIA EXEMPT MUNICIPAL INDEX 6.93% 9.83% LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE MUNICIPAL INDEX 6.30% 8.27%
Page 54 56 RISK/RETURN SUMMARY INTERNATIONAL FIXED INCOME FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 19.70% 1996: 5.53% 1997: (2.51)% 1998: 17.09%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q1 '95 11.04% Worst Quarter Return: Q1 '97 (5.67)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- INTERNATIONAL FIXED INCOME FUND (Inception 4/1/94) 17.09% 8.35% J.P. MORGAN INTERNATIONAL GOVERNMENT BOND INDEX 18.31% 8.98%
Page 55 57 RISK/RETURN SUMMARY INCOME EQUITY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 18.92% 1996: 19.99% 1997: 20.84% 1998: 9.17%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 10.98% Worst Quarter Return: Q3 '98 (9.30)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- INCOME EQUITY FUND (Inception 4/1/94) 9.17% 13.62% MERRILL LYNCH INVESTMENT GRADE CONVERTIBLE BOND INDEX 11.36% 14.02%
Page 56 58 RISK/RETURN SUMMARY STOCK INDEX FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1997: 32.71% 1998: 27.88%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 21.18% Worst Quarter Return: Q3 '98 (10.05)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- STOCK INDEX FUND (Inception 10/7/96) 27.88% 29.73% S&P 500(R)INDEX 28.61% 30.61%
Page 57 59 RISK/RETURN SUMMARY GROWTH EQUITY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 26.15% 1996: 17.82% 1997: 30.13% 1998: 33.14%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 24.82% Worst Quarter Return: Q3 '98 (11.30)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- GROWTH EQUITY FUND (Inception 4/1/94) 33.14% 22.44% S&P 500(R)INDEX 28.61% 26.49%
Page 58 60 RISK/RETURN SUMMARY SELECT EQUITY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 28.88% 1996: 21.53% 1997: 31.78% 1998: 35.13%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 27.46% Worst Quarter Return: Q3 '98 (10.70)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- SELECT EQUITY FUND (Inception 4/6/94) 35.13% 24.43% S&P 500(R)INDEX 28.61% 26.42%
Page 59 61 RISK/RETURN SUMMARY SMALL CAP FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 22.54% 1996: 18.95% 1997: 29.77% 1998: (5.94)%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q3 '97 16.95% Worst Quarter Return: Q3 '98 (20.46)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- SMALL CAP FUND (4/1/94) (5.94)% 12.02% RUSSELL 2000 INDEX (2.44)% 13.05%
Page 60 62 RISK/RETURN SUMMARY INTERNATIONAL GROWTH EQUITY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: 2.04% 1996: 5.02% 1997: 6.26% 1998: 23.98%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 18.84% Worst Quarter Return: Q3 '98 (13.72)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- INTERNATIONAL GROWTH EQUITY FUND (Inception 4/1/94) 23.98% 7.86% MSCI EAFE INDEX 19.97% 8.89%
Page 61 63 RISK/RETURN SUMMARY INTERNATIONAL SELECT EQUITY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1995: (0.79)% 1996: 2.89% 1997: 9.08% 1998: 22.36%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 16.27% Worst Quarter Return: Q3 '98 (11.80)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- INTERNATIONAL SELECT EQUITY FUND (Inception 4/5/94) 22.36% 7.26% MSCI EAFE INDEX BLENDED WITH EMERGING MARKETS FREE INDEX 15.24% 7.62%
Page 62 64 RISK/RETURN SUMMARY TECHNOLOGY FUND [Bar Chart] CALENDAR YEAR TOTAL RETURN 1997: 16.76% 1998: 83.01%
Year to date total return for the nine months ended September 30, 1999: % BEST AND WORST QUARTERLY PERFORMANCE: (for the periods ended December 31, 1998) Best Quarter Return: Q4 '98 50.19% Worst Quarter Return: Q4 '97 (13.23)%
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1998)
Since 1 Year Inception ------ --------- TECHNOLOGY FUND (Inception 4/1/96) 83.01% 45.93% MORGAN STANLEY HIGH-TECHNOLOGY 35 INDEX 95.70% 44.94% S&P 500(R)INDEX 28.61% 28.66%
Page 63 65 RISK/RETURN SUMMARY BROAD-BASED SECURITIES MARKET INDICES DESCRIPTIONS THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX is an unmanaged index including all public obligations of the U.S. Treasury and all publicly issued debt of U.S. government agencies with maturities of up to 10 years. The Index figures do no reflect any fees or expenses. THE LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX is an unmanaged index of investment grade (Baa or better) tax-exempt bonds with maturities of 4 to 6 years. The Index figures do not reflect any fees or expenses. THE LEHMAN BROTHERS MUTUAL FUND FLORIDA INTERMEDIATE TAX-EXEMPT INDEX is an unmanaged index of investment grade (Baa or better) tax-exempt Florida bonds with a remaining maturity of at least one year. The index figures do not reflect any fees or expenses. THE LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE MUNICIPAL INDEX is an unmanaged index of investment grade (Baa or better) tax-exempt bonds with maturities of five to ten years. The figures do not reflect any fees or expenses. THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX is an unmanaged index of prices of U.S. government and corporate bonds with not less than one year to maturity. The Index figures do not reflect any fees or expenses. THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged index of investment grade (Baa or better) tax-exempt bonds with a remaining maturity of at least one year. The Index figures do not reflect any fees or expenses. THE LEHMAN BROTHERS CALIFORNIA EXEMPT MUNICIPAL INDEX is an unmanaged index of investment grade (Baa or better) tax-exempt California bonds with a remaining maturity of at least one year. The Index figures do not reflect any fees or expenses. THE J.P. MORGAN INTERNATIONAL GOVERNMENT BOND INDEX is an unmanaged index of non-U.S. government bonds with maturities of one to thirty years. The Index figures do not reflect any fees or expenses. THE MERRILL LYNCH INVESTMENT GRADE CONVERTIBLE BOND INDEX is an unmanaged index consisting of investment grade (BBB or better) convertible bonds and preferred stocks. The Index figures do not reflect any fees or expenses. THE S&P 500(R) INDEX is the Standard and Poor's Composite Index of 500 stocks, a widely recognized, unmanaged index of common stock prices. The Index figures do not reflect any fees or expenses. THE RUSSELL 2000 INDEX is an unmanaged index which tracks the performance of the 2,000 smallest of the 3,000 largest U.S. companies, based on market capitalization. The Index figures do not reflect any fees or expenses. THE MSCI EAFE INDEX is the Morgan Stanley Capital International Europe, Australasia and Far East Index, an unmanaged index which tracks the performance of selected equity securities in Europe, Australia, Asia and the Far East. The Index figures do not reflect any fees or expenses. THE MSCI EAFE INDEX BLENDED WITH EMERGING MARKETS FREE INDEX is an unmanaged index comprised of companies representative of developed European and Pacific Basin countries as well as emerging market countries. The Index figures do not reflect any fees or expenses. THE MORGAN STANLEY HIGH-TECHNOLOGY 35 INDEX is an unmanaged index which tracks the performance of stocks within the technology sector. The Index figures do not reflect any fees or expenses. Page 64 66 RISK/RETURN SUMMARY FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Funds. Please note that the following information does not reflect any charges which may be imposed by The Northern Trust Company, its affiliates, correspondent banks and other institutions on their customers. For more information, please see "Account Policies and Other Information" on page __.
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 - ---------------------------------------------------------------------------------------------------------------------- Money Market None None None None None - ---------------------------------------------------------------------------------------------------------------------- U.S. Government Money Market None None None None None - ---------------------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market None None None None None - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market(4) None None None None None - ---------------------------------------------------------------------------------------------------------------------- Municipal Money Market None None None None None - ---------------------------------------------------------------------------------------------------------------------- California Municipal Money Market None None None None None - ---------------------------------------------------------------------------------------------------------------------- U.S. Government None None None None None - ---------------------------------------------------------------------------------------------------------------------- Short-Intermediate U.S. Government None None None None None - ---------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- California Intermediate Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- Fixed Income None None None None None - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- Arizona Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- California Tax-Exempt None None None None None - ---------------------------------------------------------------------------------------------------------------------- International Fixed Income None None None None None - ----------------------------------------------------------------------------------------------------------------------
Page 65 67 RISK/RETURN SUMMARY ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
TOTAL ANNUAL DISTRIBUTION FUND MANAGEMENT (12a-1) OTHER OPERATING FEES FEES(2) EXPENSES(3) EXPENSE(5) - ------------------------------------------------------------------ 0.60% 0.00% 0.29% 0.89% - ------------------------------------------------------------------ 0.60% 0.00% 0.31% 0.91% - ------------------------------------------------------------------ 0.60% 0.00% 0.31% 0.91% - ------------------------------------------------------------------ 0.60% 0.00% 0.32% 0.92% - ------------------------------------------------------------------ 0.60% 0.00% 0.29% 0.89% - ------------------------------------------------------------------ 0.60% 0.00% 0.31% 0.91% - ------------------------------------------------------------------ 0.75% 0.00% 0.32% 1.07% - ------------------------------------------------------------------ 0.75% 0.00% 0.52% 1.27% - ------------------------------------------------------------------ 0.75% 0.00% 0.31% 1.06% - ------------------------------------------------------------------ 0.75% 0.00% 0.46% 1.21% - ------------------------------------------------------------------ 0.75% 0.00% 0.54% 1.29% - ------------------------------------------------------------------ 0.75% 0.00% 0.33% 1.08% - ------------------------------------------------------------------ 0.75% 0.00% 0.33% 1.08% - ------------------------------------------------------------------ 0.75% 0.00% 0.55% 1.30% - ------------------------------------------------------------------ 0.75% 0.00% 0.42% 1.17% - ------------------------------------------------------------------ 0.90% 0.00% 1.06% 1.96% - ------------------------------------------------------------------
Page 66 68 RISK/RETURN SUMMARY
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 - ------------------------------------------------------------------------------------------------------------------------------ High Yield Municipal None None None None None - ------------------------------------------------------------------------------------------------------------------------------ High Yield Fixed Income None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Income Equity None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Stock Index None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Growth Equity None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Select Equity None None None None None - ------------------------------------------------------------------------------------------------------------------------------ MarketPower(4) None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Mid Cap Growth None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Small Cap Index None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Small Cap None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Small Cap Growth None None None None None - ------------------------------------------------------------------------------------------------------------------------------ International Growth Equity None None None None None - ------------------------------------------------------------------------------------------------------------------------------ International Select Equity None None None None None - ------------------------------------------------------------------------------------------------------------------------------ Technology None None None None None - ------------------------------------------------------------------------------------------------------------------------------
Page 67 69 RISK/RETURN SUMMARY ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
TOTAL ANNUAL DISTRIBUTION FUND (12d-1) OTHER OPERATING MANAGEMENT FEES FEES(2) EXPENSES(3) EXPENSES(5) - ------------------------------------------------------------ 0.75% 0.00% 0.97% 1.72% - ------------------------------------------------------------ 0.75% 0.00% 0.45% 1.20% - ------------------------------------------------------------ 1.00% 0.00% 0.35% 1.35% - ------------------------------------------------------------ 0.60% 0.00% 0.40% 1.00% - ------------------------------------------------------------ 1.00% 0.00% 0.30% 1.30% - ------------------------------------------------------------ 1.20% 0.00% 0.34% 1.54% - ------------------------------------------------------------ 1.20% 0.00% 0.33% 1.53% - ------------------------------------------------------------ 1.00% 0.00% 0.65% 1.65% - ------------------------------------------------------------ 0.65% 0.00% 0.57% 1.22% - ------------------------------------------------------------ 1.20% 0.00% 0.32% 1.52% - ------------------------------------------------------------ 1.20% 0.00% 0.68% 1.88% - ------------------------------------------------------------ 1.20% 0.00% 0.42% 1.62% - ------------------------------------------------------------ 1.20% 0.00% 0.46% 1.66% - ------------------------------------------------------------ 1.20% 0.00% 0.33% 1.53% - ------------------------------------------------------------
Page 68 70 RISK/RETURN SUMMARY Footnotes 1. A fee of $15.00 may be applicable for each wire redemption. 2. During the last fiscal year the Funds did not pay any 12b-1 fees. The Funds do not expect to pay any 12b-1 fees during the current fiscal year. The maximum distribution fee is 0.25% of each Fund's average net assets under Northern Funds' Distribution and Service Plan. 3. These expenses include custodian, transfer agency and co-administration expenses as well as other customary Fund expenses. The co-administrators are entitled to a co-administration fee of 0.15%, of which 0.09% is currently being waived voluntarily. Such waiver may be terminated at any time. The High Yield Municipal, High Yield Fixed Income and Small Cap Index Funds commenced operations on December 31, 1998, December 31, 1998 and September 3, 1999, respectively. The Short-Intermediate U.S. Government, California Intermediate Tax-Exempt, Arizona Tax-Exempt and Small Cap Growth Funds commenced operations on October 1, 1999. As a result, "Other Expenses" for those Funds are based on estimates for the current fiscal year. 4. Since the Tax-Exempt Money Market and MarketPower Funds had not commenced operations as of the date of this Prospectus, "Other Expenses" is based on estimated amounts the Funds expect to pay during the current fiscal year. 5. As a result of voluntary fee reductions, waivers and reimbursements, "Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which are actually incurred by the Funds are set forth below. The voluntary fee reductions, waivers and reimbursements may be terminated at any time at the option of the Investment Adviser. If this occurs, "Management Fees," "Other Expenses" and "Total Fund Operating Expenses" may increase without shareholder approval.
TOTAL ANNUAL MANAGEMENT DISTRIBUTION OTHER FUND OPERATING FUND FEES (12b-1) FEES EXPENSES EXPENSES - -------------------------------------------------------------------------------------------------------- Money Market 0.40% 0.00% 0.15% 0.55% U.S. Government Money Market 0.40% 0.00% 0.15% 0.55% U.S. Government Select Money Market 0.40% 0.00% 0.15% 0.55% Tax-Exempt Money Market 0.40% 0.00% 0.15% 0.55% Municipal Money Market 0.40% 0.00% 0.15% 0.55% California Municipal Money Market 0.40% 0.00% 0.15% 0.55% U.S. Government 0.75% 0.00% 0.15% 0.90% Short-Intermediate U.S. Government 0.75% 0.00% 0.15% 0.90% Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85% California Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85% Florida Intermediate Tax-Exempt 0.70% 0.00% 0.15% 0.85% Fixed Income 0.75% 0.00% 0.15% 0.90% Tax-Exempt 0.70% 0.00% 0.15% 0.85% Arizona Tax-Exempt 0.70% 0.00% 0.15% 0.85% California Tax-Exempt 0.70% 0.00% 0.15% 0.85% International Fixed Income 0.90% 0.00% 0.25% 1.15% High Yield Municipal 0.70% 0.00% 0.15% 0.85% High Yield Fixed Income 0.75% 0.00% 0.15% 0.90% Income Equity 0.85% 0.00% 0.15% 1.00% Stock Index 0.40% 0.00% 0.15% 0.55% Growth Equity 0.85% 0.00% 0.15% 1.00% Select Equity 0.85% 0.00% 0.15% 1.00% MarketPower 1.00% 0.00% 0.23% 1.23% Mid Cap Growth 0.85% 0.00% 0.15% 1.00% Small Cap Index 0.50% 0.00% 0.15% 0.65% Small Cap 0.85% 0.00% 0.15% 1.00% Small Cap Growth 1.00% 0.00% 0.25% 1.25% International Growth Equity 1.00% 0.00% 0.25% 1.25% International Select Equity 1.00% 0.00% 0.25% 1.25% Technology 1.00% 0.00% 0.23% 1.23%
Page 69 71 ABOUT YOUR ACCOUNT EXAMPLE The following Example is intended to help you compare the cost of investing in a Fund (without fee waivers and expense reimbursements) with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in a Fund for the time periods indicated (with reinvestment of all dividends and distributions) and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that a Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
FUND ONE YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------------------------------------------------------- Money Market $ 91 $ 284 $ 493 $ 1,096 - --------------------------------------------------------------------------------------------------------- U.S. Government Money Market 93 290 504 1,120 - --------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market 93 290 504 1,120 - --------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 94 295 N/A N/A - --------------------------------------------------------------------------------------------------------- Municipal Money Market 91 284 493 1,096 - --------------------------------------------------------------------------------------------------------- California Municipal Money Market 93 290 504 1,120 - --------------------------------------------------------------------------------------------------------- U.S. Government 109 340 590 1,306 - --------------------------------------------------------------------------------------------------------- Short-Intermediate U.S. Government 119 372 N/A N/A - --------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 108 337 585 1,294 - --------------------------------------------------------------------------------------------------------- California Intermediate Tax-Exempt 114 356 N/A N/A - --------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt 131 409 708 1,556 - --------------------------------------------------------------------------------------------------------- Fixed Income 110 343 595 1,317 - --------------------------------------------------------------------------------------------------------- Tax-Exempt 110 343 595 1,317 - --------------------------------------------------------------------------------------------------------- Arizona Tax-Exempt 127 397 N/A N/A - --------------------------------------------------------------------------------------------------------- California Tax-Exempt 119 372 644 1,420 - --------------------------------------------------------------------------------------------------------- International Fixed Income 199 615 1,057 2,285 - --------------------------------------------------------------------------------------------------------- High Yield Municipal 175 542 933 2,030 - --------------------------------------------------------------------------------------------------------- High Yield Fixed Income 122 381 660 1,455 - --------------------------------------------------------------------------------------------------------- Income Equity 137 428 739 1,624 - --------------------------------------------------------------------------------------------------------- Stock Index 102 318 552 1,225 - --------------------------------------------------------------------------------------------------------- Growth Equity 132 412 713 1,568 - --------------------------------------------------------------------------------------------------------- Select Equity 157 486 839 1,834 - --------------------------------------------------------------------------------------------------------- MarketPower 156 483 N/A N/A - --------------------------------------------------------------------------------------------------------- Mid Cap Growth 168 520 897 1,955 - --------------------------------------------------------------------------------------------------------- Small Cap Index 103 322 N/A N/A - --------------------------------------------------------------------------------------------------------- Small Cap 155 480 829 1,813 - --------------------------------------------------------------------------------------------------------- Small Cap Growth 193 596 N/A N/A - --------------------------------------------------------------------------------------------------------- International Growth Equity 165 511 881 1,922 - --------------------------------------------------------------------------------------------------------- International Select Equity 169 523 902 1,965 - ---------------------------------------------------------------------------------------------------------
Page 70 72 ABOUT YOUR ACCOUNT - --------------------------------------------------------------------------------------------------------- Technology 156 483 834 1,824 - ---------------------------------------------------------------------------------------------------------
Page 71 73 ABOUT YOUR ACCOUNT INVESTMENT ADVISERS The Northern Trust Company ("Northern Trust"), an Illinois state-chartered bank and member of the Federal Reserve System, serves as investment adviser for all Funds except the Stock Index, Small Cap Index and Small Cap Funds. Northern Trust Quantitative Advisors, Inc. ("NTQA"), an Illinois state-chartered trust company, serves as investment adviser for the Stock Index, Small Cap Index and Small Cap Funds. Prior to April 1, 1998 Northern Trust served as investment adviser to the Stock Index, Small Cap Index and Small Cap Funds pursuant to advisory agreements substantially identical as those currently in effect for such Funds. Northern Trust and NTQA are referred to as the "Investment Advisers." The Investment Advisers are located at 50 S. LaSalle Street, Chicago, IL 60675 and are wholly-owned subsidiaries of Northern Trust Corporation, a bank holding company. As of __________, 1999, Northern Trust Corporation and its subsidiaries had approximately $____ billion in assets, $____ billion in deposits and employed over ______ persons. Northern Trust and its affiliates administered in various capacities (including as master trustee, investment manager or custodian) approximately $____ trillion of assets as of __________, 1999, including approximately $____ billion of assets for which Northern Trust and its affiliates had investment management responsibility. Under its Advisory Agreement with Northern Funds, each Investment Adviser, subject to the general supervision of Northern Funds' Board of Trustees, is responsible for making investment decisions for the Funds for which it serves as adviser and for placing purchase and sale orders for portfolio securities. ADVISORY FEES As compensation for its advisory services and its assumption of related expenses, each Investment Adviser is entitled to an advisory fee, computed daily and payable monthly, at annual rates set forth in the table below (expressed as a percentage of each Fund's respective average daily net assets). The table also reflects the advisory fees (after voluntary fee waivers) paid by the Funds for the fiscal year ended March 31, 1999.
ADVISORY FEE PAID CONTRACTUAL FOR FISCAL YEAR FUND RATE ENDED 3/31/99 - ---- ----------- ----------------- Money Market 0.60% 0.40% U.S. Government Money Market 0.60% 0.40% U.S. Government Select Money Market 0.60% 0.40% Tax-Exempt Money Market 0.60% N/A Municipal Money Market 0.60% 0.40% California Municipal Money Market 0.60% 0.40% U.S. Government 0.75% 0.75% Short-Intermediate U.S. Government 0.75% N/A Intermediate Tax-Exempt 0.75% 0.70% California Intermediate Tax-Exempt 0.75% N/A Florida Intermediate Tax-Exempt 0.75% 0.70% Fixed Income 0.75% 0.75% Tax-Exempt 0.75% 0.70% Arizona Tax-Exempt 0.75% N/A California Tax-Exempt 0.75% 0.70% International Fixed Income 0.90% 0.90% High Yield Municipal 0.75% 0.70% High Yield Fixed Income 0.75% 0.75% Income Equity 1.00% 0.85% Stock Index 0.60% 0.40% Growth Equity 1.00% 0.85% Select Equity 1.20% 0.85% MarketPower 1.20% N/A Mid Cap Growth 1.00% 0.85% Small Cap Index 0.65% N/A Small Cap 1.20% 0.85% Small Cap Growth 1.20% N/A
Page 72 74 ABOUT YOUR ACCOUNT
ADVISORY FEE PAID CONTRACTUAL FOR FISCAL YEAR FUND RATE ENDED 3/31/99 - ---- ----------- ----------------- International Growth Equity 1.20% 1.00% International Select Equity 1.20% 1.00% Technology 1.20% 1.00%
The difference, if any, between the contractual advisory fees and the actual advisory fees paid by the Funds reflects that the Investment Advisers did not charge the full amount of the advisory fees to which they were entitled. The Investment Advisers may discontinue or modify their voluntary limitations in the future at their discretion. FUND MANAGEMENT The Investment Advisers employ a team approach to the investment management of the Funds, relying upon investment professionals under the leadership of James M. Snyder, Chief Investment Officer and Executive Vice President of Northern Trust and Chairman and Chief Executive Officer of NTQA. Below is information regarding the management of the Funds other than the Money Market Funds and the Stock Index and Small Cap Index Funds. FIXED INCOME FUNDS The management team leaders for the U.S. Government Fund are Mark J. Wirth, Senior Vice President of Northern Trust and Monty M. Memler, Vice President of Northern Trust. Mr. Wirth has had such responsibility for the Fund since July 1998. Mr. Memler has had such responsibility for the Fund since November 1994. Messrs. Wirth and Memler joined Northern Trust in 1986 and during the past five years have managed various fixed income portfolios. Mr. Memler joined Northern Trust in 1986 and during the past five years have managed various fixed income portfolios. Mr. Wirth and Peter Marchese, Second Vice President of Northern Trust will be the management team leaders for the Short-Intermediate U.S. Government Fund after it commences operations. Mr. Marchese joined Northern Trust in 1990 and during the past five years has managed various fixed income portfolios. The management team leaders for the Intermediate Tax-Exempt Fund are M. Jane McCart, Senior Vice President of Northern Trust, and Joel F. Silva, Vice President of Northern Trust. Ms. McCart and Mr. Silva have had such responsibility for the Fund since September 1999. Ms. McCart joined Northern Trust in 1998. From 1983 to December 1998, Ms. McCart was with Stein Roe & Farnham Incorporated where she had been the portfolio manager of various municipal bond portfolios. Mr. Silva joined Northern Trust in 1999. From 1989 to 1999, Mr. Silva was with American Century where he managed various municipal bond portfolios. Eric V. Boeckmann, Vice President of Northern Trust and Joel F. Silva will be the management team leaders for the California Intermediate Tax-Exempt and Arizona Tax-Exempt Funds after they commence operations. Mr. Boeckmann joined Northern Trust in 1985 and during the past five years has managed various municipal bond portfolios, including common trust funds invested in municipal securities. The management team leaders for the Florida Intermediate Tax-Exempt Fund are Ms. McCart and Gregory A. Bell, Second Vice President of Northern Trust. Ms McCart has had such responsibility for the Fund since September 1999. Mr. Bell has had such responsibility for the Fund since November 1998. Mr. Bell joined Northern Trust in 1984 and during the past five years has managed various municipal bond portfolios. The management team leaders for the Fixed Income Fund are Mr. Wirth and Steven M. Schafer, Vice President of Northern Trust. Mr. Wirth has had such responsibility for the Fund since July 1998 and Mr. Schafer has had such responsibility since the fund commenced operations in December 1998. Mr. Schafer joined Northern Trust in 1988 and during the past five years has managed various fixed income portfolios and served as credit analyst following both industrial and utility companies. Page 73 75 ABOUT YOUR ACCOUNT The management team leaders for the Tax-Exempt Fund are Ms. McCart and Timothy T. A. McGregor, Second Vice President of Northern Trust. Ms. McCart has had such responsibility for the Fund since September 1999. Mr. McGregor has had such responsibility for the Fund since November 1998. Mr. McGregor joined Northern Trust in 1989 and during the past five years has managed various municipal bond portfolios. The management team leaders for the California Tax-Exempt Fund are Messrs. Boeckmann and Silva. Mr. Boeckmann has had such responsibility for the Fund since April 1998. Mr. Silva has had such responsibility for the Fund since September 1999. The management team leaders for the International Fixed Income Fund are Mr. Schafer and Guy Williams, Vice President of Northern Trust. Mr. Schafer has had such responsibility for the Fund since July 1998. Mr. Williams has had such responsibility for the Fund since September 1999. Mr. Williams joined Northern Trust in 1999. From 1992 to 1999, he was a global fixed income manager for Paribas Asset Management. The management team leader for the High Yield Municipal Fund is Ms. McCart. Ms. McCart has had such responsibility since the fund commenced operations in December 1998. The management team leader for the High Yield Fixed Income Fund is Eric Misenheimer, Vice President of Northern Trust. Mr. Misenheimer has had such responsibility since July 1999. Mr. Misenheimer joined Northern Trust in 1999. From April 1998 to May 1999, Mr. Misenheimer was with Stein Roe & Farnham Incorporated where he had been a senior research analyst and assisted with portfolio management of various high yield bond portfolios. From 1993 to 1998, he was a research analyst with Falcon Asset Management. EQUITY FUNDS Theodore T. Southworth, Vice President of Northern Trust, has led the management team for the Income Equity Fund since 1995. He joined Northern Trust in 1984 and during the past five years has managed various equity portfolios. Jon D. Brorson, Senior Vice President of Northern Trust, and John J. Zielinski, Vice President of Northern Trust, are the management team leaders for the Growth Equity Fund. Mr. Brorson has had such responsibility since July 1998 and Mr. Zielinski has had such responsibility since April 1998. Mr. Brorson has managed equity portfolios with Northern Trust since 1996, and from 1990 to 1996, he was with Hartline Investment Corp., where his primary responsibilities included portfolio management, investment research, sales, and trading. Mr. Zielinski joined Northern Trust in 1980 and during the past five years has managed various equity portfolios. Robert N. Streed, Vice President of Northern Trust, is the management team leader for the Select Equity Fund. Mr. Streed has had such responsibility for the Fund since it commenced operations in April 1994. Mr. Streed joined Northern Trust in 1990 and during the past five years has managed various equity portfolios. The management team leaders for the MarketPower Fund will be R. Randall Canent and Robert G. Mitchell, Vice Presidents of Northern Trust, after it commences operations. Mr. Canent joined Northern Trust in 1992 and during the past five years has managed various equity portfolios. Mr. Mitchell joined Northern Trust in 1988 and during the past five years has managed investment portfolios for institutional clients. Theodore Breckel, Senior Vice President of Northern Trust, is the management team leader for the Mid Cap Growth Fund. Mr. Breckel has had such responsibility for the Fund since March 1998. Mr. Breckel has been with Northern Trust since 1968. During the past five years he has managed various equity portfolios. Susan J. French is the management team leader for the Small Cap Fund. Ms. French serves as Vice President of Northern Trust and, since 1998, NTQA. Ms. French has had such responsibility for the Fund since it commenced operations in April 1994. Ms. French joined Northern Trust in 1986 and during the past five years has managed various short-term investment and equity index portfolios. Page 74 76 ABOUT YOUR ACCOUNT The management team leader for the Small Cap Growth Fund is David H. Burshtan, Vice President of Northern Trust. Mr. Burshtan has had such responsibility since the Fund commenced operations in September 1999. Mr. Burshtan joined Northern Trust in 1999. From 1995 to 1999, Mr. Burshtan was a Portfolio Manager for various small cap mutual funds with Scudder Kemper Investments, Inc. From 1993 to 1995, Mr. Burshtan held a variety of analyst and portfolio management positions with Northern Trust. The management team leader for the International Growth Equity Fund and the International Select Equity Fund is Robert A. LaFleur, Senior Vice President of Northern Trust. Mr. LaFleur has had such responsibility for the Fund since 1994. Mr. LaFleur joined Northern Trust in 1982 and during the past five years has managed various international equity portfolios. The management team leaders for the Technology Fund are John B. Leo, Senior Vice President of Northern Trust, George J. Gilbert, Senior Vice President of Northern Trust and Kevin J. Spoor, Vice President of Northern Trust. Mr. Leo has had such responsibility since the Fund commenced operations in April 1996. Mr. Gilbert has had such responsibility since July 1997. Mr. Spoor has had such responsibility since September 1999. Mr. Leo joined Northern Trust in 1984. During the past five years, Mr. Leo has managed various equity and bond portfolios. Mr. Gilbert joined Northern Trust in 1980 and during the past five years has managed various technology portfolios and served as a research analyst. Mr. Spoor joined Northern Trust in 1999. From 1995 to 1998, Mr. Spoor was a senior semi-conductor analyst with Salomon Smith Barney. Prior thereto, Mr. Spoor pursued his MBA from the University of Rochester, which he received in June 1995. OTHER FUND SERVICES OTHER FUND MANAGEMENT INFORMATION Northern Trust also serves as transfer agent ("Transfer Agent") and custodian for each Fund. As Transfer Agent, Northern Trust performs various administrative servicing functions, and any shareholder inquiries should be directed to it. The fees that Northern Trust receives for its services in those capacities are described in the Statement of Additional Information. Northern Trust and First Data Investor Services Group, Inc. ("Investor Services Group") act as co-administrators for Northern Funds. The fee that Northern Trust and Investor Services Group receives for their co-administrative services is described on page __ under "Fund Fees and Expenses." PURCHASING AND SELLING SHARES PURCHASING SHARES You may purchase shares directly from Northern Funds or, if you maintain certain accounts, through Northern Trust and certain other institutions. If you have any questions or need assistance in opening an investment account or purchasing shares, call 1-800-595-9111. As of the date of this Prospectus, shares of the Tax-Exempt Money Market and MarketPower Funds are not being offered. These Funds are expected to commence operations during the next twelve months. Please call 1-800-595-9111 before investing to determine availability. OPENING AN ACCOUNT DIRECTLY FROM THE FUNDS. You may open a shareholder account and purchase shares directly from the Funds with a minimum initial investment per Fund of $2,500 ($500 for an IRA; $250 under the Automatic Investment Plan; and $500 for employees of Northern Trust and its affiliates). The minimum subsequent investment is $50 (except for Page 75 77 ABOUT YOUR ACCOUNT reinvestments of distributions for which there is no minimum). The Funds reserve the right to waive these minimums. For your convenience, there are a number of ways to invest directly in the Funds: BY MAIL. - Read this Prospectus carefully - Complete and sign the Purchase Application - Enclose a check or money order payable to Northern Funds - If you are investing on behalf of a corporation or other entity, your Purchase Application must be accompanied by a certified corporate resolution (or other acceptable evidence of authority). - Mail your check, corporate resolution (if needed) and completed Purchase Application to: Northern Funds P.O. Box 75986 Chicago, Illinois 60690-6319 - For overnight delivery use the following address: 801 South Canal Street Chicago, Illinois 60607 Attn: Northern Funds - For subsequent investments: - Enclose your check with the return remittance portion of the confirmation of your previous investment; or - Indicate on your check or a separate piece of paper your name, address and account number All checks must be payable in U.S. dollars and drawn on a bank located in the United States. Cash and third party checks are not acceptable. BY WIRE TO OPEN A NEW ACCOUNT: - Call 1-800-595-9111 for instructions - Complete a Purchase Application and send it to: Northern Funds P.O. Box 75986 Chicago, IL 60690-6319 TO ADD TO AN EXISTING ACCOUNT: - Have your bank wire Federal funds to: The Northern Trust Company Chicago, Illinois ABA Routing No. 0710-00152 (Reference 10 Digit Fund Account No.) (Reference Shareholder's Name) BY DIRECT DEPOSIT TO PURCHASE ADDITIONAL SHARES: - Determine if your employer has direct deposit capabilities through the Automated Clearing House ("ACH") - Have your employer send payments to: Page 76 78 ABOUT YOUR ACCOUNT ABA Routing No. 0710-00152 (Reference 10 Digit Fund Account No.) (Reference Shareholder's Name) - The minimum periodic investment for direct deposit is $50 BY AUTOMATIC INVESTMENT TO OPEN A NEW ACCOUNT - Complete a Purchase Application, including the Automatic Investment section - Send it to: Northern Funds P.O. Box 75986 Chicago, IL 60690-6319 - The minimum initial investment is $250; $50 for monthly minimum additions TO ADD TO AN ACCOUNT: - Call 1-800-595-9111 to obtain an Automatic Investment Plan Application - The minimum for automatic investment additions is $50 If you discontinue participation in the plan, the Funds reserve the right to redeem the investor's account involuntarily, upon 30 days written notice, if the account's net asset value is $1,000 or less. Involuntary redemptions will not be made if the value of shares in an account falls below the minimum amount solely because of a decline in the Fund's net asset value. BY DIRECTED REINVESTMENT You may elect to have your income dividends and capital gains distributions automatically invested in another Northern Fund. - Complete the Distribution Options section on the Purchase Application - Reinvestments can only be directed to an existing Northern Funds account (which must meet the minimum investment requirement) BY EXCHANGE You may open a new account or add to an existing account by exchanging shares of one Fund for shares of any other Fund offered by Northern Funds. See "Selling Shares - By Exchange." BY INTERNET You may initiate transactions between Northern Trust banking and Northern Funds accounts by using Northern Trust Private Passport. For details and to sign up for this service, go to www.northerntrust.com/privatepassport or contact your relationship manager. THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS If you have an account with Northern Trust, you may purchase Northern Funds shares through Northern Trust. You may also purchase shares through other institutions (together with Northern Trust, "Service Organizations") that have entered into agreements with Northern Funds. To determine whether you may purchase shares through your institution, contact your institution directly or call 1-800-595-9111. Northern Trust or another Service Organization may impose charges against your account which will reduce the net return on an investment in a Fund. These charges may include asset allocation fees, account maintenance fees, sweep fees, compensating balance requirements or other charges based upon account transactions, assets or income. Page 77 79 ABOUT YOUR ACCOUNT SELLING SHARES REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS If you purchased Northern Funds directly or, if you purchased your shares through an account at Northern Trust or another Service Organization and you appear on Northern Funds records as the registered holder, you may redeem all or part of your shares using one of the methods described below. BY MAIL SEND A WRITTEN REQUEST TO: Northern Funds P.O. Box 75986 Chicago, Illinois 60690-6319 THE REDEMPTION REQUEST MUST INCLUDE: - The number of shares or the dollar amount to be redeemed - The Fund account number - A signature guarantee is also required if: - The proceeds are to be sent elsewhere than the address of record, or - The redemption amount is greater than $50,000 BY WIRE If you authorize wire redemptions on your Purchase Application, you can redeem shares and have the proceeds sent by Federal wire transfer to a previously designated account. - You will be charged $15 for each wire redemption unless the designated account is maintained at Northern Trust or an affiliated bank - Call the Transfer Agent at 1-800-595-9111 for instructions - The minimum amount that may be redeemed by this method is $250 BY CHECK If you authorize the checkwriting privilege on your Purchase Application, you may redeem shares of the Money Market Funds by check in amounts of $250 or more. If your account is already open: - Call 1-800-595-9111 for the appropriate form - The application must be signed by each person whose name appears on the account and must be accompanied by a signature guarantee - Dividends are earned until the check clears the Transfer Agent - Checks you write will not be returned to you, although copies are available upon request - A fee of $20 will be charged to the account if there are insufficient funds to cover the amount of your redemption by check - To place a stop payment request, call 1-800-595-9111. A $20 fee will be charged to the account - You may not use checks to close an account or redeem shares purchased within the past fifteen days BY SYSTEMATIC WITHDRAWAL If you own shares of a Fund with a minimum value of $10,000, you may elect to have a fixed sum redeemed at regular intervals and distributed in cash or reinvested in one or more other Northern Funds. - Call 1-800-595-9111 for an application form and additional information - The minimum amount is $250 per withdrawal BY EXCHANGE Northern Funds offers you the ability to exchange shares of one Northern Fund for another Fund in the Northern Funds family. - When opening an account, complete the Exchange Privilege section of the Purchase Application or, if your account is already opened, send a written request to: Page 78 80 ABOUT YOUR ACCOUNT Northern Funds P.O. Box 75986 Chicago, IL 60690-6319 - Shares being exchanged must have a value of at least $1,000 ($2,500 if a new account is being established by the exchange) - Call 1-800-595-9111 for more information BY TELEPHONE If you authorize the telephone privilege on your Purchase Application, you may redeem Northern Funds shares by phone. - If your account is already opened, send a written request to: Northern Funds P.O. Box 75986 Chicago, IL 60690-6319 - The request must be signed by each owner of the account and must be accompanied by signature guarantees - Call 1-800-595-9111 to use the telephone privilege - During periods of unusual economic or market activity, telephone redemptions may be difficult to implement. In such event, shareholders should follow the procedures outlined above under "Selling Shares -- By Mail" BY INTERNET You may initiate transactions between Northern Trust banking and Northern Funds accounts by using Northern Trust Private Passport. For details and to sign up for this service, go to www.northerntrust.com/privatepassport or contact your relationship manager. REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS If you purchased your Northern Funds shares through an account at Northern Trust or another Service Organization, you may redeem or exchange your shares according to the instructions pertaining to that account. - Although Northern Funds imposes no charges when you redeem, when shares are purchased through Northern Trust or another Service Organization, a fee may be charged by those institutions for providing services in connection with your account - Contact your account representative at Northern Trust or other Service Organization for more information about redemptions or exchanges ACCOUNT POLICIES AND OTHER INFORMATION CALCULATING SHARE PRICE. Northern Funds issues shares and redeems shares at net asset value ("NAV"). The NAV for each Fund is calculated by dividing the value of the Fund's net assets by the number of the Fund's outstanding shares. The NAV is calculated on each Business Day as of 3:00 p.m., Chicago time, for each Non-Money Market Fund and as of 1:00 p.m., Chicago time, for each Money Market Fund. The NAV used in determining the price of your shares is the one calculated after your purchase, exchange or redemption order is received and accepted as described below. The Money Market Funds seek to maintain an NAV of $1.00 per share by valuing the obligations held by the Funds at amortized cost in accordance with SEC regulations. Amortized cost will normally approximate market value. U.S. and foreign securities held by the Non-Money Market Funds generally are valued at their market prices. Shares of an investment company held by the Non-Money Market Funds are valued at their NAV. Any securities, including restricted securities, for which market prices are not readily available are valued at fair value as Page 79 81 ABOUT YOUR ACCOUNT determined by the Investment Advisers. Short-term obligations held by a Fund are valued at their amortized cost which, according to the Investment Advisers, approximates market value. A Fund may hold foreign securities that trade on weekends or other days when the Fund does not price its shares. Therefore, the value of such securities may change on days when shareholders will not be able to purchase or redeem shares. TIMING OF MONEY MARKET FUND PURCHASE REQUESTS. Requests accepted by the Transfer Agent or other authorized intermediary by 1:00 p.m., Chicago time, on any Business Day will be executed the same day, at that day's closing share price provided that either: - The order is in proper form and payment in immediately available funds has been received by the Transfer Agent; - The order is placed by Northern Trust or a Service Organization and payment in Federal or other immediately available funds is to be made by the close of the same Business Day; or - The order is accepted by an authorized intermediary and payment in Federal or other immediately available funds is to be made by the close the same Business Day in accordance with procedures acceptable to Northern Funds. Orders received by the Transfer Agent that are accompanied by payment in any form other than immediately available funds will not be executed until payment is converted to Federal funds, which normally occurs within two Business Days after receipt. TIMING OF NON-MONEY MARKET FUND PURCHASE REQUESTS. Requests accepted by the Transfer Agent or other authorized intermediary by 3:00 p.m., Chicago time, on any Business Day will be executed the same day, at that day's closing share price provided that either: - The order is in proper form and accompanied by payment of the purchase price; - The order is placed by Northern Trust or a Service Organization and payment in Federal or other immediately available funds is to be made on the next Business Day; or - The order is accepted by an authorized intermediary and payment is to be made on the next Business Day in accordance with procedures acceptable to Northern Funds. Orders received by the Transfer Agent or other authorized intermediary on a non-Business Day or after 3:00 p.m. on a Business Day will be executed on the next Business Day, at that day's closing share price, provided that payment is made as noted above. SOCIAL SECURITY/TAX IDENTIFICATION NUMBER. Federal regulations require you to provide a Social Security or other certified taxpayer identification number when you open or reopen an account. Purchase Applications without such a number or an indication that a number has been applied for will not be accepted. If you have applied for a number, the number must be provided and certified within 60 days of the date of the Purchase Application. IN-KIND PURCHASES AND REDEMPTIONS. Northern Funds reserves the right to accept payment for shares in the form of securities that are permissible investments for a Fund. Northern Funds also reserves the right to pay redemptions by a distribution "in-kind" of securities (instead of cash) from a Fund. See the Statement of Additional Information for further information about the terms of these purchases and redemptions. MISCELLANEOUS PURCHASE INFORMATION. - - You will be responsible for all losses and expenses of a Fund in the event of any failure to make payment according to the procedures outlined in this Prospectus. Northern Trust may redeem shares from any account it maintains to protect the Funds and Northern Trust against loss. In addition, a $20 charge will be imposed if a check does not clear. - - You may initiate transactions between Northern Trust banking and Northern Funds accounts by using Northern Trust Private Passport. For additional details, please visit our website www.northerntrust.com/privatepassport or contact your relationship manager. Page 80 82 ABOUT YOUR ACCOUNT - - Northern Funds reserves the right to reject any purchase order. The Funds also reserve 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 60690-6319, calling 1-800-595-9111 or sending an e-mail to: northernfunds@execpc.com. TIMING OF REDEMPTION AND EXCHANGE REQUESTS. Redemption and exchange requests received in good order by the Transfer Agent or other authorized intermediary on a Business Day by 3:00 p.m., Chicago time, with respect to the Non-Money Market Funds, or by 1:00 p.m., Chicago time, with respect to the Money Market Funds, will be executed on the same day. The redemption or exchange will be effected at that day's closing share price. Good order means that the request must include the following information: - The account number and Fund name - The amount of the transaction, in dollar amount or number of shares - The signature of all account owners exactly as they are registered on the account (except for 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 1-800-595-9111 for more information about documentation that may be required of these entities In certain circumstances, Northern Funds may advance the time by which redemption and exchange orders must be received. See "Early Closings" on page __. PAYMENT OF MONEY MARKET FUND REDEMPTION PROCEEDS. If a money market redemption request is received by the Transfer Agent in good order by 1:00 p.m., Chicago time, on a Business Day, the proceeds will normally be sent on the next Business Day, unless payment in immediately available funds on the same Business Day is requested. Proceeds for redemption orders received on a non-Business Day will normally be sent on the second Business Day after receipt in good order. However, if any portion of the shares to be redeemed represents an investment made by check, the Funds may delay the payment of the redemption proceeds until the check has cleared and collected. This may take up to fifteen days from the purchase date. PAYMENT OF NON-MONEY MARKET FUND REDEMPTION PROCEEDS. The Non-Money Market Funds will make payment for redeemed shares typically within one or two Business Days, but no later than the seventh day after a redemption request is received in good order by the Transfer Agent or an authorized intermediary (or such longer period permitted by the SEC). However, if any portion of the shares to be redeemed represents an investment made by check, the Funds may delay the payment of the redemption proceeds until the check has cleared and collected. This may take up to fifteen days from the purchase date. MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by check unless the Transfer Agent is directed otherwise. Redemption proceeds may also be wired. A redemption request may not be processed if a shareholder has failed to submit a completed and properly executed Purchase Application. - - Northern Funds reserves the right to redeem shares held by any shareholder who provides incorrect or incomplete account information or when such involuntary redemptions are necessary to avoid adverse consequences to the Fund and its shareholders. Page 81 83 ABOUT YOUR ACCOUNT - - 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 a Fund's net asset value. - - You may initiate transactions between Northern Trust banking and Northern Funds accounts by using Northern Trust Private Passport. For additional details, please visit our web site at www.northerntrust.com/privatepassport or contact your relationship manager. - - Northern Funds reserves the right to change or discontinue any of its redemption procedures. - - Northern Funds reserves the right to defer crediting, sending or wiring redemption proceeds for up to seven days (or such longer period permitted by the SEC) after receiving the redemption order if, in its judgment, an earlier payment could adversely affect a 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 Funds and Transfer Agent may charge a shareholder reasonable costs in locating a shareholder's current address. SIGNATURE GUARANTEES. If a signature guarantee is required, it must be from an institution participating in 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. Page 82 84 ABOUT YOUR ACCOUNT BUSINESS DAY. A "Business Day" with respect to the Non-Money Market Funds is each Monday through Friday when the New York Stock Exchange (the "Exchange") is open for business. A "Business Day" with respect to the Money Market Funds is each Monday through Friday when Northern Trust or the New York Stock Exchange is open for business. In 1999 the Funds will be closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas Day and, for the Non-Money Market Funds, Good Friday. EARLY CLOSINGS. Northern Funds reserve the right to cease, or to advance the time for, accepting purchase, redemption or exchange orders for same Business Day credit when Northern Trust or the Exchange closes early as a result of unusual weather or other conditions. They also reserve this right when The Bond Market Association recommends that securities markets close or close early. AUTHORIZED INTERMEDIARIES. Northern Funds may authorize certain financial intermediaries (including banks, trust companies, brokers and investment advisers), which provide recordkeeping, reporting and processing services, to accept purchase, redemption and exchange orders from their customers on behalf of the Funds. These financial intermediaries may also designate other intermediaries to accept such orders, if approved by the Funds. Authorized intermediaries are responsible for transmitting orders and delivering funds on a timely basis. A Fund will be deemed to have received an order when the order is accepted by the authorized intermediary on a Business Day, and the order will be priced at the Fund's per share NAV next determined. SERVICE ORGANIZATIONS. Northern Funds may enter into agreements with Service Organizations such as banks, corporations, broker/dealers and other financial institutions, including Northern Trust, concerning the provision of support and/or distribution services to their customers who own Fund shares. These services may include: - - support services such as assisting investors in processing purchase, exchange and redemption requests; - - processing dividend and distribution payments from the Funds; - - providing information to customers showing their positions in the Funds; and - - providing subaccounting with respect to Fund shares beneficially owned by customers or the information necessary for subaccounting. In addition, Service Organizations may provide assistance, such as the forwarding of sales literature and advertising to their customers, in connection with the distribution of Fund shares. For their services, Service Organizations may receive fees from a Fund at annual rates of up to 0.25% of the average daily net asset value of the shares covered by their agreements. Because these fees are paid out of the Funds' assets on an on-going basis, they will increase the cost of your investment in the Funds. In addition, Northern Trust and NTQA may provide compensation to certain dealers and other financial intermediaries who provide services to their customers who invest in Northern Funds or whose customers purchase significant amounts of a Fund's shares. The amount of such compensation may be made on a one-time and/or periodic basis, and may represent all or a portion of the annual fees earned by Northern Trust and NTQA as Investment Advisers (after adjustments). This additional compensation will be paid by Northern Trust, NTQA or their affiliates and will not represent an additional expense to Northern Funds or their shareholders. Service Organizations may also charge their customers fees for providing administrative services in connection with investments in a Fund. Investors should contact their Service 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 Page 83 85 ABOUT YOUR ACCOUNT managers subject to the jurisdiction of the SEC, the Department of Labor or state securities commissions, are urged to consult their legal counsel before entering into agreements with Northern Funds. State securities laws regarding the registration of dealers may differ from Federal law. As a result, Service Organizations investing in the Funds on behalf of their customers may be required to register as dealers. Agreements that contemplate the provision of distribution services by Service Organizations are governed by a Distribution and Service Plan (the "Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under the 1940 Act. Payments to Service Organizations, including Northern Trust, under the Plan are not tied directly to their own out-of-pocket expenses and therefore may be used as they elect (for example, to defray their overhead expenses), and may exceed their direct and indirect costs. SHAREHOLDER REPORTS. Shareholders of record will be provided each year with a semi-annual report showing portfolio investments and other information as of September 30 and, after the close of the Funds' fiscal year on March 31, with an annual report containing audited financial statements. To eliminate unnecessary duplication, only one copy of shareholder reports will be sent to shareholders with the same mailing address. Shareholders who desire a duplicate copy of shareholder reports to be mailed to their residence should call 1-800-595-9111 or send an email to: northernfunds@execpc.com. DIVIDENDS AND DISTRIBUTIONS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS OF EACH FUND ARE AUTOMATICALLY REINVESTED IN ADDITIONAL SHARES OF THE SAME FUND WITHOUT ANY SALES CHARGE OR ADDITIONAL PURCHASE PRICE AMOUNT. You may, however, elect to have dividends or capital gain distributions (or both) paid in cash or reinvested in shares of another Northern Fund at their net asset value per share. If you would like to receive dividends or distributions in cash or have them reinvested in another 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. MONEY MARKET FUNDS. Each Money Market Fund's net investment income is declared as a dividend on each Business Day and paid monthly. Dividends will also be paid promptly upon a total redemption of shares in an account not subject to a standing order for the purchase of additional shares. Net investment income includes interest accrued on the Fund's assets less the Fund's estimated expenses. Net realized short-term capital gains may be distributed from time to time during Northern Funds' fiscal year (but not less frequently than annually). The Money Market Funds do not expect to realize net long-term capital gains. Money market shares begin earning dividends on the day an order is executed if payment in immediately available funds is received by Northern Funds by the time designated under "Purchasing and Selling Shares." Otherwise, shares begin earning dividends on the day payment in Federal or other immediately available funds is received. NON-MONEY MARKET FUNDS. The following table summarizes the general distribution policies for each of the Non-Money Market Funds. A Fund with an annual dividend or distribution policy may, in some years, make additional dividends or distributions to the extent necessary for the Fund to avoid incurring unnecessary tax liabilities or for other reasons. Page 84 86 ABOUT YOUR ACCOUNT
- ---------------------------------------------------------------------------------------------------------------------- DIVIDENDS, IF ANY, CAPITAL GAINS, IF ANY, FUND DECLARED AND PAID DECLARED AND PAID - ---------------------------------------------------------------------------------------------------------------------- U.S. Government Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Short-Intermediate U.S. Government Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- California Intermediate Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Fixed Income Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- Arizona Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- California Tax-Exempt Declared daily, paid monthly* Annually - ---------------------------------------------------------------------------------------------------------------------- International Fixed Income Quarterly Annually - ---------------------------------------------------------------------------------------------------------------------- High Yield Municipal Monthly Annually - ---------------------------------------------------------------------------------------------------------------------- High Yield Fixed Income Monthly Annually - ---------------------------------------------------------------------------------------------------------------------- Income Equity Monthly Annually - ---------------------------------------------------------------------------------------------------------------------- Stock Index Quarterly Annually - ---------------------------------------------------------------------------------------------------------------------- Growth Equity Quarterly Annually - ---------------------------------------------------------------------------------------------------------------------- Select Equity Annually Annually - ---------------------------------------------------------------------------------------------------------------------- Marketpower Annually Annually - ---------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Quarterly Annually - ---------------------------------------------------------------------------------------------------------------------- Small Cap Index Annually Annually - ---------------------------------------------------------------------------------------------------------------------- Small Cap Annually Annually - ---------------------------------------------------------------------------------------------------------------------- Small Cap Growth Annually Annually - ---------------------------------------------------------------------------------------------------------------------- International Growth Equity Annually Annually - ---------------------------------------------------------------------------------------------------------------------- International Select Equity Annually Annually - ---------------------------------------------------------------------------------------------------------------------- Technology Annually Annually - ----------------------------------------------------------------------------------------------------------------------
* Shares of these Funds are entitled to the dividends declared by a Fund beginning on the next Business Day after the purchase order is executed. TAX CONSIDERATIONS Each Fund contemplates declaring as dividends each year all or substantially all of its taxable income, including its net capital gain (excess of long-term capital gain over short-term capital loss). Distributions attributable to the net capital gain of a Fund will be taxable to you as long-term capital gain, regardless of how long you have held your shares. Other Fund distributions will generally be taxable as ordinary income, except as discussed below. You will be subject to income tax on Fund distributions regardless of whether they are paid in cash or reinvested in additional shares. You will be notified annually of the tax status of distributions to you. For any Fund other than a Money Market Fund, you should note that if you purchase shares just before a distribution, the purchase price will reflect the amount of the upcoming distribution, but you will be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of capital. This is known as "buying into a dividend." You will recognize taxable gain or loss on a sale, exchange or redemption of your shares, including an exchange for shares of another Fund, based on the difference between your tax basis in the shares and the amount you receive for them. To aid in computing your tax basis, you generally should retain your account statements for the periods during which you held shares. 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. Page 85 87 ABOUT YOUR ACCOUNT The one major exception to these tax principles is that distributions on, and sales, exchanges and redemptions of, shares held in an IRA (or other tax-qualified plan) will not be currently taxable. If you (a) have provided either an incorrect Social Security Number or Taxpayer Identification Number or no number at all, (b) are subject to withholding by the Internal Revenue Service for prior failure to properly include on your return payments of interest or dividends, or (c) have failed to certify to Northern Funds, when required to do so, that you are not subject to backup withholding or are an "exempt recipient," then Northern Funds will be required in certain cases to withhold and remit to the U.S. Treasury 31% of the dividends and distributions payable to you. There are certain tax requirements that the Funds must follow in order to avoid Federal taxation. In their efforts to adhere to these requirements, the Funds may have to limit their investment activity in some types of instruments. THE TAX-EXEMPT AND MUNICIPAL FUNDS. The Tax-Exempt Funds and Municipal Funds expect to pay "exempt-interest dividends" that are generally exempt from regular Federal income tax. However, a portion of the exempt-interest dividends paid by the Tax-Exempt Funds may be, and a portion of the dividends paid by the Municipal Funds generally will be, an item of tax preference for purposes of determining Federal alternative minimum tax liability. Exempt-interest dividends will also be considered along with other adjusted gross income in determining whether any Social Security or railroad retirement payments received by you are subject to Federal income taxes. Except as stated below, you may be subject to state and local taxes on Fund distributions and redemptions. State income taxes may not apply, however, to the portions of each Fund's distributions, if any, that are attributable to interest on certain types of Federal securities or interest on securities issued by the particular state or municipalities within the state. The California Funds and the Arizona Tax-Exempt Fund expect to pay dividends that are generally exempt from personal income tax in those respective states. This exemption will apply, however, only to dividends that are derived from interest paid on California or Arizona municipal instruments, respectively, or on certain Federal obligations. In addition, dividends paid by these Funds will be subject to state franchise and corporate income taxes, if applicable. The Florida Intermediate Tax-Exempt Fund intends, but cannot guarantee, that its shares will qualify for the exemption from the Florida intangibles tax. In all cases, distributions, if any, derived from net long-term capital gains will generally be taxable to you as long-term capital gains, and any dividends derived from short-term capital gains and taxable interest income will be taxable to you as ordinary income. If you receive an exempt-interest dividend with respect to any share and the share is held for six months or less, any loss on the sale or exchange of the share will be disallowed to the extent of the dividend amount. Interest on indebtedness incurred by a shareholder to purchase or carry shares of the Tax-Exempt Funds and Municipal Funds generally will not be deductible for Federal income tax purposes. THE INTERNATIONAL FUNDS. It is expected that the International Funds will be subject to foreign withholding taxes with respect to dividends or interest received from sources in foreign countries. The International Funds may make an election to treat a proportionate amount of such taxes as constituting a distribution to each shareholder, which would allow each shareholder either (1) to credit such proportionate amount of taxes against Federal income tax liability or (2) to take such amount as an itemized deduction. CONSULT YOUR TAX PROFESSIONAL. Your investment in the Funds could have additional tax consequences. You should consult your tax professional for information regarding all tax consequences applicable to your investments in the Funds. More tax information is provided in the Statement of Additional Information. This short summary is not intended as a substitute for careful tax planning. Page 86 88 ABOUT YOUR ACCOUNT TAX TABLE You may find it particularly useful to compare the tax-free yields of the Tax-Exempt Funds and the Municipal Funds to the equivalent yields from taxable investments. For an investor in a low tax bracket, it may not be helpful to invest in a tax-exempt investment if a higher after-tax yield can be achieved from a taxable instrument. The table below illustrates the difference between hypothetical tax-free yields and tax-equivalent yields for different tax brackets. You should be aware, however, that tax brackets can change over time and that your tax adviser should be consulted for specific yield calculations.
- -------------------------------------------------------------------------------------------------------------------------------- FEDERAL MARGINAL TAX-EXEMPT YIELDS TAXABLE INCOME TAX RATE 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% - -------------------------------------------------------------------------------------------------------------------------------- SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS - -------------------------------------------------------------------------------------------------------------------------------- $ 0 - $ 25,750 $ 0 - $ 43,050 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% - -------------------------------------------------------------------------------------------------------------------------------- $ 25,751 - $ 62,450 $ 43,051 - $104,050 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% - -------------------------------------------------------------------------------------------------------------------------------- $ 62,451 - $130,250 $104,051 - $158,550 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% - -------------------------------------------------------------------------------------------------------------------------------- $130,251 - $283,150 $158,551 - $283,150 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% - -------------------------------------------------------------------------------------------------------------------------------- Over $283,151 Over $283,051 39.6% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25% - --------------------------------------------------------------------------------------------------------------------------------
The tax-exempt yields used here are hypothetical and no assurance can be made that the Funds will attain any particular yield. A Fund's yield fluctuates as market conditions change. The tax brackets and related yield calculations are based on the 1999 Federal marginal tax rates indicated in the table. The table does not reflect the phase out of personal exemptions and itemized deductions which will apply to certain higher income taxpayers. In addition, the brackets do not take into consideration the California or Arizona state personal income tax or the Florida intangibles tax or any other state tax. YEAR 2000 ISSUES Like every other business dependent upon computerized information processing, Northern Trust Corporation must deal with "Year 2000" issues. Many computer systems use two digits rather than four to identify the year. Unless adapted, these systems may not be able to correctly distinguish the Year 2000 from the Year 1900. As the Year 2000 approaches, many systems may be unable to accurately process certain date-based information, which could cause a variety of operational problems for businesses. This could have a negative effect on the companies in which the Funds invest, thus hurting the Funds' investment returns. Northern Trust Corporation has implemented steps to prepare its critical computer systems and processes for Year 2000 processing. It has established a dedicated Year 2000 Project Team whose members have significant systems development and maintenance experience. Northern Trust Corporation's Year 2000 project includes a comprehensive testing plan of its critical systems. Northern Trust Corporation has advised Northern Funds that it has substantially completed work on its critical systems and testing with outside parties. Northern Trust Corporation also will have a program to monitor and assess the efforts of other parties, such as other service providers to the Fund. However, it cannot control the success of those other parties' efforts. Contingency plans are being established to provide Northern Trust Corporation with alternatives in case these entities experience significant Year 2000 difficulties that impact Northern Trust Corporation. Furthermore, even if the actions taken by Northern Trust Corporation are successful, the normal operations of the Funds may, in any event, be disrupted significantly by the failure of communications and public utility companies, governmental entities, financial processors or others to perform their services as a result of Year 2000 problems. Page 87 89 ABOUT YOUR ACCOUNT Efforts in foreign countries to remediate potential Year 2000 problems are not as extensive as those in the United States. As a result, the operations of foreign markets, foreign issuers and foreign governments may be disrupted by the Year 2000 problem and the investment portfolio of a Fund may be adversely affected. Page 88 90 Risks, Securities, Techniques and Financial Information RISKS, SECURITIES AND TECHNIQUES ADDITIONAL INFORMATION ON FUND STRATEGIES, RISKS, SECURITIES AND TECHNIQUES THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS. IT ALSO EXPLORES THE VARIOUS INVESTMENT SECURITIES AND TECHNIQUES THAT THE INVESTMENT MANAGEMENT TEAM MAY USE. THE FUNDS MAY INVEST IN OTHER SECURITIES AND ARE SUBJECT TO FURTHER RESTRICTIONS AND RISKS WHICH ARE DESCRIBED IN THE STATEMENT OF ADDITIONAL INFORMATION. YOU SHOULD NOTE THAT A FUND'S INVESTMENT OBJECTIVE MAY BE CHANGED BY NORTHERN FUNDS' BOARD OF TRUSTEES WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL, HOWEVER, BE NOTIFIED OF ANY CHANGES. ANY SUCH CHANGE MAY RESULT IN A FUND HAVING AN INVESTMENT OBJECTIVE DIFFERENT FROM THE OBJECTIVE WHICH THE SHAREHOLDER CONSIDERED APPROPRIATE AT THE TIME OF INVESTMENT IN THE FUND. ADDITIONAL INFORMATION ON PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS DERIVATIVES. The Funds may purchase certain "derivative" instruments. A derivative is a financial instrument whose value is derived from---or based upon---the performance of underlying assets, interest or currency exchange rates or indices. Derivatives include futures contracts, options, interest rate and currency swaps, equity swaps, structured securities, forward currency contracts and structured debt obligations (including collateralized mortgage obligations and other types of asset-backed securities, "stripped" securities and various floating rate instruments, including leveraged "inverse floaters"). INVESTMENT STRATEGY. A Fund will invest in derivatives only if the potential risks and rewards are consistent with the Fund's objective, strategies and overall risk profile. The Funds may use derivatives for hedging purposes to offset a potential loss in one position by establishing an interest in an opposite position. Certain Funds may also use derivatives for speculative purposes to invest for potential income or capital gain. SPECIAL RISKS. Engaging in derivative transactions involves special risks, including (a) market risk that the Fund's derivatives position will lose value; (b) credit risk that the counterparty to the transaction will default; (c) leveraging risk that the value of the derivative instrument will decline more than the value of the assets on which it is based; (d) illiquidity risk that a Fund will be unable to sell its position because of lack of market depth or disruption; (e) pricing risk that the value of a derivative instrument will be difficult to determine; and (f) operations risk that loss will occur as a result of inadequate systems or human error. Many types of derivatives have been recently developed and have not been tested over complete market cycles. For these reasons, a Fund may suffer a loss whether or not the analysis of the investment management team is accurate. FOREIGN 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 International Funds intend to invest a substantial portion of their total assets in foreign securities. The Fixed Income, High Yield Fixed Income, Income Equity, Growth Equity, Select Equity, Marketpower, Mid Cap Growth, Small Cap, Small Cap Growth and Technology Funds may invest up to 25% of their total assets in foreign securities including ADRs, EDRs and GDRs. These Funds may also invest in foreign time deposits and other short-term instruments. The Money Market Fund may invest in the U.S. dollar-denominated obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities, Page 89 91 Risks, Securities, Techniques and Financial Information foreign commercial banks and foreign branches of U.S. banks. It may also invest in U.S. dollar-denominated commercial paper and other obligations of foreign issuers. Investments by the Money Market Fund in foreign issuer obligations will not exceed 50% of the Fund's total assets measured at the time of purchase. The International Growth Equity, International Select Equity and International Fixed Income Funds may invest more than 25% of their total assets in the securities of issuers located in countries with securities markets that are highly developed, liquid and subject to extensive regulation. Such countries may include, but are not limited to Japan, the United Kingdom, France, Germany and Switzerland. SPECIAL RISKS. Foreign securities involve special risks and costs. Foreign securities, and in particular foreign debt securities, are sensitive to changes in interest rates. In addition, investment in the securities of foreign governments involves the risk that foreign governments may default on their obligations or may otherwise not respect the integrity of their debt. The performance of investments in securities denominated in a foreign currency will also depend, in part, on the strength of the foreign currency against the U.S. dollar and the interest rate environment in the country issuing the currency. Absent other events which could otherwise affect the value of a foreign security (such as a change in the political climate or an issuer's credit quality), appreciation in the value of the foreign currency generally results in an increase in value of a foreign currency-denominated security in terms of U.S. dollars. A decline in the value of the foreign currency relative to the U.S. dollar generally results in a decrease in value of a foreign currency-denominated security. Investment in foreign securities may involve higher costs than investment in U.S. securities, including higher transaction and custody costs as well as the imposition of additional taxes by foreign governments. Foreign investments may also involve risks associated with the level of currency exchange rates, less complete financial information about the issuers, less market liquidity, more market volatility and political instability. Future political and economic developments, the possible imposition of withholding taxes on dividend income, the possible seizure or nationalization of foreign holdings, the possible establishment of exchange controls or freezes on the convertibility of currency, or the adoption of other governmental restrictions might adversely affect an investment in foreign securities. Additionally, foreign banks and foreign branches of domestic banks may be subject to less stringent reserve requirements, and to different accounting, auditing and recordkeeping requirements. Additional risks are involved when investing in countries with emerging economies or securities markets. These countries are located in the Asia/Pacific region, Eastern Europe, 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, a Fund may be required to deliver securities receiving payment and may also be unable to complete transactions during market disruptions. As a result of these and other risks, investments in these countries generally present a greater risk of loss to the Funds. While the Funds' investments may, if permitted, be denominated in foreign currencies, the portfolio securities and other assets held by the Funds are valued in U.S. dollars. Currency exchange rates may fluctuate significantly over short periods of time causing a Fund's net asset value to fluctuate as well. Currency exchange rates can be affected unpredictably by the intervention or the failure to intervene by U.S. or foreign governments or central banks, or by currency controls or political developments in the U.S. or abroad. To the extent that a Fund is invested in foreign securities while also maintaining currency positions, it may be exposed to greater combined risk. The Funds' respective net currency positions may expose them to risks independent of their securities positions. The introduction of a single currency, the euro, on January 1, 1999 for participating nations in the European Economic and Monetary Union presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates for currencies being converted into the euro; the Page 90 92 Risks, Securities, Techniques and Financial Information fluctuation of the euro relative to non-euro currencies during the transition period from January 1, 1999 to December 31, 2001 and beyond; whether the interest rate, tax and labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other countries in the European Union ("EU"), such as the United Kingdom and Denmark, into the euro and the admission of other non-EU countries such as Poland, Latvia and Lithuania as members of the EU may have an impact on the euro. These or other factors, including political and economic risks, could cause market disruptions, and could adversely affect the value of securities held by the Funds. Because of the number of countries using this single currency, a significant portion of the assets of the International Funds may be denominated in the euro. 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. Except as stated in the next section, fixed income and convertible securities purchased by the Funds will generally be rated investment grade. The Funds may also invest in unrated securities if the Investment Adviser believes they are comparable in quality. SPECIAL RISKS. Although securities rated BBB by S&P, Duff or Fitch, or Baa by Moody's are considered investment grade, they have certain speculative characteristics. Therefore, they may be subject to a higher risk of default than obligations with higher ratings. Subsequent to its purchase by a Fund, a rated security may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Investment Adviser will consider such an event in determining whether the Fund should continue to hold the security. NON-INVESTMENT GRADE SECURITIES. Non-investment grade fixed income and convertible securities are generally rated BB or below by S&P, Duff or Fitch, or Ba by Moody's. INVESTMENT STRATEGY. The High Yield Municipal Fund and the High Yield Fixed Income Fund may invest without limitation in non-investment grade securities, including convertible securities. The other Fixed Income Funds (with the exception of the U.S. Government Fund and the Short-Intermediate U.S. Government Fund) and the Equity Funds (with the exception of the Stock Index Fund and Small Cap Index Fund ) may invest up to 15% (35% in the case of the Income Equity Fund) of total assets in non-investment grade securities, including convertible securities, when the investment management team determines that such securities are desirable in light of the Funds' investment objectives and portfolio mix. SPECIAL RISKS. Non-investment grade securities (sometimes referred to as "junk bonds") are considered predominantly speculative by traditional investment standards. The market value of these low-rated securities tends to be more sensitive to individual corporate developments and changes in interest rates and economic conditions than higher-rated securities. In addition, they generally present a higher degree of credit risk. Issuers of low-rated securities are often highly leveraged, so their ability to repay their debt during an economic downturn or periods of rising interest rates may be impaired. The risk of loss due to default by these issuers is also greater because low-rated securities generally are unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by a Fund in defaulted securities poses additional risk of loss should nonpayment of principal and interest continue in respect of such securities. Even if such securities are held to maturity, recovery by a Fund of its initial investment and any anticipated income or appreciation will be uncertain. A Fund may also incur additional expenses in seeking recovery on defaulted securities. Page 91 93 Risks, Securities, Techniques and Financial Information The secondary market for lower quality securities is concentrated in relatively few market markers and is dominated by institutional investors. Accordingly, the secondary market for such securities is not as liquid as, and is more volatile than, the secondary market for higher quality securities. In addition, market trading volume for these securities is generally lower and the secondary market for such securities could contract under adverse market or economic conditions, independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on the market price and a Fund's ability to dispose of particular portfolio investments. A less developed secondary market may also make it more difficult for a Fund to obtain precise valuations of the high yield securities in its portfolio. Investments in lower quality securities, whether rated or unrated, will be more dependent on Northern Trust's credit analysis than would be the case with investments in higher quality securities. 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, a 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 a Fund. INVESTMENT STRATEGY. Each Non-Money Market Fund may invest all or any portion of its assets in short-term obligations pending investment, to meet anticipated redemption requests or as a temporary defensive measure in response to adverse market or economic conditions (except for the Stock Index and Small Cap Index Funds which generally will not invest in these securities as part of a temporary defensive strategy to protect against potential stock market declines). SPECIAL RISKS. A Non-Money Market Fund may not achieve its investment objective when its assets are invested in short-term obligations. MATURITY RISK. Each Fixed Income Fund will normally maintain the dollar-weighted average maturity of its Fund within a specified range. However, the maturities of certain instruments, such as variable and floating rate instruments, are subject to estimation. In addition, in calculating average weighted maturities, the maturity of mortgage and other asset-backed securities will be based on estimates of average life. As a result, the Funds cannot guarantee that these estimates will, in fact, be accurate or that their average maturities will remain within their specified limits. PORTFOLIO TURNOVER. The investment management team will not consider the Fund turnover rate a limiting factor in making investment decisions for a Fund. A high portfolio turnover rate (100% or more) is likely to involve higher brokerage commissions and other transactions costs, which could reduce a Fund's return. It may also result in higher short-term capital gains that are taxable to shareholders. See "Financial Highlights" for the Funds' historical portfolio turnover rates. Northern Funds expects that the annual portfolio turnover rate of each of the Short-Intermediate U.S. Government Fund, the California Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the California Tax-Exempt Fund, The Marketpower Fund and the Small Cap Index Fund will generally not exceed Page 92 94 Risks, Securities, Techniques and Financial Information 100%; the annual portfolio turnover rate of the High Yield Municipal Fund, High Yield Fixed Income Fund and Small Cap Growth Fund will generally not exceed 200%. TRACKING RISK. The Stock Index and Small Cap Index Funds (the "Index Funds") seek to track the performance of their respective benchmarks indices. INVESTMENT STRATEGY. Under normal market conditions, the Investment Adviser expects the quarterly performance of the Index Funds to be within a .95 correlation with their respective benchmarks, before expenses. SPECIAL RISKS. The Index Funds are subject to the risk of tracking variance. Tracking variance may result from share purchases and redemptions, transaction costs, expenses and other factors. These may prevent a Fund from achieving its investment objective. SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE CALIFORNIA FUNDS, FLORIDA INTERMEDIATE TAX-EXEMPT FUND AND THE ARIZONA TAX-EXEMPT FUND. The investments of the California Funds in California municipal instruments, the Florida Intermediate Tax-Exempt Fund in Florida municipal instruments and the Arizona Tax-Exempt Fund in Arizona municipal instruments raise additional considerations. Payment of the interest on and the principal of these instruments is dependent upon the continuing ability of issuers in these states to meet their obligations. INVESTMENT STRATEGY. Under normal market conditions, at least 65% of the value of the California Funds' total assets will be invested in California municipal instruments, at least 65% of the value of the Florida Intermediate Tax-Exempt Fund's total assets will be invested in Florida municipal instruments, and at least 65% of the value of the Arizona Tax-Exempt Fund's total assets will be invested in Arizona municipal instruments. Consequently, these Funds are more susceptible to factors adversely affecting issuers of California, Florida and Arizona municipal instruments, and may be riskier than comparable funds that do not emphasize these issuers to this degree. SPECIAL RISKS. The California Funds' investments will be affected by political and economic developments within the State of California (the "State"), and by the financial condition of the State, its public authorities and political subdivisions. After suffering a severe recession in the early 1990's which caused the State to experience financial difficulties, California's economy entered a sustained recovery since late 1993 and the State's budget has been returned to a positive balance. California's long-term credit rating has been raised after being reduced during the recession. To respond to its own revenue shortfalls during the recession, the State reduced assistance to its public authorities and political subdivisions. Cutbacks in state aid could further adversely affect the financial condition of cities, counties and education districts which are subject to their own fiscal constraints. California voters in the past have passed amendments to the California Constitution and other measures that limit the taxing and spending authority of California governmental entities, and future voter initiatives could result in adverse consequences affecting California municipal instruments. Also, the ultimate fiscal effect of federally-mandated reform of welfare programs on the State and its local governments is still to be resolved. These factors, among others (including the outcome of related pending litigation), could reduce the credit standing of certain issuers of California municipal instruments. Similarly, if Florida or Arizona or any of their respective political subdivisions should suffer serious financial difficulties to the extent their ability to pay their obligations might be jeopardized, the ability of such entities to market their securities, and the value of the Florida Intermediate Tax-Exempt Fund or the Arizona Tax-Exempt Fund, could be adversely affected. In addition to the risk of nonpayment of California, Florida or Arizona municipal instruments, if these obligations decline in quality and are downgraded by an NRSRO, they may become ineligible for purchase by the Funds. Since there are large numbers of buyers of these instruments, the supply of California, Florida or Arizona municipal instruments that are eligible for purchase by the Funds could become inadequate at certain times. Page 93 95 Risks, Securities, Techniques and Financial Information A more detailed description of special factors affecting investments in California, Florida and Arizona municipal instruments is provided in the Statement of Additional Information. SPECIAL RISKS AND CONSIDERATIONS APPLICABLE TO THE TECHNOLOGY FUND. The Technology Fund's concentration in technology securities presents special risk considerations. INVESTMENT STRATEGY. The Technology Fund invests principally in companies that develop, produce or distribute products and services related to advances in technology. SPECIAL RISKS. Technology companies may produce or use products or services that prove commercially unsuccessful, become obsolete or become adversely impacted by government regulation. Competitive pressures in the technology industry may affect negatively the financial condition of technology companies, and the Fund's concentration in technology securities may subject it to more volatile price movements than a more diversified securities portfolio. In certain instances, technology securities may experience significant price movements caused by disproportionate investor optimism or pessimism with little or no basis in fundamental economic conditions. As a result of these and other reasons, investments in the technology industry can experience sudden and rapid appreciation and depreciation. You should, therefore, expect that 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(R) Index. In addition, the Fund's investments may be concentrated in companies that develop or sell computers, software and peripheral products, which present the following additional risks. These companies are often dependent on the existence and health of other products or industries and face highly competitive pressures, product licensing, trademark and patent uncertainties and rapid technological changes which may have a significant effect on their financial condition. For example, an increasing number of companies and new product offerings can lead to price cuts and slower selling cycles, and many of these companies may be dependent on the success of a principal product, may rely on sole source providers and third-party manufacturers, and may experience difficulties in managing growth. A more detailed description of special factors affecting investments in California, Florida and Arizona municipal instruments is provided in the Statement of Additional Information. ADDITIONAL DESCRIPTION OF SECURITIES AND COMMON INVESTMENT TECHNIQUES ASSET-BACKED SECURITIES. Asset-backed securities are sponsored by entities such as government agencies, banks, financial companies and commercial or industrial companies. They represent interests in pools of mortgages or other cash-flow producing assets such as automobile loans, credit card receivables and other financial assets. In effect, these securities "pass through" the monthly payments that individual borrowers make on their mortgages or other assets net of any fees paid to the issuers. Examples of these include guaranteed mortgage pass-through certificates, collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"). INVESTMENT STRATEGY. The U.S. Government Money Market Fund, the U.S. Government Select Money Market Fund, the U.S. Government Fund and the Short-Intermediate U.S. Government Fund may purchase securities that are secured or backed by mortgages and that are issued or guaranteed by the U.S. government, its agencies or instrumentalities. The other Funds may purchase these and other types of asset-backed securities. The Funds will invest in asset-backed securities rated investment grade (rated BBB or better by S&P, Duff or Fitch, or Baa or better by Moody's) at the time of purchase. They may also invest in unrated mortgage-backed securities which the Investment Adviser believes are of comparable quality. These rating and comparable quality limitations do not apply to the High Yield Municipal and High Yield Fixed Income Funds. In addition, asset-backed securities purchased by the Money Market Funds must meet the quality restrictions imposed by the SEC. 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 Page 94 96 Risks, Securities, Techniques and Financial Information change because of actual or perceived changes in the creditworthiness of the originator, the servicing agent, the financial institution providing the credit support or the counterparty. Like other fixed income securities, when interest rates rise, the value of an asset-backed security generally will decline. However, when interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed income securities. In addition, non-mortgage asset-backed securities involve certain risks not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the underlying collateral. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and Federal consumer credit laws. Automobile receivables are subject to the risk that the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing the receivables. BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Funds can borrow money from banks and enter into reverse repurchase agreements with banks and other financial institutions. Reverse repurchase agreements involve the sale of securities held by a Fund subject to the Fund's agreement to repurchase them at a mutually agreed upon date and price (including interest). INVESTMENT STRATEGY. Each Fund may borrow in amounts not exceeding one-third of its total assets (including the amount borrowed). These transactions may be entered into as a temporary measure for emergency purposes or to meet redemption requests. The Funds (other than the Municipal Money Market, U.S. Government Select Money Market, Tax-Exempt Money Market, California Municipal Money Market, Income Equity, Growth Equity, Select Equity and Small Cap Funds) may utilize reverse repurchase agreements when the investment management team expects that the interest income to be earned from the investment of the transaction proceeds will be greater than the related interest expense. A Fund's reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In addition, whenever borrowings exceed 5% of the Fund's total assets, the Fund will not make any investments. SPECIAL RISKS. Borrowings and reverse repurchase agreements involve leveraging. If the securities held by the Funds decline in value while these transactions are outstanding, the net asset value of the Funds' outstanding shares will decline in value by proportionately more than the decline in value of the securities. In addition, reverse repurchase agreements involve the risks that the interest income earned by a Fund (from the investment of the proceeds) will be less than the interest expense of the transaction, that the market value of the securities sold by a Fund will decline below the price the Fund is obligated to pay to repurchase the securities, and that the securities may not be returned to the Fund. CONVERTIBLE SECURITIES. A convertible security is a bond or preferred stock that may be converted (exchanged) into the common stock of the issuing company within a specified time period for a specified number of shares. They offer the Funds a way to participate in the capital appreciation of the common stock into which the securities are convertible, while earning higher current income than is available from the common stock. INVESTMENT STRATEGY. The Equity Funds (other than the Stock Index and Small Cap Index Funds), the Fixed Income Fund, High Yield Fixed Income Fund and the International Fixed Income Fund may each acquire convertible securities. These securities are subject to the same rating requirements as fixed income securities held by a Fund. CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. Custodial receipts are participations in trusts that hold U.S. Treasury securities and are sold under names such as TIGRs and CATS. Like other stripped obligations, they entitle the holder to future interest or principal payments on the U.S. Treasury securities. INVESTMENT STRATEGY. To the extent consistent with their respective investment objectives, the Funds, other than the U.S. Government Select Money Market Fund, may invest a portion of their total assets in custodial receipts. Investments by the U.S. Government Money Market Fund, U.S. Government Fund and Short-Intermediate U.S. Government Fund in custodial receipts will not exceed 35% of the value of such Funds' total assets. Page 95 97 Risks, Securities, Techniques and Financial Information SPECIAL RISKS. Like other stripped obligations, custodial receipts may be subject to greater price volatility than ordinary debt obligations because of the way in which their principal and interest are returned to investors. EQUITY SWAPS. Equity swaps allow the parties to the swap agreement to exchange components of return on one equity investment (e.g., a basket of equity securities or an index) for a component of return on another non-equity or equity investment, including an exchange of differential rates of return. INVESTMENT STRATEGY. The Equity Funds may invest in equity swaps. Equity swaps may be used to invest in a market without owning or taking physical custody of securities in circumstances where direct investment may be restricted for legal reasons or is otherwise impractical. Equity swaps may also be used for other purposes, such as hedging or seeking to increase total return. SPECIAL RISKS. Equity swaps are derivative instruments and their values can be very volatile. To the extent that the investment management team does not accurately analyze and predict the potential relative fluctuation on the components swapped with the other party, a Fund may suffer a loss. The value of some components of an equity swap (such as the dividends on a common stock) may also be sensitive to changes in interest rates. Furthermore, during the period a swap is outstanding, a Fund may suffer a loss if the counterparty defaults. EXCHANGE RATE-RELATED SECURITIES. Exchange rate-related securities represent certain foreign debt obligations whose principal values are linked to a foreign currency but which are repaid in U.S. dollars. INVESTMENT STRATEGY. The Fixed Income, International Fixed Income, High Yield Fixed Income and Income Equity Funds may invest in exchange rate-related securities. SPECIAL RISKS. The principal payable on an exchange rate-related security is subject to currency risk. In addition, the potential illiquidity and high volatility of the foreign exchange market may make exchange rate-related securities difficult to sell prior to maturity at an appropriate price. FORWARD CURRENCY EXCHANGE CONTRACTS. A forward currency exchange contract is an obligation to exchange one currency for another on a future date at a specified exchange rate. INVESTMENT STRATEGY. The Equity Funds (other than the Stock Index and Small Cap Index Funds), the International Funds, the Fixed Income Fund and the High Yield Fixed Income Fund may enter into forward currency exchange contracts for hedging purposes and to help reduce the risks and volatility caused by changes in foreign currency exchange rates. The International Funds and the High Yield Fixed Income Fund may also enter into these contracts for speculative purposes (i.e., to increase total return) or for cross-hedging purposes. Foreign currency exchange contracts will be used at the discretion of the investment management team, and no Fund is required to hedge its foreign currency positions. SPECIAL RISKS. Forward foreign currency contracts are privately negotiated transactions, and can have substantial price volatility. As a result, they offer less protection against default by the other party than is available for instruments traded on an exchange. When used for hedging purposes, they tend to limit any potential gain that may be realized if the value of a Fund's foreign holdings increases because of currency fluctuations. When used for speculative purposes, forward currency exchange contracts may result in additional losses that would not otherwise be incurred. FUTURES CONTRACTS AND RELATED OPTIONS. A futures contract is a type of derivative instrument that obligates the holder to buy or sell an asset in the future at an agreed upon price. For example, a futures contract may obligate a Fund, at maturity, to take or make delivery of certain domestic or foreign securities, the cash value of a securities index or a stated quantity of a foreign currency. When a Fund purchases an option on a futures contract, it has the right to assume a position as a purchaser or seller of a futures contract at a specified exercise price during the option period. When a Fund sells an option on a futures contract, it becomes obligated to purchase or sell a futures contract if the option is exercised. Page 96 98 Risks, Securities, Techniques and Financial Information INVESTMENT STRATEGY. To the extent consistent with its investment objective, each Fund (other than the Money Market Funds) may invest in futures contracts and options on futures contacts on domestic or foreign exchanges or boards of trade. They may be used for hedging purposes, to increase total return or to maintain liquidity to meet potential shareholder redemptions, invest cash balances or dividends or minimize trading costs. The value of a Fund's futures contacts may equal up to 100% of its total assets. However, a Fund will not purchase or sell a futures contract unless, after the transaction, the sum of the aggregate amount of margin deposits on its existing futures positions and the amount of premiums paid for related options used for non-hedging purposes is 5% or less of its total assets. SPECIAL RISKS. Futures contracts and options present the following risks: imperfect correlation between the change in market value of a Fund's securities and the price of futures contracts and options; the possible inability to close a futures contract when desired; losses due to unanticipated market movements which are potentially unlimited; and the possible inability of the investment management team to correctly predict the direction of securities prices, interest rates, currency exchange rates and other economic factors. Foreign exchanges or boards of trade generally do not offer the same protections as U.S. exchanges. ILLIQUID OR RESTRICTED SECURITIES. Illiquid securities include repurchase agreements and time deposits with notice/termination dates of more than seven days, certain variable amount master demand notes that cannot be called within seven days, certain insurance funding agreements (see below), certain unlisted over-the-counter options and other securities that are traded in the U.S. but are subject to trading restrictions because they are not registered under the Securities Act of 1933, as amended (the "1933 Act"). INVESTMENT STRATEGY. Each Fund may invest up to 15% (10% in the case of the Money Market Funds) of its net assets in securities that are illiquid. If otherwise consistent with their investment objectives and policies, the Funds may purchase commercial paper issued pursuant to Section 4(2) of the 1933 Act and domestically traded securities that are not registered under the 1933 Act but can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act ("Rule 144A Securities"). These securities will not be considered illiquid so long as the Investment Advisers determine, under guidelines approved by the Northern Funds' Board of Trustees, that an adequate trading market exists. SPECIAL RISKS. Because illiquid and restricted securities may be difficult to sell at an acceptable price, they may be subject to greater volatility and may result in a loss to a Fund. The practice of investing in Rule 144A Securities could increase the level of a Fund's illiquidity during any period that qualified institutional buyers become uninterested in purchasing these securities. INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is an agreement that requires a Fund to make cash contributions to a deposit fund of an insurance company's general account. The insurance company then credits interest to the Fund for a set time period. INVESTMENT STRATEGY. The Money Market Fund and Fixed Income Fund may invest in IFAs issued by insurance companies that meet quality and credit standards established by the Investment Adviser. The High Yield Fixed Income Fund may invest in IFAs without regard to a minimum rating criteria. SPECIAL RISKS. IFAs are not insured by a government agency--they are backed only by the insurance company that issues them. As a result, they are subject to default risk. In addition, the transfer of IFAs may be restricted and an active secondary market in IFAs does not currently exist. This means that it may be difficult or impossible to sell an IFA at an appropriate price. INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. Interest rate and currency swaps are contracts that obligate a Fund and another party to exchange their rights to pay or receive interest or specified amounts of currency, respectively. Interest rate floors entitle the purchasers to receive interest payments if a specified index Page 97 99 Risks, Securities, Techniques and Financial Information falls below a predetermined interest rate. Interest rate caps entitle the purchasers to receive interest payments if a specified index exceeds a predetermined interest rate. INVESTMENT STRATEGY. The Fixed Income Funds and the Income Equity Fund may enter into interest rate swaps and the U.S. Government, Short-Intermediate U.S. Government, Fixed Income, International Fixed Income, High Yield Municipal and High Yield Fixed Income Funds may purchase interest rate floors or caps to protect against interest rate fluctuations and fluctuations in the floating rate market. The International Funds, the Fixed Income, High Yield Fixed Income, Income Equity, Growth Equity, Select Equity, Marketpower, Mid Cap Growth, Small Cap, Small Cap Growth and Technology Funds may also enter into currency swaps to protect against currency fluctuations. SPECIAL RISKS. If the other party to an interest rate swap defaults, a Fund's risk of loss consists of the amount of interest payments that the Fund is entitled to receive. In contrast, currency swaps usually involve the delivery of the entire principal value of one currency in exchange for the other currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party will default on its delivery obligations. Like other derivative securities, swaps, floors and caps can be highly volatile. As a result, they may not always be successful hedges and they could lower a Fund's total return. INVESTMENT COMPANIES. To the extent consistent with their respective investment objectives and policies, the Funds may invest in securities issued by other investment companies, including money market funds, index funds, "country funds" (i.e., funds that invest primarily in issuers located in a specific foreign country or region), S&P's Depository Receipts ("SPDRs") and similar securities of other issuers. INVESTMENT STRATEGY. Investments by a Fund in other investment companies will be subject to the limitations of the 1940 Act. SPECIAL RISKS. As a shareholder of another investment company, a Fund would be subject to the same risks as any other investor in that company. In addition, it would bear a proportionate share of any fees and expenses paid by that company. These would be in addition to the advisory and other fees paid directly by the Fund. LOAN PARTICIPATIONS. A loan participation is an interest in a loan to a U.S. or foreign company or other borrower which is administered and sold by a financial intermediary. INVESTMENT STRATEGY. The High Yield Fixed Income Fund may invest in loan participations in the form of a direct or co-lending relationship with the corporate borrower, an assignment of an interest in the loan by a co-lender or another participant, or a participation in a seller's share of the loan. SPECIAL RISKS. Like other debt obligations, loan participations may be subject to credit risk if the borrower defaults on making interest payments and repaying the principal. In the case where the Fund purchases a loan assignment or participation from another lender, the Fund is also subject to delays, expenses and risks greater than would have been involved if the Fund had purchased a direct obligation of the borrower. MUNICIPAL AND RELATED INSTRUMENTS. Municipal instruments include debt obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies, authorities and instrumentalities. Municipal instruments include both "general" and "revenue" bonds and may be issued to obtain funds for various public purposes. General obligations are secured by the issuer's pledge of its full faith, credit and taxing power. Revenue obligations are payable only from the revenues derived from a particular facility or class of facilities. In some cases, revenue bonds are also payable from the proceeds of a special excise or other specific revenue source such as lease payments from the user of a facility being financed. Some municipal instruments, known as private activity bonds, are issued to finance projects for private companies. Private activity bonds are usually revenue obligations since they are typically payable by the user of the facilities financed by the bonds. Page 98 100 Risks, Securities, Techniques and Financial Information Municipal instruments also include "moral obligation" bonds, municipal leases, certificates of participation and custodial receipts. Moral obligation banks are supported by a moral commitment but not a legal obligation of a state or municipality. Municipal leases and participation certificates present the risk that the state or municipality involved will not appropriate the monies to meet scheduled payments on an annual basis. Custodial receipts represent interests in municipal instruments held by a trustee. The Tax-Exempt Funds (other than the Tax-Exempt Money Market Fund) and the High Yield Municipal Fund may also hold tax-exempt derivative instruments that have interest rates that reset inversely to changing short-term rates and/or have imbedded interest rate floors and caps that require the issuer to pay an adjusted interest rate if market rates fall below or rise above a specified rate. Because some of these instruments represent relatively recent innovations in the municipal bond markets, and the trading market for these instruments is less developed than the markets for traditional types of municipal instruments, it is uncertain how these instruments will perform under different economic and interest-rate scenarios. Also, because these instruments may be leveraged, their market values may be more volatile than other types of municipal instruments and may present greater potential for capital gain or loss. The possibility of default by the issuer or the issuer's credit provider may be greater for these derivative instruments than for other types of instruments. In some cases it may be difficult to determine the fair value of a derivative instrument because of a lack of reliable objective information and an established secondary market for some instruments may not exist. In many cases, the Internal Revenue Service has not ruled on whether the interest received on a tax-exempt derivative instrument is tax-exempt and, accordingly, purchases of such instruments are based on the opinion of counsel to the sponsors of the instruments. Each Tax-Exempt Fund and Municipal Fund may acquire "stand-by commitments" relating to the municipal instruments it holds. Under a stand-by commitment, a dealer agrees to purchase, at the Fund's option, specified municipal instruments at a specified price. A stand-by commitment may increase the cost, and thereby reduce the yield, of the municipal instruments to which the commitment relates. The Funds will acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights for trading purposes. INVESTMENT STRATEGY. Although it is not their current policy to do so on a regular basis, in connection with their investments in municipal instruments, the Tax-Exempt Funds and Municipal Funds may invest more than 25% of their total assets in municipal instruments the interest upon which is paid solely by governmental issuers from revenues of similar projects. However, the Tax-Exempt Funds and Municipal Funds do not intend to invest more than 25% of the value of their total assets in industrial development bonds or similar obligations where the non-governmental entities supplying the revenues to be paid are in the same industry. The Florida Intermediate Tax-Exempt Fund expects to invest principally in Florida municipal instruments, the California Funds expect to invest principally in California municipal instruments and the Arizona Tax-Exempt Fund expects to invest principally in Arizona municipal instruments. The other Tax-Exempt Funds and Municipal Funds may also invest from time to time more than 25% of the value of their total assets in municipal instruments whose issuers are in the same state. Funds in addition to the Tax-Exempt Funds and Municipal Funds may invest from time to time in municipal instruments or other securities issued by state and local governmental bodies. Generally, this will occur when the yield of municipal instruments, on a pre-tax basis, is comparable to that of other permitted short-term taxable investments. Dividends paid by the Funds other than the Tax-Exempt Funds and Municipal Funds on such investments will be taxable to shareholders. SPECIAL RISKS. Municipal instruments purchased by the Tax-Exempt Funds and Municipal Funds may be backed by letters of credit, insurance or other forms of credit enhancement issued by foreign (as well as domestic) banks, insurance companies and other financial institutions. If the credit quality of these banks, insurance companies and financial institutions declines, a Fund could suffer a loss to the extent that the Fund is relying upon this credit support. Risks relating to foreign banks and financial institutions are described on page 86 under "Foreign Investments." In addition, when a substantial portion of a Fund's assets is invested in instruments which are used to finance facilities involving a particular industry, whose issuers are in the same state or which are otherwise Page 99 101 Risks, Securities, Techniques and Financial Information related, there is a possibility that an economic, business or political development affecting one instrument would likewise affect the related instrument. OPTIONS. An option is a type of derivative instrument that gives the holder the right (but not the obligation) to buy (a "call") or sell (a "put") an asset in the future at an agreed upon price prior to the expiration date of the option. INVESTMENT STRATEGY. To the extent consistent with its investment objective, each Fund (other than the Money Market Funds) may write (sell) covered call options, buy put options, buy call options and write secured put options for hedging (or, with respect to the International Funds, cross-hedging) purposes or to earn additional income. Options may relate to particular securities, foreign or domestic securities indices, financial instruments, foreign currencies or (in the case of the International Fixed Income Fund and High Yield Fixed Income Fund) the yield differential between two securities. A Fund will not purchase put and call options in an amount that exceeds 5% of its net assets at the time of purchase. The total value of a Fund's assets subject to options written by the Fund will not be greater than 25% of its net assets at the time the option is written. A Fund may "cover" a call option by owning the security underlying the option or through other means. Put options written by a Fund are "secured" if the Fund maintains liquid assets in a segregated account in an amount at least equal to the exercise price of the option up until the expiration date. SPECIAL RISKS. Options trading is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary Fund securities transactions. The value of options can be highly volatile, and their use can result in loss if the investment management team is incorrect in its expectation of price fluctuations. The successful use of options for hedging purposes also depends in part on the ability of the investment management team to predict future price fluctuations and the degree of correlation between the options and securities markets. Each Fund will invest and trade in unlisted over-the-counter options only with firms deemed creditworthy by the Investment Advisers. However, unlisted options are not subject to the protections afforded purchasers of listed options by the Options Clearing Corporation, which performs the obligations of its members which fail to perform them in connection with the purchase or sale of options. REAL ESTATE INVESTMENT TRUSTS (REITs). REITs are pooled investment vehicles that invest primarily in either real estate or real estate related loans. INVESTMENT STRATEGY. The High Yield Fixed Income, Income Equity, Small Cap Index, Small Cap and Small Cap Growth Funds may invest in REITs. SPECIAL RISKS. The value of a REIT is affected by changes in the value of the properties owned by the REIT or securing mortgage loans held by the REIT. REITs are dependent upon cash flow from their investments to repay financing costs and the ability of a REIT's manager. REITs are also subject to risks generally associated with investments in real estate. A Fund will indirectly bear its proportionate share of any expenses, including management fees, paid by a REIT in which it invests. REPURCHASE AGREEMENTS. Repurchase agreements involve the purchase of securities by a Fund subject to the seller's agreement to repurchase them at a mutually agreed upon date and price. INVESTMENT STRATEGY. Each Fund may enter into repurchase agreements with financial institutions such as banks and broker-dealers that are deemed to be creditworthy by the Investment Advisers. Although the securities subject to a repurchase agreement may have maturities exceeding one year, settlement of the agreement will never occur more than one year after a Fund acquires the securities. SPECIAL RISKS. In the event of a default, a Fund will suffer a loss to the extent that the proceeds from the sale of the underlying securities and other collateral are less than the repurchase price and the Fund's costs associated with delay and enforcement of the repurchase agreement. In addition, in the event of Page 100 102 Risks, Securities, Techniques and Financial Information bankruptcy, a Fund could suffer additional losses if a court determines that the Fund's interest in the collateral is unenforceable. SECURITIES LENDING. In order to generate additional income, the Funds may lend securities on a short-term basis to banks, broker-dealers or other qualified institutions. In exchange, the Funds will receive collateral equal to at least 100% of the value of the securities loaned. INVESTMENT STRATEGY. Securities lending may represent no more than one-third the value of a Fund's total assets (including the loan collateral). Any cash collateral received by a Fund in connection with these loans may be invested in U.S. government securities and other liquid high-grade debt obligations. SPECIAL RISKS. The main risk when lending portfolio securities is that the borrower might become insolvent or refuse to honor its obligation to return the securities. In this event, a Fund could experience delays in recovering its securities and may incur a capital loss. In addition, a Fund may incur a loss in reinvesting the cash collateral it receives. STRIPPED OBLIGATIONS. These securities are issued by the U.S. government (or agency or instrumentality), foreign governments, banks and other issuers. They entitle the holder to receive either interest payments or principal payments that have been "stripped" from a debt obligation. These obligations include stripped mortgage-backed securities, which are derivative multi-class mortgage securities. INVESTMENT STRATEGY. To the extent consistent with their respective investment objectives, the Funds may purchase stripped securities. 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 a 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. Each Fund may invest in structured securities to the extent consistent with its investment objective. SPECIAL RISKS. The terms of some structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, a Fund could suffer a total loss of its investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may entail a greater degree of market risk than other types of securities. Structured securities may also be more volatile, less liquid and more difficult to accurately price than less complex securities due to their derivative nature. UNITED STATES GOVERNMENT OBLIGATIONS. These include U.S. Treasury obligations, such as bills, notes and bonds, which generally differ only in terms of their interest rates, maturities and time of issuance. These also include obligations issued or guaranteed by the U.S. government or its agencies and instrumentalities. Securities guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities are deemed to include (a) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government or an agency or instrumentality thereof, and (b) participations in loans made to foreign governments or their agencies that are so guaranteed. Page 101 103 Risks, Securities, Techniques and Financial Information INVESTMENT STRATEGY. To the extent consistent with its investment objective, each Fund may invest in a variety of U.S. Treasury obligations and also may invest in obligations issued or guaranteed by the U.S. government or its agencies and instrumentalities. SPECIAL RISKS. Not all U.S. government obligations carry the same 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 (other than the Money Market Funds) leveraged inverse floating rate instruments ("inverse floaters"). An inverse floater is leveraged to the extent that its interest rate varies by an amount that exceeds the amount of the variation in the index rate of interest. INVESTMENT STRATEGY. Each Fund may invest in rated and unrated variable and floating rate instruments to the extent consistent with its investment objective. Unrated instruments may be purchased by a Fund if they are determined by the Investment Advisers to be of comparable quality to rated instruments eligible for purchase by the Fund. 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 Funds are not entitled to exercise their demand rights. As a result, the Funds could suffer a loss with respect to these instruments. WARRANTS. A warrant represents the right to purchase a security at a predetermined price for a specified period of time. INVESTMENT STRATEGY. Each Equity Fund (other than the Stock Index and Small Cap Index Funds) and the High Yield Fixed Income Fund may invest up to 5% of its net assets at the time of purchase in warrants and similar rights. A Fund may also purchase bonds that are issued in tandem with warrants. SPECIAL RISKS. Warrants are derivative instruments that present risks similar to options. WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD COMMITMENTS. A purchase of "when-issued" securities refers to a transaction made conditionally because the securities, although authorized, have not yet been issued. A delayed delivery or forward commitment transaction involves a contract to purchase or sell securities for a fixed price at a future date beyond the customary settlement period. INVESTMENT STRATEGY. Each Fund may purchase or sell securities on a when-issued, delayed delivery or forward commitment basis. Although the Funds would generally purchase securities in these transactions with the intention of acquiring the securities, the Funds may dispose of such securities prior to settlement if the investment management team deems it appropriate to do so. Page 102 104 Risks, Securities, Techniques and Financial Information SPECIAL RISKS. Purchasing securities on a when-issued, delayed delivery or forward commitment basis involves the risk that the value of the securities may decrease by the time they are actually issued or delivered. Conversely, selling securities in these transactions involves the risk that the value of the securities may increase by the time they are actually issued or delivered. These transactions also involve the risk that the seller may fail to deliver the security or cash on the settlement date. ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. These are securities issued at a discount from their face value because interest payments are typically postponed until maturity. Interest payments on pay-in-kind securities are payable by the delivery of additional securities. The amount of the discount rate varies depending on factors such as the time remaining until maturity, prevailing interest rates, a security's liquidity and the issuer's credit quality. These securities also may take the form of debt securities that have been stripped of their interest payments. INVESTMENT STRATEGY. Each Fund may invest in zero coupon, pay-in-kind and capital appreciation bonds to the extent consistent with its investment objective. SPECIAL RISKS. The market prices of zero coupon, pay-in-kind and capital appreciation bonds generally are more volatile than the market prices of interest-bearing securities and are likely to respond to a greater degree to changes in interest rates than interest-bearing securities having similar maturities and credit quality. A Fund's investments in zero coupon, pay-in-kind and capital appreciation bonds may require the Fund to sell some of its Fund securities to generate sufficient cash to satisfy certain income distribution requirements. DISCLAIMERS The Stock Index Fund is not sponsored, endorsed, sold or promoted by S&P, nor does S&P guarantee the accuracy and/or completeness of the S&P 500(R) Index or any data included therein. S&P makes no warranty, express or implied, as to the results to be obtained by the Fund, owners of the Fund, any person or any entity from the use of the S&P 500(R) Index or any data included therein. S&P makes no express or implied warranties and expressly disclaims all such warranties of merchantability or fitness for a particular purpose for use with respect to the S&P 500(R) Index or any data included therein. The Small Cap Index Fund is not sponsored, endorsed, sold or promoted by Russell, nor does Russell guarantee the accuracy and/or completeness of the Russell 2000 Index or any data included therein. Russell makes no warranty, express or implied, as to the results to be obtained by the Fund, owners of the Fund, any person or any entity from the use of the Russell 2000 Index or any data included therein. Russell makes no express or implied warranties and expressly disclaims all such warranties of merchantability or fitness for a particular purpose for use with respect to the Russell 2000 Index or any data included therein. Northern Trust is sometimes referred to as "The Northern Trust Bank" in advertisements and other sales literature. Page 103 105 FINANCIAL INFORMATION THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND A FUND'S FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS (OR, IF SHORTER, THE PERIOD OF THE FUND'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN A FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY ARTHUR ANDERSEN LLP, WHOSE REPORT IS INCLUDED IN THE FUNDS' ANNUAL REPORT ALONG WITH THE FUNDS' FINANCIAL STATEMENTS. THE ANNUAL REPORT IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE. Page 104 106 FINANCIAL HIGHLIGHTS MONEY MARKET FUNDS
MONEY MARKET FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 1999 1998 1997 1996 1995(1) - ------------------------------------------------------------------------------------------------------ SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment Income ................. 0.05 0.05 0.05 0.05 0.04 - ------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS PAID: From net investment Income ................. (0.05) (0.05) (0.05) (0.05) (0.04) - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------ TOTAL RETURN(3) ............. 5.04% 5.31% 5.05% 5.57% 4.55% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $ 4,886,098 $ 3,296,030 $ 1,607,187 $ 1,061,813 $ 894,279 Ratio to average net assets of:(4) Expenses, net of Waivers and Reimbursements ........... 0.55% 0.55% 0.55% 0.49% 0.45% Expenses, before Waivers and Reimbursements ........... 0.89% 0.90% 0.90% 0.91% 0.96% Net investment income, net of waivers and reimbursements ........... 4.91% 5.19% 4.94% 5.42% 4.94% Net investment income, Before waivers and Reimbursements ........... 4.57% 4.84% 4.59% 5.00% 4.43% - ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT MONEY MARKET FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 1999 1998 1997 1996 1995(1) - ------------------------------------------------------------------------------------------------------ SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment Income ................. 0.05 0.05 0.05 0.05 0.04 - ------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS PAID: From net investment Income ................. (0.05) (0.05) (0.05) (0.05) (0.04) - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ------------------------------------------------------------------------------------------------------ TOTAL RETURN(3) ............. 4.94% 5.22% 4.93% 5.46% 4.47% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $ 469,866 $ 417,042 $ 314,259 $ 207,105 $ 227,543 Ratio to average net assets of:(4) Expenses, net of Waivers and Reimbursements ........... 0.55% 0.55% 0.55% 0.49% 0.45% Expenses, before Waivers and Reimbursements ........... 0.91% 0.93% 0.96% 0.94% 1.01% Net investment income, net of waivers and reimbursements ........... 4.82% 5.10% 4.82% 5.33% 4.93% Net investment income, Before waivers and Reimbursements ........... 4.46% 4.72% 4.41% 4.88% 4.37% - ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SELECT MONEY MARKET FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 1999 1998 1997 1996 1995(2) - --------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment Income ................. 0.05 0.05 0.05 0.05 0.02 - --------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment Income ................. (0.05) (0.05) (0.05) (0.05) (0.02) - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------- TOTAL RETURN(3) ............. 4.87% 5.24% 5.07% 5.55% 1.75% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $ 416,527 $ 306,425 $ 168,128 $ 85,400 $ 82,162 Ratio to average net assets of:(4) Expenses, net of Waivers and Reimbursements ........... 0.55% 0.46% 0.40% 0.33% 0.30% Expenses, before Waivers and Reimbursements ........... 0.91% 0.93% 0.97% 1.00% 1.32% Net investment income, net of waivers and reimbursements ........... 4.73% 5.13% 4.95% 5.43% 5.84% Net investment income, Before waivers and Reimbursements ........... 4.37% 4.66% 4.38% 4.76% 4.82% - ---------------------------------------------------------------------------------------------------
(1) For the period April 11, 1994 (commencement of operations) through March 31, 1995. (2) For the period December 12, 1994 (commencement of operations) through March 31, 1995. (3) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (4) Annualized for periods less than a full year. Page 105 107 FINANCIAL HIGHLIGHTS (CONTINUED) MONEY MARKET FUNDS
MUNICIPAL MONEY MARKET FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 1999 1998 1997 1996 1995(1) - -------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment Income.................. 0.03 0.03 0.03 0.03 0.03 - -------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment Income.................. (0.03) (0.03) (0.03) (0.03) (0.03) - -------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------- TOTAL RETURN(3).............. 2.98% 3.27% 3.14% 3.54% 2.90% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year............... $ 2,384,030 $ 1,814,343 $ 1,420,041 $ 1,102,789 $ 927,747 Ratio to average net assets of:(4) Expenses, net of waivers and reimbursements........ 0.55% 0.55% 0.55% 0.49% 0.45% Expenses, before waivers and reimbursements........ 0.89% 0.89% 0.90% 0.91% 0.95% Net investment income, net of waivers and reimbursements............ 2.90% 3.20% 3.08% 3.46% 3.10% Net investment income, Before waivers and Reimbursements............ 2.56% 2.86% 2.73% 3.04% 2.60% - --------------------------------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL MONEY MARKET FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31 MARCH 31 MARCH 31 MARCH 31 MARCH 31 1999 1998 1997 1996 1995(2) - --------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment Income.................. 0.03 0.03 0.03 0.04 0.01 - --------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment Income.................. (0.03) (0.03) (0.03) (0.04) (0.01) - --------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------- TOTAL RETURN(3).............. 2.75% 3.20% 3.19% 3.63% 1.27% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year............... $ 363,050 $ 224,843 $ 200,989 $ 165,087 $ 161,316 Ratio to average net assets of:(4) Expenses, net of waivers and reimbursements........ 0.55% 0.49% 0.45% 0.39% 0.35% Expenses, before waivers and reimbursements........ 0.91% 0.94% 0.94% 0.94% 1.07% Net investment income, net of waivers and reimbursements............ 2.68% 3.14% 3.13% 3.55% 3.78% Net investment income, Before waivers and Reimbursements............ 2.32% 2.69% 2.64% 3.00% 3.06% - ---------------------------------------------------------------------------------------------------
(1) For the period April 11, 1994 (commencement of operations) through March 31, 1995. (2) For the period November 29, 1994 (commencement of operations) through March 31, 1995. (3) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (4) Annualized for periods less than a full year. Page 106 108 FINANCIAL HIGHLIGHTS (CONTINUED) FIXED INCOME FUNDS
U.S. GOVERNMENT FUND ------------------------------------------------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.20 $ 9.88 $ 10.06 $ 9.84 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.50 0.54 0.51 0.51 0.50 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.10 0.32 (0.11) 0.29 (0.16) ---------- ---------- ---------- ---------- ---------- Total Income from Investment Operations ........ 0.60 0.86 0.40 0.80 0.34 ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.49) (0.53) (0.51) (0.51) (0.50) From net realized gains ... (0.26) (0.01) (0.05) (0.07) -- In excess of net investment income ........ -- -- -- -- -- In excess of net realized gains ........... -- -- (0.02) -- -- ---------- ---------- ---------- ---------- ---------- Total Distributions Paid ..... (0.75) (0.54) (0.58) (0.58) (0.50) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF YEAR ................ $ 10.05 $ 10.20 $ 9.88 $ 10.06 $ 9.84 ---------- ---------- ---------- ---------- ---------- TOTAL RETURN(2) .............. 6.01% 8.90% 3.98% 7.65% 3.49% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $ 268,242 $ 229,352 $ 181,921 $ 149,062 $ 116,443 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.90% 0.90% 0.90% 0.90% 0.90% Expenses, before waivers and reimbursements ........ 1.07% 1.07% 1.09% 1.10% 1.12% Net investment income, net of waivers and reimbursements ............ 4.73% 5.24% 5.19% 5.07% 5.20% Net investment income, before waivers and reimbursements ............ 4.56% 5.07% 5.00% 4.87% 4.98% PORTFOLIO TURNOVER RATE ...................... 123.75% 47.41% 83.41% 112.00% 42.29% ---------- ---------- ---------- ---------- ----------
INTERMEDIATE TAX-EXEMPT FUND ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.36 $ 10.07 $ 10.22 $ 10.03 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.39 0.40 0.40 0.41 0.40 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.11 0.29 (0.06) 0.26 0.03 ----------- ----------- ----------- ----------- ----------- Total Income from Investment Operations ........ 0.50 0.69 0.34 0.67 0.43 ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.39) (0.40) (0.40) (0.41) (0.40) From net realized gains ... (0.11) -- (0.07) (0.07) -- In excess of net investment income ........ -- -- -- -- -- In excess of net realized gains ........... -- -- (0.02) -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions Paid ..... (0.50) (0.40) (0.49) (0.48) (0.40) ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF YEAR ................ $ 10.36 $ 10.36 $ 10.07 $ 10.22 $ 10.03 ----------- ----------- ----------- ----------- ----------- TOTAL RETURN(2) .............. 4.88% 6.95% 3.39% 6.81% 4.38% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $ 344,789 $ 298,529 $ 264,630 $ 244,139 $ 221,251 ----------- ----------- ----------- ----------- ----------- Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.85% 0.85% 0.85% 0.85% 0.85% Expenses, before waivers and reimbursements ........ 1.06% 1.07% 1.07% 1.08% 1.09% Net investment income, net of waivers and reimbursements ............ 3.76% 3.84% 3.90% 4.01% 4.09% Net investment income, before waivers and reimbursements ............ 3.55% 3.62% 3.68% 3.78% 3.85% PORTFOLIO TURNOVER RATE ...................... 54.03% 61.83% 61.39% 137.85% 78.87%
FLORIDA INTERMEDIATE TAX-EXEMPT FUND -------------------------------------- YEAR YEAR YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997(1) ---------- ---------- ---------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.47 $ 10.03 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.39 0.40 0.24 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.16 0.44 0.03 ---------- ---------- ---------- Total Income from Investment Operations ........ 0.55 0.84 0.27 ---------- ---------- ---------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.39) (0.40) (0.24) From net realized gains ... (0.16) -- -- In excess of net investment income ........ -- -- -- In excess of net realized gains ........... -- -- -- ---------- ---------- ---------- Total Distributions Paid ..... (0.55) (0.40) (0.24) ---------- ---------- ---------- NET ASSET VALUE, END OF YEAR ................ $ 10.47 $ 10.47 $ 10.03 ---------- ---------- ---------- TOTAL RETURN(2) .............. 5.38% 8.51% 2.63% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $ 37,121 $ 25,329 $ 14,807 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.85% 0.85% 0.85% Expenses, before waivers and reimbursements ........ 1.29% 1.41% 2.31% Net investment income, net of waivers and reimbursements ............ 3.67% 3.86% 3.84% Net investment income, before waivers and reimbursements ............ 3.23% 3.30% 2.38% PORTFOLIO TURNOVER RATE ...................... 57.98% 46.12% 50.77% ---------- ---------- ----------
Page 107 109 (1) For the period August 15, 1996 (commencement of operations) through March 31, 1997. (2) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (3) Annualized for periods less than a full year. Page 108 110 FINANCIAL HIGHLIGHTS (CONTINUED) FIXED INCOME FUNDS
FIXED INCOME FUND ---------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.42 $ 9.86 $ 10.10 $ 9.78 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.54 0.59 0.57 0.58 0.62 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... -- 0.56 (0.12) 0.50 (0.22) -------- -------- -------- -------- -------- Total Income from Investment Operations ........ 0.54 1.15 0.45 1.08 0.40 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.54) (0.58) (0.56) (0.59) (0.62) From net realized gains ... (0.27) (0.01) (0.10) (0.17) -- In excess of net investment income ........ -- -- (0.01) -- -- In excess of net realized gains ........... -- -- (0.02) -- -- -------- -------- -------- -------- -------- Total Distributions Paid ..... (0.81) (0.59) (0.69) (0.76) (0.62) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF YEAR ................ $ 10.15 $ 10.42 $ 9.86 $ 10.10 $ 9.78 -------- -------- -------- -------- -------- TOTAL RETURN(2) .............. 5.18% 11.90% 4.59% 11.18% 4.16% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $275,108 $181,917 $122,444 $101,339 $ 65,929 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.90% 0.90% 0.90% 0.90% 0.90% Expenses, before waivers and reimbursements ........ 1.08% 1.09% 1.12% 1.14% 1.18% Net investment income, net of waivers and reimbursements ............ 5.15% 5.71% 5.69% 5.79% 6.48% Net investment income, before waivers and reimbursements ............ 4.97% 5.52% 5.47% 5.55% 6.20% PORTFOLIO TURNOVER RATE ...................... 84.85% 33.55% 87.64% 116.22% 55.27% -------- -------- -------- -------- --------
TAX-EXEMPT FUND ----------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.73 $ 10.24 $ 10.35 $ 10.08 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.45 0.47 0.50 0.48 0.48 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.13 0.57 (0.06) 0.29 0.08 -------- -------- -------- -------- -------- Total Income from Investment Operations ........ 0.58 1.04 0.44 0.77 0.56 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.45) (0.47) (0.47) (0.48) (0.48) From net realized gains ... (0.23) (0.08) (0.05) (0.02) -- In excess of net investment income ........ -- -- (0.03) -- -- In excess of net realized gains ........... -- -- -- -- -- -------- -------- -------- -------- -------- Total Distributions Paid ..... (0.68) (0.55) (0.55) (0.50) (0.48) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF YEAR ................ $ 10.63 $ 10.73 $ 10.24 $ 10.35 $ 10.08 -------- -------- -------- -------- -------- TOTAL RETURN(2) .............. 5.47% 10.39% 4.32% 7.80% 5.78% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $227,823 $167,220 $136,372 $125,113 $118,690 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.85% 0.85% 0.85% 0.85% 0.85% Expenses, before waivers and reimbursements ........ 1.08% 1.09% 1.10% 1.10% 1.11% Net investment income, net of waivers and reimbursements ............ 4.13% 4.42% 4.61% 4.62% 4.95% Net investment income, before waivers and reimbursements ............ 3.90% 4.18% 4.36% 4.37% 4.69% PORTFOLIO TURNOVER RATE ...................... 140.39% 74.32% 8.10% 60.50% 54.94% -------- -------- -------- -------- --------
CALIFORNIA TAX-EXEMPT FUND --------------------------- YEAR YEAR ENDED ENDED MARCH 31, MARCH 31, 1999 1998 ---------- ---------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $ 10.76 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.43 0.41 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.23 0.76 ------- ------- Total Income from Investment Operations ........ 0.66 1.17 ------- ------- LESS DISTRIBUTIONS PAID: From net investment income .................. (0.43) (0.41) From net realized gains ... (0.10) -- In excess of net investment income ........ -- -- In excess of net realized gains ........... -- -- ------- ------- Total Distributions Paid ..... (0.53) (0.41) ------- ------- NET ASSET VALUE, END OF YEAR ................ $ 10.89 $ 10.76 ------- ------- TOTAL RETURN(2) .............. 6.20% 11.86% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $77,249 $39,943 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 0.85% 0.85% Expenses, before waivers and reimbursements ........ 1.17% 1.60% Net investment income, net of waivers and reimbursements ............ 3.87% 4.01% Net investment income, before waivers and reimbursements ............ 3.55% 3.26% PORTFOLIO TURNOVER RATE ...................... 62.55% 22.22% ------- -------
Page 109 111 (1) For the period August 8, 1997 (commencement of operations) through March 31, 1998. (2) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (3) Annualized for periods less than a full year. Page 110 112 FINANCIAL HIGHLIGHTS (CONTINUED) FIXED INCOME FUNDS
HIGH YIELD HIGH YIELD MUNICIPAL FIXED INCOME INTERNATIONAL FIXED INCOME FUND FUND FUND --------------------------------------------------------- ---------- ------------ YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 1999(1) 1999(1) - ---------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ......... $9.85 $10.08 $10.62 $10.64 $10.00 $10.00 $10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income ..... 0.38 0.43 0.56 0.78 0.58 0.05 0.11 Net realized and unrealized gains (losses) on investments, forward foreign currency contracts and foreign currency transactions ... 0.58 0.02 (0.40) (0.16) 0.64 -- 0.08 - --------------------------------------------------------------------------------------------------------------------- Total Income from Investment Operations ........ 0.96 0.45 0.16 0.62 1.22 0.05 0.19 - --------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment Income .................. (0.32) (0.59) (0.58) (0.62) (0.56) (0.04) (0.09) From net realized gains ... (0.07) (0.09) (0.11) (0.02) -- -- -- In excess of net investment income ........ -- -- -- -- (0.02) -- -- In excess of net realized gains ........... (0.04) -- (0.01) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions Paid ..... (0.43) (0.68) (0.70) (0.64) (0.58) (0.04) (0.09) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ................ $10.38 $9.85 $10.08 $10.62 $10.64 $10.01 $10.10 - --------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(2) .............. 9.68% 4.61% 1.39% 5.84% 12.77% 0.57% 2.06% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year ............... $14,285 $13,675 $16,426 $15,665 $13,028 $10,033 $40,864 Ratio to average net assets of:(3) Expenses, net of waivers and reimbursements ........ 1.15% 1.15% 1.15% 1.15% 1.15% 0.85% 0.90% Expenses, before waivers and reimbursements ........ 1.96% 1.87% 1.96% 2.00% 2.42% 5.60% 2.18% Net investment income, net of waivers and reimbursements ............ 4.69% 4.98% 5.49% 5.75% 5.96% 2.92% 6.78% Net investment income, before waivers and reimbursements ............ 3.88% 4.26% 4.68% 4.90% 4.69% (1.83)% 5.50% PORTFOLIO TURNOVER RATE ...... 16.49% 30.26% 37.76% 52.05% 43.24% 0.00% 0.00% - ---------------------------------------------------------------------------------------------------------------------
Page 111 113 (1) Commenced investment operations after the close of business on December 31, 1998. (2) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (3) Annualized for periods less than a full year. Page 112 114 FINANCIAL HIGHLIGHTS (CONTINUED) EQUITY FUNDS
INCOME EQUITY FUND STOCK INDEX FUND --------------------------------------------------------- --------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 1999 1998 1997(1) - ----------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $13.81 $11.81 $11.59 $9.95 $10.00 $15.03 $10.74 $10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... 0.46 0.45 0.44 0.34 0.29 0.16 0.15 0.08 Net realized and unrealized Gains (losses) on investments, options, futures contracts and foreign currency transactions ........... (0.41) 3.02 1.19 1.66 (0.08) 2.49 4.80 0.74 - ----------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 0.05 3.47 1.63 2.00 0.21 2.65 4.95 0.82 - ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................... (0.48) (0.44) (0.44) (0.36) (0.26) (0.17) (0.15) (0.07) From net realized gains .. (0.65) (1.03) (0.97) -- -- (0.17) (0.51) (0.01) In excess of net investment income ....... -- -- -- -- -- -- -- -- In excess of accumulated net realized gains on investment transaction . -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Total Distributions Paid .... (1.13) (1.47) (1.41) (0.36) (0.26) (0.34) (0.66) (0.08) - ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $12.73 $13.81 $11.81 $11.59 $9.95 $17.34 $15.03 $10.74 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 0.67% 31.00% 14.42% 20.41% 2.21% 17.78% 47.11% 8.21% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $118,414 $117,562 $77,102 $55,919 $38,954 $169,062 $93,907 $35,840 Ratio to average net assets of:(7) Expenses, net of waivers and reimbursements ........ 1.00% 1.00% 1.00% 1.00% 1.00% 0.55% 0.55% 0.55% Expenses, before waivers and reimbursements ........ 1.35% 1.37% 1.42% 1.48% 1.55% 1.00% 1.18% 2.23% Net investment income (loss), net of waivers and reimbursements ............ 3.54% 3.53% 3.71% 3.17% 3.08% 1.10% 1.23% 1.92% Net investment income (loss), before waivers and reimbursements ....... 3.19% 3.16% 3.29% 2.69% 2.53% 0.65% 0.60% 0.24% PORTFOLIO TURNOVER RATE ..... 79.95% 81.24% 72.04% 67.32% 45.68% 2.46% 32.06% 64.94% - -----------------------------------------------------------------------------------------------------------------------------
GROWTH EQUITY FUND --------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $18.62 $13.93 $13.15 $10.61 $10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... 0.02 0.03 0.08 0.08 0.08 Net realized and unrealized Gains (losses) on investments, options, futures contracts and foreign currency transactions ........... 4.51 6.36 1.49 2.59 0.60 - ----------------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 4.53 6.39 1.57 2.67 0.68 - ----------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................. (0.02) (0.03) (0.08) (0.08) (0.07) From net realized gains .. (1.19) (1.67) (0.71) (0.05) -- In excess of net investment income ....... -- -- -- -- -- In excess of accumulated net realized gains on investment transaction . -- -- -- -- -- - ----------------------------------------------------------------------------------------- Total Distributions Paid .... (1.21) (1.70) (0.79) (0.13) (0.07) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $21.94 $18.62 $13.93 $13.15 $10.61 - ----------------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 24.72% 48.06% 11.72% 25.13% 6.90% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $640,948 $479,782 $302,605 $224,571 $113,185 Ratio to average net assets of:(7) Expenses, net of waivers and reimbursements ........ 1.00% 1.00% 1.00% 1.00% 1.00% Expenses, before waivers and reimbursements ........ 1.30% 1.30% 1.33% 1.36% 1.40% Net investment income (loss), net of waivers and reimbursements ............ 0.08% 0.18% 0.56% 0.70% 0.86% Net investment income (loss), before waivers and reimbursements ....... (0.22)% (0.12)% 0.23% 0.34% 0.46% PORTFOLIO TURNOVER RATE ..... 49.67% 73.85% 67.34% 73.20% 82.90% - -----------------------------------------------------------------------------------------
Page 113 115 FINANCIAL HIGHLIGHTS (CONTINUED) EQUITY FUNDS
SELECT EQUITY FUND ------------------------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995(2) - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 19.16 $ 14.55 $ 13.12 $ 10.77 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... -- 0.02 0.02 0.02 0.06 Net realized and unrealized gains (losses) on investments, options, futures contracts and foreign currency transactions .. 5.40 6.81 2.05 2.73 0.75 - ---------------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 5.40 6.83 2.07 2.75 0.81 - ---------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................. (0.01) (0.02) (0.02) (0.03) (0.04) From net realized gains .. (1.22) (2.20) (0.62) (0.37) -- In excess of net investment income ....... -- -- -- -- -- In excess of accumulated net realized gain on investment transactions . -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Distributions Paid .... (1.23) (2.22) (0.64) (0.40) (0.04) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $ 23.33 $ 19.16 $ 14.55 $ 13.12 $ 10.77 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 28.79% 49.71% 15.64% 25.70% 8.18% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $198,530 $126,536 $63,677 $33,842 $15,123 Ratio to average net assets of:(7) Expenses, net of waivers and reimbursements ....... 1.00% 1.00% 1.00% 1.00% 1.00% Expenses, before waivers and reimbursements ....... 1.54% 1.58% 1.67% 1.91% 2.61% Net investment income (loss), net of waivers and reimbursements ....... (0.15)% 0.15% 0.21% 0.22% 0.82% Net investment income (loss) before waivers and reimbursements ....... (0.69)% (0.43)% (0.46)% (0.69)% (0.79)% PORTFOLIO TURNOVER RATE ..................... 87.73% 148.55% 72.68% 137.99% 48.88% - ----------------------------------------------------------------------------------------------------------------------------------
MID CAP GROWTH FUND SMALL CAP FUND ----------- ------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999(3) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 10.00 $ 16.76 $ 12.31 $ 11.58 $ 9.98 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... -- 0.04 0.03 0.07 0.05 0.11 Net realized and unrealized gains (losses) on investments, options, futures contracts and foreign currency transactions .. 1.72 (3.93) 5.14 1.37 2.29 (0.05) - ------------------------------------------------------------------------------------------------------------------------ Total Income (Loss) from Investment Operations .... 1.72 (3.89) 5.17 1.44 2.34 0.06 - ------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS PAID: From net investment income ................. -- (0.01) (0.04) (0.06) (0.07) (0.08) From net realized gains .. -- (0.54) (0.68) (0.65) (0.67) -- In excess of net investment income ....... -- -- -- -- -- -- In excess of accumulated net realized gain on investment transactions . -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Total Distributions Paid .... -- (0.55) (0.72) (0.71) (0.74) (0.08) - ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR ............... $ 11.72 $ 12.32 $ 16.76 $ 12.31 $ 11.58 $ 9.98 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN(6) ............. 17.19% (23.46)% 42.71% 12.48% 24.09% 0.57% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $77,378 $264,434 $368,579 $197,113 $155,238 $76,627 Ratio to average net assets of:(7) Expenses, net of waivers and reimbursements ....... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Expenses, before waivers and reimbursements ....... 1.65% 1.52% 1.53% 1.54% 1.61% 1.76% Net investment income (loss), net of waivers and reimbursements ....... (0.51)% 0.25% 0.28% 0.54% 0.65% 1.36% Net investment income (loss) before waivers and reimbursements ....... (1.16)% (0.27)% (0.25)% 0.00% 0.04% 0.60% PORTFOLIO TURNOVER RATE ..................... 173.39% 18.74% 18.59% 18.92% 46.59% 82.46% - ------------------------------------------------------------------------------------------------------------------------
- Page 114 - 116 FINANCIAL HIGHLIGHTS (CONTINUED) EQUITY FUNDS
INTERNATIONAL GROWTH EQUITY FUND --------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 11.66 $ 10.05 $ 10.23 $ 9.61 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... 0.13 0.09 0.09 0.17 0.04 Net realized and unrealized gains (losses) on investments, options, futures contracts and foreign currency transactions ........... 1.36 1.98 0.18 0.65 (0.31) - --------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 1.49 2.07 0.27 0.82 (0.27) - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................. -- (0.07) (0.09) (0.11) (0.03) From net realized gains .. (0.46) (0.29) (0.23) -- -- In excess of net investment income ....... (0.12) (0.10) -- (0.09) -- In excess of accumulated net realized gains on investment transactions . -- -- (0.13) -- (0.09) - --------------------------------------------------------------------------------------------------------------------------- Total Distributions Paid .... (0.58) (0.46) (0.45) (0.20) (0.12) - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $ 12.57 $ 11.66 $ 10.05 $ 10.23 $ 9.61 - --------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 13.04% 21.34% 2.61% 8.61% (2.65)% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $215,656 $178,210 $165,892 $181,237 $114,673 Ratio to average net assets of: (7) Expenses, net of waivers and reimbursements ....... 1.25% 1.25% 1.25% 1.25% 1.25% Expenses, before waivers and reimbursements ....... 1.62% 1.62% 1.63% 1.65% 1.71% Net investment income (loss), net of waivers and reimbursements ....... 0.52% 0.79% 0.78% 0.92% 0.47% Net investment income (loss), before waivers and reimbursements ....... 0.15% 0.42% 0.40% 0.52% 0.01% PORTFOLIO TURNOVER RATE ..................... 177.89% 145.02% 190.94% 216.86% 158.31% - ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SELECT EQUITY FUND ---------------------------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997 1996 1995(4) - ---------------------------------------------------------------------------------------------------------------------------- SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 12.52 $ 10.37 $ 10.73 $ 9.78 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... 0.04 0.22 0.04 0.01 0.04 Net realized and unrealized gains (losses) on investments, options, futures contracts and foreign currency transactions ........... 1.08 2.19 (0.25) 0.99 (0.23) - ---------------------------------------------------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 1.12 2.41 (0.21) 1.00 (0.19) - ---------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................. -- (0.16) (0.03) (0.02) (0.03) From net realized gains .. (0.65) -- -- -- -- In excess of net investment income ....... (0.01) (0.10) (0.04) (0.03) -- In excess of accumulated net realized gains on investment transactions . -- -- (0.08) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total Distributions Paid .... (0.66) (0.26) (0.15) (0.05) (0.03) - ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $ 12.98 $ 12.52 $ 10.37 $ 10.73 $ 9.78 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 9.16% 23.74% (1.95)% 10.20% (1.95)% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $124,513 $117,618 $108,944 $102,719 $71,958 Ratio to average net assets of: (7) Expenses, net of waivers and reimbursements ....... 1.25% 1.25% 1.25% 1.25% 1.25% Expenses, before waivers and reimbursements ....... 1.66% 1.64% 1.66% 1.71% 1.75% Net investment income (loss), net of waivers and reimbursements ....... 0.38% 0.29% 0.47% 0.12% 0.47% Net investment income (loss), before waivers and reimbursements ....... (0.03)% (0.10)% 0.06% (0.34)% (0.03)% PORTFOLIO TURNOVER RATE ..................... 168.19% 98.22% 97.60% 176.71% 97.69% - ----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY FUND ---------------------------------------------- YEAR YEAR YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, 1999 1998 1997(5) - ------------------------------------------------------------------------------ SELECTED PER SHARE DATA NET ASSET VALUE, BEGINNING OF YEAR ........ $ 17.11 $ 11.95 $ 10.00 INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income .... -- -- -- Net realized and unrealized gains (losses) on investments, options, futures contracts and foreign currency transactions ........... 13.55 6.06 2.10 - ------------------------------------------------------------------------------- Total Income (Loss) from Investment Operations .... 13.55 6.06 2.10 - ------------------------------------------------------------------------------- LESS DISTRIBUTIONS PAID: From net investment income ................. -- -- -- From net realized gains .. (0.67) (0.90) (0.15) In excess of net investment income ....... -- -- -- In excess of accumulated net realized gains on investment transactions . -- -- -- - ------------------------------------------------------------------------------- Total Distributions Paid .... (0.67) (0.90) (0.15) - ------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR ............... $ 29.99 $ 17.11 $ 11.95 - ------------------------------------------------------------------------------- TOTAL RETURN(6) ............. 79.97% 52.62% 20.82% SUPPLEMENTAL DATA AND RATIOS: Net assets, in thousands, end of year .............. $343,709 $104,389 $43,754 Ratio to average net assets of: (7) Expenses, net of waivers and reimbursements ....... 1.23% 1.25% 1.25% Expenses, before waivers and reimbursements ....... 1.53% 1.59% 2.02% Net investment income (loss), net of waivers and reimbursements ....... (0.87)% (0.96)% (0.75)% Net investment income (loss), before waivers and reimbursements ....... (1.17)% (1.30)% (1.52)% PORTFOLIO TURNOVER RATE ..................... 61.01% 74.75% 67.89% - -------------------------------------------------------------------------------
- Page 115 - 117 - --------------------------------- (1) For the period October 7, 1996 (commencement of operations) through March 31, 1997. (2) For the period April 6, 1994 (commencement of operations) through March 31, 1995. (3) Commenced investment operations after the close of business on March 31, 1998. (4) For the period April 5, 1994 (commencement of operations) through March 31, 1995. (5) Commenced investment operations on April 1, 1996. (6) Assumes investment at net asset value at the beginning of the year, reinvestment of all dividends and distributions, and a complete redemption of the investment at net asset value at the end of the year. Total return is not annualized for periods less than one year. (7) Annualized for periods less than a full year. - Page 116 - 118 FOR MORE INFORMATION ANNUAL/SEMIANNUAL REPORT Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION Additional information about the Funds and their policies is also available in the Funds' Statement of Additional Information ("SAI"). The SAI is incorporated by reference into this Prospectus (is legally considered part of this Prospectus). The Funds' annual and semiannual reports, and the SAI, are available free upon request by calling The Northern Funds Center at 1-800-595-9111. TO OBTAIN OTHER INFORMATION AND FOR SHAREHOLDER INQUIRIES: BY TELEPHONE - Call 1-800-595-9111 BY MAIL - Northern Funds P.O. Box 75986 Chicago, IL 60690-6319 ON THE INTERNET - Text-only versions of the Funds' documents are available: - On the SEC's website at http://www.sec.gov. - On Northern Funds' website at http://www.northernfunds.com. You may review and obtain copies of Northern Funds' documents by visiting the SEC's Public Reference Room in Washington, D.C. You may also obtain copies of Northern Funds' documents by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-6009. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. [LOGO] 811-8236 - Page 117 - 119 33-73404 811-8236 PART B STATEMENT OF ADDITIONAL INFORMATION MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND U.S. GOVERNMENT SELECT MONEY MARKET FUND TAX-EXEMPT MONEY MARKET FUND MUNICIPAL MONEY MARKET FUND CALIFORNIA MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT FUND SHORT-INTERMEDIATE U.S. GOVERNMENT FUND INTERMEDIATE TAX-EXEMPT FUND CALIFORNIA INTERMEDIATE TAX-EXEMPT FUND FLORIDA INTERMEDIATE TAX-EXEMPT FUND FIXED INCOME FUND TAX-EXEMPT FUND ARIZONA TAX-EXEMPT FUND CALIFORNIA TAX-EXEMPT FUND INTERNATIONAL FIXED INCOME FUND HIGH YIELD MUNICIPAL FUND HIGH YIELD FIXED INCOME FUND INCOME EQUITY FUND STOCK INDEX FUND GROWTH EQUITY FUND SELECT EQUITY FUND MARKETPOWER FUND MID CAP GROWTH FUND SMALL CAP INDEX FUND SMALL CAP FUND SMALL CAP GROWTH FUND INTERNATIONAL GROWTH EQUITY FUND INTERNATIONAL SELECT EQUITY FUND TECHNOLOGY FUND NORTHERN FUNDS (THE "TRUST") This Statement of Additional Information dated November 30, 1999 (the "Additional Statement") is not a prospectus. This Additional Statement should be read in conjunction with -1- 120 the Prospectus dated November 30, 1999, as amended or supplemented from time to time, for the Money Market Fund, U.S. Government Money Market Fund, U.S. Government Select Money Market Fund, Tax-Exempt Money Market Fund, Municipal Money Market Fund, California Municipal Money Market Fund (collectively, the "Money Market Funds"), U.S. Government Fund, Short-Intermediate U.S. Government Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, International Fixed Income Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund, MarketPower Fund, Mid Cap Growth Fund, Small Cap Index Fund, Small Cap Fund, Small Cap Growth Fund, International Growth Equity Fund, International Select Equity Fund and Technology Fund (collectively, the "Non-Money Market Funds," and together with the Money Market Funds, the "Funds") of Northern Funds (the "Prospectus"). Copies of the Prospectus may be obtained without charge from the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by calling 1-800-595-9111. Capitalized terms not otherwise defined have the same meaning as in the Prospectus. The audited financial statements and related report of Arthur Andersen LLP, independent accountants, contained in the annual report to shareholders for the fiscal year ended March 31, 1999 are incorporated herein by reference in the section entitled "Financial Statements." No other part of the annual report is incorporated by reference herein. Copies of the annual report may be obtained, upon request and without charge by calling The Northern Trust Company at 1-800-595-9111. ---------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. An investment in a Fund is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any government agency. An investment in a Fund involves investment risks, including possible loss of principal. Although each of the Money Market Funds seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds. -2- 121 INDEX
Page ---- ADDITIONAL INVESTMENT INFORMATION ..................................... 4 Investment Objectives and Policies .................................... 4 Special Risk Factors and Considerations Relating to California Municipal Instruments, Florida Municipal Instruments and Arizona Municipal Instruments ................................... 35 California Municipal Instruments ...................................... 35 Florida Municipal Instruments ......................................... 46 Arizona Municipal Instruments ......................................... 50 Investment Restrictions ............................................... 53 ADDITIONAL TRUST INFORMATION .......................................... 58 Classification and History ............................................ 58 Trustees and Officers ................................................. 58 Investment Adviser, Transfer Agent and Custodian ...................... 63 Co-Administrators and Distributor ..................................... 77 Service Organizations ................................................. 81 Counsel and Auditors .................................................. 83 In-Kind Purchases and Redemptions ..................................... 83 Automatic Investing Plan .............................................. 83 Directed Reinvestments ................................................ 84 Redemptions and Exchanges ............................................. 84 Retirement Plans ...................................................... 85 Expenses .............................................................. 85 PERFORMANCE INFORMATION ............................................... 85 Money Market Funds .................................................... 85 Non-Money Market Funds ................................................ 88 General Information ................................................... 93 NET ASSET VALUE ....................................................... 95 TAXES 91 Federal - General Information ......................................... 97 Federal - Tax-Exempt Information ...................................... 99 Taxation of Certain Financial Instruments ............................. 101 Special State Tax Considerations Pertaining to the California Funds ........................................................... 101 Special State Tax Considerations Pertaining to the Florida Intermediate Tax-Exempt Fund .................................... 103 Special State Tax Considerations Pertaining to the Arizona Tax-Exempt Fund ................................................. 103 DESCRIPTION OF SHARES ................................................. 104 FINANCIAL STATEMENTS .................................................. 107 OTHER INFORMATION ..................................................... 107 APPENDIX A ............................................................ A-1 APPENDIX B ............................................................ B-1
-3- 122 ADDITIONAL INVESTMENT INFORMATION INVESTMENT OBJECTIVES AND POLICIES The following supplements the investment objectives, strategies and risks of the Funds as set forth in the Prospectus. The investment objective of each Fund may be changed without the vote of the majority of the Fund's outstanding shares. Except as expressly noted below, each Fund's investment policies may be changed without shareholder approval. In addition to the instruments discussed below and in the Prospectus, each Fund may purchase other types of financial instruments, however designated, whose investment and credit quality characteristics are determined by the Investment Advisers to be substantially similar to those of any other investment otherwise permitted by the Funds' investment policies. MONEY MARKET FUNDS Money Market Fund seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing only in high-quality money market instruments. U.S. Government Money Market Fund has the same objective as the Money Market Fund but invests primarily in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and related repurchase agreements. U.S. Government Select Money Market Fund seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high quality money market instruments. Tax-Exempt Money Market Fund seeks to provide a high level of income exempt from regular Federal income tax, to the extent consistent with the preservation of capital, by investing primarily in municipal instruments. Municipal Money Market Fund seeks high current income exempt from regular federal tax to the extent consistent with preserving capital by investing mainly in short-term municipal instruments. California Municipal Money Market Fund seeks to provide its shareholders to the extent consistent with the preservation of capital and prescribed portfolio standards, a high level of income exempt from regular federal income tax and California state personal income tax. 4 123 FIXED INCOME FUNDS U.S. Government Fund seeks high current income from U.S. Government securities. The Fund's dollar-weighted average maturity is anticipated to range between one and ten years. It is designed for investors who seek greater principal stability than is generally available from higher yielding corporate bonds. Short-Intermediate U.S. Government Fund seeks high current income from a broad range of U.S. Government securities. The Fund's dollar-weighted average maturity is anticipated to range between two and five years. It is designed for investors who seek greater principal stability than is generally available from higher yielding corporate bonds. Fixed Income Fund seeks high current income from a broad range of bonds and other fixed income securities. The Fund's average maturity is anticipated to range between seven and twelve years. This Fund generally presents greater risk and reward potential than the U.S. Government Fund and the Short-Intermediate U.S. Government Fund. International Fixed Income Fund seeks to maximize total return consistent with reasonable risk while investing in foreign securities markets. Total return is comprised of current income and value fluctuations from investing in bonds and other fixed income securities of foreign issuers. High Yield Municipal Fund seeks a high level of current income exempt from regular federal income tax. High Yield Fixed Income Fund seeks a high level of current income. In seeking current income, the Fund may also consider the potential for capital appreciation. In pursuing its investment objective, the Fund invests in high yield fixed income instruments. TAX-EXEMPT FIXED INCOME FUNDS Intermediate Tax-Exempt Fund seeks high current income exempt from regular federal income tax by investing in a broad range of municipal instruments with an expected average maturity of three to ten years. California Intermediate Tax-Exempt Fund seeks high current income exempt from regular federal income tax and California state personal income tax by investing in municipal instruments with an expected average maturity of three to ten years. Florida Intermediate Tax-Exempt Fund seeks high current income exempt from regular federal income tax by investing in municipal instruments 5 124 with an expected average maturity of three to ten years. The Fund intends, but cannot guarantee, that its shares will qualify for exemption from the Florida intangibles tax. Tax-Exempt Fund seeks high current income exempt from regular federal income tax by investing in municipal instruments with an expected average maturity of ten to thirty years. Arizona Tax-Exempt Fund seeks high current income exempt from regular federal income tax and Arizona state personal income tax by investing in municipal instruments with an expected average maturity of ten to thirty years. California Tax-Exempt Fund seeks high current income exempt from regular federal income tax and California state personal income tax by investing in municipal instruments with an expected average maturity of ten and thirty years. EQUITY FUNDS Income Equity Fund seeks to achieve high current income and, as a secondary objective, longer-term capital appreciation. The Fund invests in convertible and other equity securities. Because it emphasizes high current income, this Fund is likely to have the least price fluctuation of Northern Funds' equity funds. Stock Index Fund seeks to provide investment results approximating the aggregate price and dividend performance of the securities included in the S&P 500 Index. Growth Equity Fund seeks long-term capital appreciation by investing mainly in the equity securities of growth companies. It is designed for investors willing to accept above-average price volatility in search of long-term reward. Select Equity Fund is also for the more aggressive investor, seeking long-term capital appreciation by investing principally in common stocks of companies the adviser believes to have superior growth characteristics. Any income is incidental to this objective. MarketPower Fund seeks to provide long-term capital appreciation by investing primarily in the equity securities of a concentrated group of companies believed to have significant "market power." Any income received is incidental to this objective. 6 125 Mid Cap Growth Fund seeks long-term capital appreciation by investing primarily in equity securities of companies with market capitalizations that are within the capitalization range of the Standard & Poor's MidCap 400 Stock Index at the time of investment. Small Cap Index Fund seeks to provide investment results approximating the aggregate price and dividend performance of the securities included in the Russell 2000 Index. Small Cap Fund seeks long-term capital appreciation; any income is incidental to this objective. Because it invests principally in the equity securities of smaller companies, this Fund is likely to have more price volatility than the Growth Equity and Select Equity Funds. Small Cap Growth Fund seeks long-term capital appreciation by investing primarily in equity securities of companies with market capitalizations that are within the capitalization range of the Russell 2000 Small Stock Index. International Growth Equity Fund offers the potential benefits of international diversification to investors willing to accept above-average price volatility while seeking long-term capital appreciation. While subject to additional risks such as currency fluctuations and the higher volatility of foreign securities, this Fund uses diversification, in an effort to control risk. International Select Equity Fund seeks long-term growth by investing principally in common stock of foreign issuers that the adviser believes are growing faster than their markets. Because fewer countries and securities are generally represented in this Fund than in the International Growth Equity Fund, it is likely to experience more price volatility. Technology Fund seeks long-term capital appreciation by investing principally in equity securities and securities convertible into common stock of companies that develop, produce or distribute products and services related to advances in technology. The Fund will, under normal market conditions, invest at least 65% of the value of its total assets in securities of companies principally engaged in technology business activities. An issuer is considered principally engaged in technology business activities if such issuer is listed on the Morgan Stanley High-Technology 35 Index (the "Morgan Stanley Index"), the Hambrecht and Quist Technology Index (the "H&Q Index"), the SoundView Technology Index, the technology grouping of the S&P 500 Index or any other comparable index. The Morgan Stanley Index is an equal dollar weighted index of 35 stocks drawn from nine technology subsectors: computer services, design 7 126 software, server software, PC software and new media, networking and telecom equipment, server hardware, PC hardware and peripherals, specialized systems and semi-conductors. The SoundView Technology Index is an equal dollar weighted index designed to measure the performance of the technology industry. It is comprised of 100 major technology companies chosen by SoundView Financial Group. The H&Q Index is comprised of publicly traded stocks of approximately 250 technology companies. The H&Q Index includes companies in the electronics, services and related technologies industries and is a market capitalization weighted index. Changes in the indices may occur when Morgan Stanley, SoundView or H&Q choose to modify their indices or as mergers, acquisitions and failures dictate. Such changes may happen with fair regularity owing to the fast-changing nature of the technology industries. COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party. Bank notes and bankers' acceptances rank junior to deposit liabilities of the bank and pari passu with other senior, unsecured obligations of the bank. Bank notes are classified as "other borrowings" on a bank's balance sheet, while deposit notes and certificates of deposit are classified as deposits. Bank notes are not insured by the Federal Deposit Insurance Corporation or any other insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation only to the extent of $100,000 per depositor per bank. A Fund may invest a portion of its net assets in the obligations of foreign banks and foreign branches of domestic banks. Such obligations include Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated certificates of deposit issued by offices of foreign and domestic banks located outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs except they are issued by Canadian offices of major Canadian banks; Schedule Bs, which are obligations issued by Canadian branches of foreign or domestic banks; Yankee Certificates of Deposit ("Yankee Cds"), which are U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a foreign bank and held in the United States; and Yankee Bankers' Acceptances ("Yankee Bas"), which are U.S. dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign bank and held in the United States. 8 127 INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is normally a general obligation of the issuing insurance company and not a separate account. The purchase price paid for an IFA becomes part of the general assets of the insurance company, and the contract is paid from the company's general assets. The Money Market Fund and Fixed Income Fund will only purchase highly rated IFAs. The High Yield Fixed Income Fund is not subject to any minimum rating criteria. Generally, IFAs are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in IFAs may not exist. Therefore, IFAs will be subject to a Fund's limitation on illiquid investments when the Fund may not demand payment of the principal amount within seven days and a reliable trading market is absent. ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent consistent with their respective investment objectives, each Fund may invest in zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon and capital appreciation bonds are debt securities issued or sold at a discount from their face value and which do not entitle the holder to any periodic payment of interest prior to maturity or a specified date. The original issue discount varies depending on the time remaining until maturity or cash payment date, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. These securities also may take the form of debt securities that have been stripped of their unmatured interest coupons, the coupons themselves or receipts or certificates representing interests in such stripped debt obligations or coupons. The market prices of zero coupon bonds, capital appreciation bonds and PIK securities generally are more volatile than the market prices of interest bearing securities and are likely to respond to a greater degree to changes in interest rates than interest bearing securities having similar maturities and credit quality. PIK securities may be debt obligations or preferred shares that provide the issuer with the option of paying interest or dividends on such obligations in cash or in the form of additional securities rather than cash. Similar to zero coupon bonds, PIK securities are designed to give an issuer flexibility in managing cash flow. PIK securities that are debt securities can either be senior or subordinated debt and generally trade flat (i.e., without accrued interest). The trading price of PIK debt securities generally reflects the market value of the underlying debt plus an amount representing accrued interest since the last interest payment. Zero coupon bonds, capital appreciation bonds and PIK securities involve the additional risk that, unlike securities that periodically pay interest to maturity, a Fund will realize no cash until a specified future payment date unless a portion of such securities is sold and, if the issuer of such securities defaults, a Fund may obtain no return at all on its investment. In addition, even though such securities do not provide for the payment of current interest in cash, the Funds are nonetheless required to accrue income on such investments for each taxable year and generally are required to distribute such accrued amounts (net of deductible expenses, if any) to avoid being subject to tax. Because no cash is generally received at the time of the accrual, a Fund may be required to liquidate other portfolio securities to obtain sufficient cash to satisfy federal tax distribution requirements applicable to the Fund. 9 128 LOAN PARTICIPATIONS. The High Yield Fixed Income Fund may invest in loan participations. Such loans must be to issuers in whose obligations the High Yield Fixed Income Fund may invest. A loan participation is an interest in a loan to a U.S. or foreign company or other borrower which is administered and sold by a financial intermediary. In a typical corporate loan syndication, a number of lenders, usually banks (co-lenders), lend a corporate borrower a specified sum pursuant to the terms and conditions of a loan agreement. One of the co-lenders usually agrees to act as the agent bank with respect to the loan. Participation interests acquired by the High Yield Fixed Income Fund may take the form of a direct or co-lending relationship with the corporate borrower, an assignment of an interest in the loan by a co-lender or another participant, or a participation in the seller's share of the loan. When the High Yield Fixed Income Fund acts as co-lender in connection with a participation interest or when the High Yield Fixed Income Fund acquires certain participation interests, the High Yield Fixed Income Fund will have direct recourse against the borrower if the borrower fails to pay scheduled principal and interest. In cases where the High Yield Fixed Income Fund lacks direct recourse, it will look to the agent bank to enforce appropriate credit remedies against the borrower. In these cases, the High Yield Fixed Income Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation (such as commercial paper) of such borrower. For example, in the event of the bankruptcy or insolvency of the corporate borrower, a loan participation may be subject to certain defenses by the borrower as a result of improper conduct by the agent bank. Moreover, under the terms of the loan participation, the High Yield Fixed Income Fund may be regarded as a creditor of the agent bank (rather than of the underlying corporate borrower), so that the High Yield Fixed Income Fund may also be subject to the risk that the agent bank may become insolvent. The secondary market, if any, for these loan participations is limited and any loan participations purchased by the High Yield Fixed Income Fund will be regarded as illiquid. For purposes of certain investment limitations pertaining to diversification of the High Yield Fixed Income Fund's portfolio investments, the issuer of a loan participation will be the underlying borrower. However, in cases where the High Yield Fixed Income Fund does not have recourse directly against the borrower, both the borrower and each agent bank and co-lender interposed between the High Yield Fixed Income Fund and the borrower will be deemed issuers of a loan participation. REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio securities from financial institutions subject to the seller's agreement to repurchase them at a mutually agreed upon date and price ("repurchase agreements"). Repurchase agreements are considered to be loans under the Investment Company Act of 1940 (the "1940 Act"). Although the securities subject to a repurchase agreement may bear maturities exceeding one year, settlement for the repurchase agreement will never be more than one year after a Fund's acquisition of the securities and normally will be within a shorter period of time. Securities subject to repurchase agreements are held either by Northern Funds' custodian or subcustodian (if any), or in the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will be required to maintain the value of the securities subject to the agreement in an amount exceeding the repurchase price (including accrued interest). Default by the seller would, however, expose a 10 129 Fund to possible loss because of adverse market action or delay in connection with the disposition of the underlying obligations. REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds by selling portfolio securities to financial institutions such as banks and broker/dealers and agreeing to repurchase them at a mutually specified date and price ("reverse repurchase agreements"). The Funds may use the proceeds of reverse repurchase agreements to purchase other securities either maturing, or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. Reverse repurchase agreements are considered to be borrowings under the 1940 Act. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Fund may decline below the repurchase price. A Fund will pay interest on amounts obtained pursuant to a reverse repurchase agreement. While reverse repurchase agreements are outstanding, a Fund will segregate liquid assets in an amount at least equal to the market value of the securities, plus accrued interest, subject to the agreement. VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable and floating rate instruments that may be acquired by the Funds as described in the Prospectus, the Investment Advisers will consider the earning power, cash flows and other liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to demand features, will monitor their financial status and ability to meet payment on demand. In determining weighted average portfolio maturity, an instrument may, subject to applicable Securities and Exchange Commission ("SEC") regulations, be deemed to have a maturity shorter than its nominal maturity based on the period remaining until the next interest rate adjustment or the time a Fund can recover payment of principal as specified in the instrument. Where necessary to ensure that a variable or floating rate instrument is of the minimum required credit quality for a Fund, the issuer's obligation to pay the principal of the instrument will be backed by an unconditional bank letter or line of credit, guarantee or commitment to lend. Variable and floating rate instruments eligible for purchase by the Funds include variable amount master demand notes, which permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate, and (except for the Money Market Funds) leveraged inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage interest in inverse floaters is associated with greater volatility in their market values. Accordingly, the duration of an inverse floater may exceed its stated final maturity. The Funds may deem the maturity of variable and floating rate instruments to be less than their stated maturities based on their variable and floating rate features and/or their put features. Unrated variable and floating rate instruments will be determined by the Investment Advisers to be of comparable quality at the time of purchase to rated instruments which may be purchased by the Funds. Variable and floating rate instruments including inverse floaters held by a Fund will be subject to the Fund's limitation on illiquid investments when the Fund may not demand payment of the principal amount within seven days absent a reliable trading market. 11 130 FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase securities on a when-issued basis or purchase or sell securities on a forward commitment (sometimes called delayed delivery) basis. These transactions involve a commitment by the Fund to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitment transactions are normally negotiated directly with the other party. A Fund will purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or negotiate a commitment after entering into it. A Fund also may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. When a Fund purchases securities on a when-issued, delayed-delivery or forward commitment basis, the Fund will segregate liquid assets having a value (determined daily) at least equal to the amount of the Fund's purchase commitments until three days prior to the settlement date, or will otherwise cover its position. These procedures are designed to ensure that the Fund will maintain sufficient assets at all times to cover its obligations under when-issued purchases, forward commitments and delayed-delivery transactions. For purposes of determining a Fund's average dollar-weighted maturity, the maturity of when-issued, delayed-delivery or forward commitment securities will be calculated from the commitment date. UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government obligations that may be acquired by the Funds include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), General Services Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks and Maritime Administration. SUPRANATIONAL BANK OBLIGATIONS. A Fund may invest in obligations of supranational banks. Supranational banks are international banking institutions designed or supported by national governments to promote economic reconstruction, development or trade among nations (e.g., the International Bank for Reconstruction and Development). Obligations of supranational banks may be supported by appropriated but unpaid commitments of their member countries and there is no assurance that these commitments will be undertaken or met in the future. STRIPPED OBLIGATIONS. The Treasury Department has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and principal payments on Treasury securities through the Federal Reserve book-entry record-keeping system. The Federal Reserve program as established by the Treasury 12 131 Department is known as "STRIPS" or "Separate Trading of Registered Interest and Principal of Securities." The Funds may purchase securities registered in the STRIPS program. Under the STRIPS program, the Funds are able to have their beneficial ownership of zero coupon securities recorded directly in the book-entry record-keeping system in lieu of having to hold certificates or other evidences of ownership of the underlying U.S. Treasury securities. In addition, the Funds, other than the U.S. Government Select Money Market Fund, may acquire U.S. Government obligations and their unmatured interest coupons that have been separated ("stripped") by their holder, typically a custodian bank or investment brokerage firm. Having separated the interest coupons from the underlying principal of the U.S. Government obligations, the holder will resell the stripped securities in custodial receipt programs with a number of different names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold separately from the underlying principal, which is usually sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic interest (cash) payments. The underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are ostensibly owned by the bearer or holder), in trust on behalf of the owners. Counsel to the underwriters of these certificates or other evidences of ownership of U.S. Treasury securities have stated that, in their opinion, purchasers of the stripped securities most likely will be deemed the beneficial holders of the underlying U.S. Government obligations for federal tax purposes. Northern Funds is unaware of any binding legislative, judicial or administrative authority on this issue. The Prospectus discusses other types of stripped securities that may be purchased by the Funds, including stripped mortgage-backed securities ("SMBS"). SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mortgage-backed obligations. A common type of SMBS will have one class receiving all of the interest, while the other class receives all of the principal. However, in some instances, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities. The market value of the class consisting entirely of principal payments generally is extremely volatile in response to changes in interest rates. The yields on a class of SMBS that receives all or most of the interest are generally higher than prevailing market yields on other mortgage-backed obligations because their cash flow patterns are also volatile and there is a risk that the initial investment will not be fully recouped. SMBS issued by the U.S. Government (or a U.S. Government agency or instrumentality) may be considered liquid under guidelines established by the Trust's Board of Trustees if they can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of the net asset value per share. ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the Funds may purchase asset-backed securities, which are securities backed by mortgages, installment contracts, credit card receivables or other financial assets. Asset-backed securities represent interests in "pools" of assets in which payments of both interest and principal on the securities 13 132 are made periodically, thus in effect "passing through" such payments made by the individual borrowers on the assets that underlie the securities, net of any fees paid to the issuer or guarantor of the securities. The average life of asset-backed securities varies with the maturities of the underlying instruments, and the average life of a mortgage-backed instrument, in particular, is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as a result of mortgage prepayments. For this and other reasons, an asset-backed security's stated maturity may be shortened, and the security's total return may be difficult to predict precisely. If an asset-backed security is purchased at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Conversely, if an asset-backed security is purchased at a discount, faster than expected prepayments will increase, while slower than expected prepayments will decrease, yield to maturity. In calculating a Fund's average weighted maturity, the maturity of asset-backed securities will be based on estimates of average life. Prepayments on asset-backed securities generally increase with falling interest rates and decrease with rising interest rates; furthermore, prepayment rates are influenced by a variety of economic and social factors. In general, the collateral supporting non-mortgage asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. Asset-backed securities acquired by the Funds may include collateralized mortgage obligations ("CMOs") issued by private companies. CMOs provide the holder with a specified interest in the cash flow of a pool of underlying mortgages or other mortgage-backed securities. Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or floating interest rate and a final distribution date. The relative payment rights of the various CMO classes may be structured in a variety of ways. The Funds will not purchase "residual" CMO interests, which normally exhibit greater price volatility. There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. Mortgage-related securities guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes"), which are guaranteed as to the timely payment of principal and interest by GNMA and backed by the full faith and credit of the United States. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes"), which are solely the obligations of FNMA and are not backed by or entitled to the full faith and credit of the United States, but are supported by the right of the issuer to borrow from the Treasury. FNMA is a government-sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of the principal and interest by FNMA. Mortgage-related securities issued by 14 133 the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. Non-mortgage asset-backed securities involve certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the underlying collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which have given debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. Therefore, there is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support payments on these securities. MUNICIPAL INSTRUMENTS. Municipal instruments are generally issued to finance public works, such as airports, bridges, highways, housing, health-related entities, transportation-related projects, educational programs, water and pollution control and sewer works. They are also issued to repay outstanding obligations, to raise funds for general operating expenses and to make loans to other public institutions and for other facilities. Municipal instruments include private activity bonds issued by or on behalf of public authorities. Private activity bonds are or have been issued to obtain funds to provide, among other things, privately operated housing facilities, pollution control facilities, convention or trade show facilities, mass transit, airport, port or parking facilities and certain local facilities for water supply, gas, electricity or sewage or solid waste disposal. Private activity bonds are also issued to privately held or publicly owned corporations in the financing of commercial or industrial facilities. State and local governments are authorized in most states to issue private activity bonds for such purposes in order to encourage corporations to locate within their communities. The principal and interest on these obligations may be payable from the general revenues of the users of such facilities. Municipal instruments include both "general" and "revenue" obligations. General obligations are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue obligations are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as lease revenue payments from the user 15 134 of the facility being financed. Private activity bonds are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of a private activity bond is usually directly related to the credit standing of the private user of the facility involved. The Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund (the "Tax-Exempt Funds") and the Municipal Money Market Fund, California Municipal Money Market Fund and High Yield Municipal Fund (the "Municipal Funds") may also invest in "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of a moral obligation bond is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund (if such a fund has been established), the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer. The Tax-Exempt Money Market, Municipal Money Market and California Municipal Money Market Funds may invest in fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, D-2 or higher by D&P or F-2 or higher by Fitch IBCA and tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moody's, A-2 or higher by S&P, D-2 or higher by D&P or F-2 or higher by Fitch IBCA. The Tax-Exempt Money Market, Municipal Money Market and California Municipal Money Market Funds may also invest in rated and unrated municipal bonds, notes, paper or other instruments that are of comparable quality to the tax-exempt commercial paper permitted to be purchased by the Funds. Within the principal classifications of municipal instruments described above there are a variety of categories, including municipal bonds, municipal notes, municipal leases, custodial receipts and participation certificates. Municipal notes include tax, revenue and bond anticipation notes of short maturity, generally less than three years, which are issued to obtain temporary funds for various public purposes. Municipal leases and participation certificates are obligations issued by state or local governments or authorities to finance the acquisition of equipment and facilities. Participation certificates may represent participations in a lease, an installment purchase contract, or a conditional sales contract. Certain municipal lease obligations (and related participation certificates) may include "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Custodial receipts are underwritten by securities dealers or banks and evidence ownership of future interest payments, principal payments or both on certain municipal securities. Municipal leases (and participations in such leases) present the risk that a municipality will not appropriate funds for the lease payments. Northern Trust, under the supervision of Northern Funds' Board of Trustees, will determine the credit quality of any unrated municipal leases on an ongoing basis, including an assessment of the likelihood that the leases will not be cancelled. There are, of course, variations in the quality of municipal instruments, both within a particular category and between categories, and the yields on municipal instruments depend upon a variety of factors, including general market conditions, the financial condition of the issuer, 16 135 general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of an NRSRO, such as Moody's, S&P and Fitch IBCA described in Appendix A hereto, represent such NRSRO's opinion as to the quality of municipal instruments. It should be emphasized that these ratings are general and are not absolute standards of quality. Municipal instruments with the same maturity, interest rate and rating may have different yields. Municipal instruments of the same maturity and interest rate with different ratings may have the same yield. An issuer's obligations under its municipal instruments are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be enacted by federal or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. The power or ability of an issuer to meet its obligations for the payment of interest on and principal of its municipal instruments may be materially adversely affected by litigation or other conditions. From time to time proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal instruments. For example, under the Tax Reform Act of 1986 interest on certain private activity bonds must be included in an investor's federal alternative minimum taxable income, and corporate investors must include all tax-exempt interest in their federal alternative minimum taxable income. Northern Funds cannot predict what legislation, if any, may be proposed in the future in Congress as regards the federal income tax status of interest on municipal instruments or which proposals, if any, might be enacted. Such proposals, if enacted, might materially and adversely affect the availability of municipal instruments for investment by the Tax-Exempt and Municipal Funds and the Funds' liquidity and value. In such an event the Board of Trustees would reevaluate the Funds' investment objectives and policies and consider changes in their structure or possible dissolution. Certain of the municipal instruments held by a Fund may be insured as to the timely payment of principal and interest. The insurance policies will usually be obtained by the issuer of the municipal instrument at the time of its original issuance. In the event that the issuer defaults on an interest or principal payment, the insurer will be notified and will be required to make payment to the bondholders. There is, however, no guarantee that the insurer will meet its obligations. In addition, such insurance will not protect against market fluctuations caused by changes in interest rates and other factors. A Fund may invest more than 25% of its total assets in municipal instruments covered by insurance policies. In addition, municipal instruments may be backed by letters of credit or guarantees issued by domestic or foreign banks or other financial institutions which are not subject to federal deposit insurance. Adverse developments affecting the banking industry generally or a particular bank or financial institution that has provided its credit or guarantee with respect to a municipal instrument held by a Fund, including a change in the credit quality of any such bank or financial institution, could result in a loss to the Fund and adversely affect the value of its shares. As described below under "Foreign Securities," letters of credit and guarantees issued by foreign 17 136 banks and financial institutions involve certain risks in addition to those of similar instruments issued by domestic banks and financial institutions. Interest earned by the Tax-Exempt Money Market Fund, Intermediate Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-Exempt Fund or California Tax-Exempt Fund on private activity bonds (if any) that is treated as a specific tax preference item under the federal alternative minimum tax will not be deemed to have been derived from municipal instruments for purposes of determining whether that Fund meets its fundamental policy that at least 80% of its annual gross income be derived from municipal instruments. The Tax-Exempt Funds and the Municipal Funds may invest in municipal leases, which may be considered liquid under guidelines established by Northern Funds' Board of Trustees. The guidelines will provide for determination of the liquidity of a municipal lease obligation based on factors including the following: (1) the frequency of trades and quotes for the obligation; (2) the number of dealers willing to purchase or sell the security and the number of other potential buyers; (3) the willingness of dealers to undertake to make a market in the security; and (4) the nature of the marketplace trades, including the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer. Northern Trust, under the supervision of Northern Funds' Board of Trustees, will also consider the continued marketability of a municipal lease obligation based upon an analysis of the general credit quality of the municipality issuing the obligation and the essentiality to the municipality of the property covered by the lease. Opinions relating to the validity of municipal instruments (including California, Florida and Arizona municipal instruments) and to federal and state tax issues relating to these securities are rendered by counsel to the respective issuing authorities at the time of issuance. Such opinions may contain various assumptions, qualifications or exceptions that are reasonably acceptable to Northern Trust. Neither Northern Funds nor Northern Trust will review the proceedings relating to the issuance of municipal instruments or the bases for such opinions. Currently, it is not the intention of the Tax-Exempt Funds and the Municipal Funds (other than the Florida Intermediate Tax-Exempt Fund, the California Funds and the Arizona Tax-Exempt Fund) to invest more than 25% of their total assets in municipal instruments whose issuers are in the same state. STANDBY COMMITMENTS. The Tax-Exempt Funds and Municipal Funds may enter into standby commitments with respect to municipal instruments held by them. Under a standby commitment, a dealer agrees to purchase at a Fund's option a specified municipal instrument. Standby commitments may be exercisable by a Fund at any time before the maturity of the underlying municipal instruments and may be sold, transferred or assigned only with the instruments involved. The Funds expect that standby commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, the Funds may pay for a standby commitment either separately in cash or by paying a higher price for municipal instruments which are acquired subject to the commitment (thus reducing the yield to maturity otherwise available for the same securities). The total amount paid in either manner for outstanding standby commitments held by a Fund will not exceed 1/2 of 1% of the value of the Fund's total assets calculated immediately after each standby commitment is acquired. 18 137 The Funds intend to enter into standby commitments only with dealers, banks and broker-dealers which, in Northern Trust's opinion, present minimal credit risks. The Funds will acquire standby commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. The acquisition of a standby commitment will not affect the valuation of the underlying municipal instrument. The actual standby commitment will be valued at zero in determining net asset value. Accordingly, where a Fund pays directly or indirectly for a standby commitment, its cost will be reflected as an unrealized loss for the period during which the commitment is held by the Fund and will be reflected in realized gain or loss when the commitment is exercised or expires. WARRANTS. The Income Equity, Growth Equity, Select Equity, MarketPower, Mid Cap Growth, Small Cap, Small Cap Growth, International Growth Equity, International Select Equity, Technology and High Yield Fixed Income Funds may purchase warrants and similar rights, which are privileges issued by corporations enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of time. The prices of warrants do not necessarily correlate with the prices of the underlying shares. The purchase of warrants involves the risk that a Fund could lose the purchase value of a warrant if the right to subscribe to additional shares is not exercised prior to the warrant's expiration. Also, the purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price of the related security may exceed the value of the subscribed security's market price such as when there is no movement in the level of the underlying security. FOREIGN SECURITIES. The International Funds intend to invest primarily in the securities of foreign issuers. In addition, each Equity Fund, the Fixed Income Fund and the High Yield Fixed Income Fund may invest a portion of their assets in such securities, including (except with respect to the Fixed Income Fund) eurodollar convertible securities, which are fixed income securities that are issued in U.S. dollars outside the United States and are convertible into or exchangeable for equity securities of the same or a different issuer. The Money Market Fund may also invest in dollar-denominated obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities, as well as other foreign issuers. These obligations may be issued by supranational entities, including international organizations (such as the European Coal and Steel Community) designed or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Investment in foreign securities involves special risks. These include market risk, interest rate risk and the risks of investing in securities of foreign issuers and of companies whose securities are principally traded outside the United States and in investments denominated in foreign currencies. Market risk involves the possibility that stock prices will decline over short or even extended periods. The stock markets tend to be cyclical, with periods of generally rising prices and periods of generally declining prices. These cycles will affect the value of a Fund that invests in foreign stocks. The holdings of a Fund that 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 19 138 strength of the foreign currency against the U.S. dollar and the interest rate environment in the country issuing the currency. Absent other events which could otherwise affect the value of a foreign security (such as a change in the political climate or an issuer's credit quality), appreciation in the value of the foreign currency generally can be expected to increase the value of a foreign currency-denominated security in terms of U.S. dollars. A rise in foreign interest rates or decline in the value of the foreign currency relative to the U.S. dollar generally can be expected to depress the value of a foreign currency-denominated security. There are other risks and costs involved in investing in foreign securities which are in addition to the usual risks inherent in domestic investments. Investment in foreign securities involves higher costs than investment in U.S. securities, including higher transaction and custody costs as well as the imposition of additional taxes by foreign governments. Foreign investments also involve risks associated with the level of currency exchange rates, less complete financial information about the issuers, less market liquidity, more market volatility and political instability. Future political and economic developments, the possible imposition of withholding taxes on dividend income, the possible seizure or nationalization of foreign holdings, the possible establishment of exchange controls, or the adoption of other governmental restrictions might adversely affect an investment in foreign securities. Additionally, foreign banks and foreign branches of domestic banks are subject to less stringent reserve requirements, and to different accounting, auditing and recordkeeping requirements. The Money Market Fund, the Fixed Income Fund, the High Yield Fixed Income Fund, each Equity Fund and each International Fund may invest in foreign debt, including the securities of foreign governments. Several risks exist concerning such investments, including the risk that foreign governments may default on their obligations, may not respect the integrity of such debt, may attempt to renegotiate the debt at a lower rate, and may not honor investments by United States entities or citizens. To the extent consistent with their investment objectives, the Funds may also invest in obligations of the International Bank for Reconstruction and Development (also known as the World Bank) which are supported by subscribed, but unpaid, commitments of its member countries. There is no assurance that these commitments will be undertaken or complied with in the future. The 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 have disrupted the relationship of the Japanese yen with other currencies and with the U.S. dollar. Future political, economic and social developments in Europe, Japan and in the Asia\Pacific regional context can be expected to produce continuing effects on securities and currency markets. In addition, the International Funds and High Yield Fixed Income Fund may invest their assets in countries with emerging economies or securities markets. These countries are located 20 139 in the Asia-Pacific region, Eastern Europe, Latin and South America and Africa. Political and economic structures in many of these countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability characteristics of more developed countries. Some of these countries may have in the past failed to recognize private property rights and may have at times nationalized or expropriated the assets of private companies. In general, the securities markets of these countries are less liquid, subject to greater price volatility, have smaller market capitalizations and have problems with securities registration and custody. As a result, the risks presented by investments in these countries are heightened. Additionally, settlement procedures in emerging countries are frequently less developed and reliable than those in the United States and may involve a Fund's delivery of securities before receipt of payment for their sale. Settlement or registration problems may make it more difficult for a Fund to value its portfolio securities and could cause the Fund to miss attractive investment opportunities, to have a portion of its assets uninvested or to incur losses due to the failure of a counterparty to pay for securities the Fund has delivered or the Fund's inability to complete its contractual obligations. Although a Fund (other than the Money Market Fund) may invest in securities denominated in foreign currencies, its portfolio securities and other assets are valued in U.S. dollars. Currency exchange rates may fluctuate significantly over short periods of time causing, together with other factors, a Fund's net asset value to fluctuate as well. Currency exchange rates can be affected unpredictably by the intervention or the failure to intervene by U.S. or foreign governments or central banks, or by currency controls or political developments in the U.S. or abroad. To the extent that a Fund's total assets, adjusted to reflect the Fund's net position after giving effect to currency transactions, are denominated in the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political developments within those countries. In addition, through the use of forward currency exchange contracts and with other instruments, the respective net currency positions of the International Funds may expose them to risks independent of their securities positions. Although the net long and short foreign currency exposure of the International Funds will not exceed their respective total asset values, to the extent that a Fund is fully invested in foreign securities while also maintaining currency positions, it may be exposed to greater risk than it would have if it did not maintain the currency positions. The Funds are also subject to the possible imposition of exchange control regulations or freezes on the convertibility of currency. Investors should understand that the expense ratios of the International Funds can be expected to be higher than those of Funds investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the higher cost of investment research, higher costs of custody of foreign securities, higher commissions paid on comparable transactions on foreign markets and additional costs arising from delays in settlements of transactions involving foreign securities. Dividends and interest payable on a Fund's foreign portfolio securities may be subject to foreign withholding taxes. To the extent such taxes are not offset by credits or deductions allowed to investors under U.S. federal income tax law, they may reduce the net return to the shareholders. See "Taxes." 21 140 AMERICAN DEPOSITORY RECEIPTS. Each Equity Fund and each International Fund can invest in ADRs. ADRs are receipts typically issued by a United States bank or trust company evidencing ownership of the underlying foreign securities and are denominated in U.S. dollars. Some institutions issuing ADRs may not be sponsored by the issuer. A non-sponsored depository may not provide the same shareholder information that a sponsored depository is required to provide under its contractual arrangement with the issuer. EUROPEAN DEPOSITORY RECEIPTS. Each Equity Fund and each International Fund can also invest in EDRs and GDRs. EDRs and GDRs are receipts issued by a non-U.S. financial institution evidencing ownership of underlying foreign or U.S. securities and are usually denominated in foreign currencies. EDRs and GDRs may not be denominated in the same currency as the securities they represent. Generally, EDRs and GDRs are designed for use in the foreign securities markets. FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible loss on investments resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Fixed Income, International Fixed Income, High Yield Fixed Income, Income Equity, Growth Equity, Select Equity, MarketPower, Mid Cap Growth, Small Cap, Small Cap Growth, International Growth Equity, International Select Equity and Technology Funds are authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather may allow a Fund to establish a rate of exchange for a future point in time. When entering into a contract for the purchase or sale of a security, a Fund may enter into a forward foreign currency exchange contract for the amount of the purchase or sale price to protect against variations, between the date the security is purchased or sold and the date on which payment is made or received, in the value of the foreign currency relative to the U.S. dollar or other foreign currency. In addition, when an Investment Adviser anticipates that a particular foreign currency may decline substantially relative to the U.S. dollar or other leading currencies, in order to reduce risk, a Fund may enter into a forward contract to sell, for a fixed amount, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. Similarly, when the securities held by a Fund create a short position in a foreign currency, a Fund may enter into a forward contract to buy, for a fixed amount, an amount of foreign currency approximating the short position. A Fund's net long and short foreign currency exposure will not exceed its total asset value. With respect to any forward foreign currency contract, it will not generally be possible to match precisely the amount covered by that contract and the value of the securities involved due to the changes in the values of such securities resulting from market movements between the date the forward contract is entered into and the date it matures. While forward contracts may offer protection from losses resulting from declines or appreciation in the value of a particular foreign currency, they also limit potential gains which might result from changes in the value of such currency. A Fund will also incur 22 141 costs in connection with forward foreign currency exchange contracts and conversions of foreign currencies and U.S. dollars. In addition, Northern Trust may purchase or sell forward currency exchange contracts for the International Fixed Income Fund, International Growth Equity Fund and International Select Equity Fund (collectively, the "International Funds") and the High Yield Fixed Income Fund to seek to increase total return when Northern Trust anticipates that the foreign currency will appreciate or depreciate in value. The International Funds and the High Yield Fixed Income Fund may engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities denominated in a different currency if Northern Trust believes that there is a pattern of correlation between the two currencies. Liquid assets equal to the amount of a Fund's assets that could be required to consummate forward contracts will be segregated except to the extent the contracts are otherwise "covered." The segregated assets will be valued at market or fair value. If the market or fair value of such assets declines, additional liquid assets will be segregated daily so that the value of the segregated assets will equal the amount of such commitments by the Fund. A forward contract to sell a foreign currency is "covered" if a Fund owns the currency (or securities denominated in the currency) underlying the contract, or holds a forward contract (or call option) permitting the Fund to buy the same currency at a price that is (i) no higher than the Fund's price to sell the currency or (ii) greater than the Fund's price to sell the currency provided the Fund segregates liquid assets in the amount of the difference. A forward contract to buy a foreign currency is "covered" if a Fund holds a forward contract (or put option) permitting the Fund to sell the same currency at a price that is (i) as high as or higher than the Fund's price to buy the currency or (ii) lower than the Fund's price to buy the currency provided the Fund segregates liquid assets in the amount of the difference. OPTIONS. Each Non-Money Market Fund may buy put options and buy call options and write covered call and secured put options. Such options may relate to particular securities, foreign and domestic securities indices, financial instruments, foreign currencies or (in the case of the International Fixed Income Fund and the High Yield Fixed Income Fund) the yield differential between two securities ("yield curve options"), and may or may not be listed on a domestic or foreign securities exchange and may or may not be issued by the Options Clearing Corporation. A call option for a particular security gives the purchaser of the option the right to buy, and a writer the obligation to sell, the underlying security at the stated exercise price prior to the expiration of the option, regardless of the market price of the security. The premium paid to the writer is in consideration for undertaking the obligation under the option contract. A put option for a particular security gives the purchaser the right to sell the security at the stated exercise price prior to the expiration date of the option, regardless of the market price of the security. Options on indices and yield curve options provide the holder with the right to make or receive a cash settlement upon exercise of the option. With respect to options on indices, the amount of the settlement will equal the difference between the closing price of the index at the time of exercise and the exercise price of the option expressed in dollars, times a specified multiple. With respect to yield curve options, the amount of the settlement will equal the difference between the yields of designated securities. 23 142 Options trading is a highly specialized activity which entails greater than ordinary investment risk. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. The Funds will write call options only if they are "covered." In the case of a call option on a security or currency, the option is "covered" if a Fund owns the instrument underlying the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are segregated) upon conversion or exchange of other securities held by it. For a call option on an index, the option is covered if a Fund maintains with its custodian securities comprising the index or liquid assets equal to the contract value. A call option is also covered if a Fund holds a call on the same instrument or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the Fund segregates liquid assets in the amount of the difference. The Funds will write put options only if they are "secured" by segregated liquid assets in an amount not less than the exercise price of the option at all times during the option period. With respect to yield curve options, a call (or put) option is covered if the International Fixed Income Fund or High Yield Fixed Income Fund holds another call (or put) option on the spread between the same two securities and maintains in a segregated account liquid assets sufficient to cover the Fund's net liability under the two options. Therefore, the Fund's liability for such a covered option is generally limited to the difference between the amount of the Fund's liability under the option written by the Fund less the value of the option held by the Fund. Yield curve options may also be covered in such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations. Yield curve options are traded over-the-counter, and because they have been only recently introduced, established trading markets for these securities have not yet developed. A Fund's obligation to sell an instrument subject to a covered call option written by it, or to purchase an instrument subject to a secured put option written by it, may be terminated prior to the expiration date of the option by the Fund's execution of a closing purchase transaction, which is effected by purchasing on an exchange an option of the same series (i.e., same underlying instrument, exercise price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing purchase transaction will ordinarily be effected to realize a profit on an outstanding option, to prevent an underlying instrument from being called, to permit the sale of the underlying instrument or to permit the writing of a new option containing different terms on such underlying instrument. The cost of such a liquidation purchase plus transaction costs may be greater than the premium received upon the original option, in which event the Fund will have incurred a loss in the transaction. There is no assurance that a liquid secondary market will exist for any particular option. An option writer, unable to effect a closing purchase transaction, will not be able to sell the underlying instrument (in the case of a covered call option) or liquidate the segregated assets (in the case of a secured put option) until the option expires or the optioned instrument or currency is delivered upon exercise with the result that the writer in such circumstances will be subject to the risk of market decline or appreciation in the instrument during such period. 24 143 When a Fund purchases an option, the premium paid by it is recorded as an asset of the Fund. When a Fund writes an option, an amount equal to the net premium (the premium less the commission) received by a Fund is included in the liability section of the Fund's statement of assets and liabilities as a deferred credit. The amount of this asset or deferred credit will be subsequently marked-to-market to reflect the current value of the option purchased or written. The current value of the traded option is the last sale price or, in the absence of a sale, the current bid price. If an option purchased by a Fund expires unexercised, the Fund realizes a loss equal to the premium paid. If a Fund enters into a closing sale transaction on an option purchased by it, the Fund will realize a gain if the premium received by the Fund on the closing transaction is more than the premium paid to purchase the option, or a loss if it is less. If an option written by a Fund expires on the stipulated expiration date or if a Fund enters into a closing purchase transaction, it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the option is sold) and the deferred credit related to such option will be eliminated. If an option written by a Fund is exercised, the proceeds of the sale will be increased by the net premium originally received and the Fund will realize a gain or loss. There are several risks associated with transactions in options. For example, there are significant differences between the securities, currency and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on an exchange may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities or currencies; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading value; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money Market Funds) may purchase and sell futures contracts and may purchase and sell call and put options on futures contracts for hedging purposes, for speculative purposes (to seek to increase total return), or for liquidity management purposes. When used as a hedge, a Fund may sell a futures contract in order to offset a decrease in the market value of its portfolio securities that might otherwise result from a market decline or currency exchange fluctuations. A Fund may do so either to hedge the value of its portfolio of securities as whole, or to protect against declines, occurring prior to sales of securities, in the value of the securities to be sold. Conversely, a Fund may purchase a futures contract as a hedge in anticipation of purchases of securities. In addition, a Fund may utilize futures contracts in anticipation of changes in the composition of its portfolio holdings. For a detailed description of futures contracts and related options, see Appendix B to this Additional Statement. 25 144 Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC") regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the CFTC and arbitration proceedings provided them by the National Futures Association or any domestic futures exchange. In particular, a Fund's investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time an order is placed and the time it is liquidated, offset or exercised. For a detailed description of futures contracts and related options, see Appendix B to this Additional Statement. In connection with a Fund's position in a futures contract or related option, the Fund will segregate liquid assets or will otherwise cover its position in accordance with applicable SEC requirements. Northern Funds intends to comply with the regulations of the Commodity Futures Trading Commission exempting the Funds from registration as a "commodity pool operator." REAL ESTATE INVESTMENT TRUSTS. The High Yield Fixed Income Fund, Income Equity Fund, Small Cap Index Fund, Small Cap Fund and Small Cap Growth Fund may invest in equity real estate investment trusts ("REITs"). REITs pool investors' funds for investment primarily in commercial real estate properties. Investments in REITs may subject the Fund to certain risks. REITs may be affected by changes in the value of the underlying property owned by the trusts. REITs are dependent upon specialized management skill, may not be diversified and are subject to the risks of financing projects. REITs are also subject to heavy cash flow dependency, defaults by borrowers, self liquidation and the possibility of failing to qualify for the beneficial tax treatment available to REITs under the Internal Revenue Code of 1986, as amended, and to maintain exemption from the 1940 Act. As a shareholder in a REIT, the Fund would bear, along with other shareholders, its pro rata portion of the REIT's operating expenses. These expenses would be in addition to the advisory and other expenses the Fund bears directly in connection with its own operations. SECURITIES LENDING. Collateral for loans of portfolio securities made by a Fund may consist of cash, cash equivalents, securities issued or guaranteed by the U.S. Government or its agencies or (except for the U.S. Government Money Market Fund, U.S. Government Select 26 145 Money Market Fund, U.S. Government Fund and Short-Intermediate U.S. Government Fund) irrevocable bank letters of credit (or any combination thereof). The borrower of securities will be required to maintain the market value of the collateral at not less than the market value of the loaned securities, and such value will be monitored on a daily basis. When a Fund lends its securities, it continues to receive dividends and interest on the securities loaned and may simultaneously earn interest on the investment of the cash collateral. Although voting rights, or rights to consent, attendant to securities on loan pass to the borrower, such loans will be called so that the securities may be voted by a Fund if a material event affecting the investment is to occur. INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The U.S. Government, Short-Intermediate U.S. Government, Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt, International Fixed Income, High Yield Municipal, High Yield Fixed Income and Income Equity Funds may enter into interest rate swaps for hedging purposes and not for speculation. The U.S. Government, Short-Intermediate U.S. Government, Fixed Income, International Fixed Income, High Yield Municipal and High Yield Fixed Income Funds may also purchase interest rate floors or caps for hedging purposes and not for speculation. A Fund will typically use interest rate swaps to preserve a return on a particular investment or portion of its portfolio or to shorten the effective duration of its portfolio investments. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. The purchase of an interest rate floor or cap entitles the purchaser to receive payments of interest on a notional principal amount from the seller, to the extent the specified index falls below (floor) or exceeds (cap) a predetermined interest rate. The International Funds and the High Yield Fixed Income Fund may also enter into currency swaps, which involve the exchange of the rights of a Fund and another party to make or receive payments in specific currencies. A Fund will only enter into interest rate swaps or interest rate floor or cap transactions on a net basis, i.e. the two payment streams are netted out, with a Fund receiving or paying, as the case may be, only the net amount of the two payments. In contrast, currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Inasmuch as these transactions are entered into for good faith hedging purposes, the Funds and the Investment Advisers believe that such obligations do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to the Funds' borrowing restrictions. The net amount of the excess, if any, of the Funds' obligations over their entitlements with respect to each interest rate or currency swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate net asset value at least equal to such accrued excess, will be segregated by the Funds. Except for the High Yield Fixed Income Fund (which is not subject to any minimum rating criteria), a Fund will not enter into a currency or interest rate swap or interest rate floor or cap transaction unless the unsecured commercial paper, senior debt or the claims-paying ability of the other party thereto is rated either A or A-1 or better by S&P, Duff or Fitch IBCA, or A or P-1 or better by Moody's. If there is a default by the other party to such transaction, a Fund will 27 146 have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with markets for other similar instruments which are traded in the Interbank market. EQUITY SWAPS. Each Equity Fund may enter into equity swap contracts to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. Equity swaps may also be used for hedging purposes or to seek to increase total return. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. Equity swap contracts may be structured in different ways. For example, a counterparty may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap contract would have increased in value had it been invested in particular stocks (or an index of stocks), plus the dividends that would have been received on those stocks. In these cases, the Fund may agree to pay to the counterparty the amount, if any, by which that notional amount would have decreased in value had it been invested in the stocks. Therefore, the return to the Fund on any equity swap contract should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. In other cases, the counterparty and the Fund may each agree to pay the other the difference between the relative investment performances that would have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or indices of stocks). A Fund will enter into equity swaps only on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of an equity swap contract or periodically during its term. Equity swaps do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to equity swaps is limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to an equity swap defaults, a Fund's risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated cash or liquid assets to cover the Funds' potential exposure, the Funds and their Investment Advisers believe that transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to a Fund's borrowing restrictions. The Funds will not enter into any equity swap transactions unless the unsecured commercial paper, senior debt or claims-paying ability of the other party is rated either A, or A-1 or better by Standard & Poor's, Duff & Phelps or Fitch IBCA, or A or P-1 or better by Moody's Investors Service. If there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreements related to the transaction. The use of equity swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. If the Investment Advisers are incorrect in their forecasts of market values, the 28 147 investment performance of a Fund would be less favorable than it would have been if this investment technique were not used. CONVERTIBLE SECURITIES. Convertible securities entitle the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible securities mature or are redeemed, converted or exchanged. Prior to conversion, convertible securities have characteristics similar to ordinary debt securities in that they normally provide a stable stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities rank senior to common stock in a corporation's capital structure and therefore generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. In selecting convertible securities, the Investment Advisers will consider, among other factors: an evaluation of the creditworthiness of the issuers of the securities; the interest or dividend income generated by the securities; the potential for capital appreciation of the securities and the underlying common stocks; the prices of the securities relative to other comparable securities and to the underlying common stocks; whether the securities are entitled to the benefits of sinking funds or other protective conditions; diversification of the Fund's portfolio as to issuers; and whether the securities are rated by a rating agency and, if so, the ratings assigned. The value of convertible securities is a function of their investment value (determined by yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and their conversion value (their worth, at market value, if converted into the underlying common stock). The investment value of convertible securities is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline, and by the credit standing of the issuer and other factors. The conversion value of convertible securities is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible securities is governed principally by their investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible securities will be increasingly influenced by their conversion value. In addition, convertible securities generally sell at a premium over their conversion value determined by the extent to which investors place value on the right to acquire the underlying common stock while holding fixed income securities. Capital appreciation for a Fund may result from an improvement in the credit standing of an issuer whose securities are held in the Fund or from a general lowering of interest rates, or a combination of both. Conversely, a reduction in the credit standing of an issuer whose securities are held by a Fund or a general increase in interest rates may be expected to result in capital depreciation to the Fund. In general, investments in lower quality convertible securities are subject to a significant risk of a change in the credit rating or financial condition of the issuing entity. Investments in convertible securities of medium or lower quality are also likely to be subject to greater market 29 148 fluctuation and to greater risk of loss of income and principal due to default than investments of higher quality fixed-income securities. Such lower quality securities generally tend to reflect short-term corporate and market developments to a greater extent than higher quality securities, which react more to fluctuations in the general level of interest rates. A Fund will generally reduce risk to the investor by diversification, credit analysis and attention to current developments in trends of both the economy and financial markets. However, while diversification reduces the effect on a Fund of any single investment, it does not reduce the overall risk of investing in lower quality securities. RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Advisers believe that smaller companies can provide greater growth potential than larger, more mature firms, investing in the securities of such companies also involves greater risk, portfolio price volatility and cost. Historically, small capitalization stocks, which will be the Small Cap Index, Small Cap and Small Cap Growth Funds' primary investments, and stocks of recently organized companies, in which the Small Cap Index, Small Cap and Small Cap Growth Funds may also invest, have been more volatile in price than the larger capitalization stocks included in the S&P 500 Index. Among the reasons for this greater price volatility are the lower degree of market liquidity (the securities of companies with small stock market capitalizations may trade less frequently and in limited volume) and the greater sensitivity of small companies to changing economic conditions. For example, these companies are associated with higher investment risk due to the greater business risks of small size and limited product lines, markets, distribution channels and financial and managerial resources. The values of small company stocks will frequently fluctuate independently of the values of larger company stocks. Small company stocks may decline in price as large company stock prices rise, or rise in price as large company stock prices decline. You should, therefore, expect that the net asset value of the Fund's shares will be more volatile than, and may fluctuate independently of, broad stock market indices such as the S&P 500 Index. The additional costs associated with the acquisition of small company stocks include brokerage costs, market impact costs (that is, the increase in market prices which may result when a Fund purchases thinly traded stock) and the effect of the "bid-ask" spread in small company stocks. These costs will be borne by all shareholders and may negatively impact investment performance. RISKS RELATED TO MEDIUM AND LOWER QUALITY SECURITIES. Investments in medium and lower quality securities present special risk considerations. Medium quality securities, although considered investment grade, are also considered to have speculative characteristics. Lower quality securities are considered predominately speculative by traditional investment standards. In some cases, these obligations may be highly speculative and have poor prospects for reaching investment grade standard. While any investment carries some risk, certain risks associated with lower quality securities are different from those for investment-grade securities. The risk of loss through default is greater because lower quality securities are usually unsecured and are often subordinate to an issuer's other obligations. Additionally, the issuers of these securities frequently have high debt levels and are thus more sensitive to difficult economic conditions, individual corporate developments and rising interest rates. Consequently, the market price of 30 149 these securities may be quite volatile and may result in wider fluctuations of a Fund's net asset value per share. There remains some uncertainty about the performance level of the market for lower quality securities under adverse market and economic environments. An economic downturn or increase in interest rates could have a negative impact on both the markets for lower quality securities (resulting in a greater number of bond defaults) and the value of lower quality securities held in a portfolio of investments. The economy and interest rates can affect lower quality securities differently than other securities. For example, the prices of lower quality securities are more sensitive to adverse economic changes or individual corporate developments than are the prices of higher quality investments. In addition, during an economic downturn or period in which interest rates are rising significantly, highly leveraged issuers may experience financial difficulties, which, in turn, would adversely affect their ability to service their principal and interest payment obligations, meet projected business goals and obtain additional financing. The market value of lower quality securities tends to reflect individual corporate developments to a greater extent than that of higher quality securities which react primarily to fluctuations in the general level of interest rates. Lower quality securities are often issued in connection with a corporate reorganization or restructuring or as a part of a merger, acquisition, takeover or similar event. They are also issued by less established companies seeking to expand. Such issuers are often highly leveraged, may not have available to them more traditional methods of financing and are generally less able than more established or less leveraged entities to make scheduled payments of principal and interest in the event of adverse economic developments or business conditions. A holder's risk of loss from default is significantly greater for lower quality securities than is the case for holders of other debt securities because such securities are generally unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by a Fund in defaulted securities poses additional risk of loss should nonpayment of principal and interest continue in respect of such securities. Even if such securities are held to maturity, recovery by a Fund of its initial investment and any anticipated income or appreciation will be uncertain. A Fund may also incur additional expenses in seeking recovering on defaulted securities. If an issuer of a security defaults, a Fund may incur additional expenses to seek recovery. In addition, periods of economic uncertainty would likely result in increased volatility for the market prices of lower quality securities as well as a Fund's net asset value. In general, both the prices and yields of lower quality securities will fluctuate. The secondary market for lower quality securities is concentrated in relatively few market makers and is dominated by institutional investors, including mutual funds, insurance companies and other financial institutions. Accordingly, the secondary market for such securities is not as liquid as, and is more volatile than, the secondary market for higher quality securities. In addition, market trading volume for high yield fixed income securities is generally lower and the secondary market for such securities could contract under adverse market or economic conditions, independent of any specific adverse changes in the condition of a particular issuer. 31 150 These factors may have an adverse effect on the market price and a Fund's ability to dispose of particular portfolio investments. A less developed secondary market may also make it more difficult for a Fund to obtain precise valuations of the high yield securities in its portfolio. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of lower quality convertible securities held by a Fund, especially in a thinly traded market. Illiquid or restricted securities held by a Fund may involve special registration responsibilities, liabilities and costs, and could involve other liquidity and valuation difficulties. The credit ratings assigned by a rating agency evaluate the safety of a rated security's principal and interest payments, but do not address market value risk and, therefore, may not fully reflect the true risks of an investment. Because the ratings of the rating agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the Investment Adviser performs its own analysis of the issuers whose lower quality securities a Fund holds. Because of this, a Fund's performance may depend more on its Investment Adviser's credit analysis than is the case of mutual funds investing in higher quality securities. INVESTMENT COMPANIES. With respect to the investments of the Funds in the securities of other investment companies, such investments will be limited so that, as determined after a purchase is made, either (a) not more than 3% of the total outstanding stock of such investment company will be owned by a Fund, Northern Funds as a whole and their affiliated persons (as defined in the 1940 Act) or (b) (i) not more than 5% of the value of the total assets of a Fund will be invested in the securities of any one investment company; (ii) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund. Certain investment companies whose securities are purchased by the Funds may not be obligated to redeem such securities in an amount exceeding 1% of the investment company's total outstanding securities during any period of less than 30 days. Therefore, such securities that exceed this amount may be illiquid. Notwithstanding the foregoing, a Fund may adhere to more restrictive limitations with respect to its investments in securities issued by other investment companies if required by the SEC or deemed to be in the best interests of Northern Funds. If required by the 1940 Act, each Fund expects to vote the shares of other investment companies that are held by it in the same proportion as the vote of all other holders of such securities. YIELDS AND RATINGS. The yields on certain obligations, including the money market instruments in which the Funds invest, are dependent on a variety of factors, including general economic conditions, conditions in the particular market for the obligation, financial condition of the issuer, size of the offering, maturity of the obligation and ratings of the issue. The ratings of Standard & Poor's, Moody's, Duff, Fitch IBCA and Thomson BankWatch, Inc. represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same 32 151 rating, maturity and interest rate may have different market prices. For a more complete discussion of ratings, see Appendix A to this Additional Statement. Subject to the limitations stated in the Prospectus, if a security held by a Fund undergoes a rating revision, the Fund may continue to hold the security if the Investment Advisers determine such retention is warranted. STOCK INDICES. The Standard & Poor's 500(R) Composite Stock Price Index (the "S&P 500 Index") is a market value-weighted index consisting of 500 common stocks which are traded on the New York Stock Exchange, American Stock Exchange and the Nasdaq National Market System and selected by Standard & Poor's Corporation ("Standard & Poor's") through a detailed screening process starting on a macro-economic level and working toward a micro-economic level dealing with company-specific information such as market value, industry group classification, capitalization and trading activity. Standard & Poor's primary objective for the S&P 500 Index is to be the performance benchmark for the U.S. equity markets. The companies chosen for inclusion in the S&P 500 Index tend to be leaders in important industries within the U.S. economy. However, companies are not selected by Standard & Poor's for inclusion because they are expected to have superior stock price performance relative to the market in general or other stocks in particular. Standard & Poor's makes no representation or warranty, implied or express, to purchasers of Stock Index Fund shares or any member of the public regarding the advisability of investing in the Fund or the ability of the S&P 500 Index to track general stock market performance. The Standard & Poor's Midcap 400 Stock Index ("S&P MidCap 400 Index") is a market-weighted index composed of 400 common stocks chosen by Standard & Poor's for market size, liquidity and industry group representation. The purpose of the S&P MidCap 400 Index is to represent the performance of the medium-capitalization sector of the U.S. securities market. Medium capitalized stocks which are included in the S&P 500 Index are excluded from the S&P MidCap 400 Index. Except for a limited number of Canadian securities, the S&P MidCap 400 does not include foreign securities. As of ______, 1999, the approximate market capitalization range of the companies included in the S&P MidCap 400 Index was between $___ million and $____ billion. The Russell 2000 Index is a market value-weighted index composed of the stocks of the smallest 2000 companies in the Russell 3000 Index, which is composed of the stocks of 3000 large U.S. domiciled companies (based on market capitalization) that represent approximately 98% of the investable U.S. equity markets. Because of its emphasis on the smallest 2000 companies, the Russell 2000 Index represents approximately 10% of the total market capitalization of the Russell 3000 Index. As of ______, 1999, the average market capitalization of the companies included in the Russell 2000 Index was approximately $_____ million. The Russell 2000 Index is reconstituted annually to reflect changes in market capitalization. The primary criteria used by Frank Russell & Company ("Russell") to determine the initial list of securities eligible for inclusion in the Russell 3000 Index (and accordingly, the Russell 2000 Index) is total market capitalization adjusted for large private holdings and cross-ownership. However, companies are not selected by Russell for inclusion in the Russell 2000 Index because they are expected to have superior stock price performance relative to the market in general or 33 152 other stocks in particular. Russell makes no representation or warranty, implied or express, to purchasers of Small Cap Index or Small Cap Growth Fund shares or any member of the public regarding the advisability of investing in the Fund or the ability of the Russell 2000 Index to track general market performance of small capitalization stocks. TRACKING VARIANCE. As discussed in the Prospectus, the Stock Index and Small Cap Index Funds are subject to the risk of tracking variance. Tracking variance may result from share purchases and redemptions, transaction costs, expenses and other factors. Share purchases and redemptions may necessitate the purchase and sale of securities by a Fund and the resulting transaction costs which may be substantial because of the number and the characteristics of the securities held. In addition, transaction costs are incurred because sales of securities received in connection with spin-offs and other corporate organizations are made to conform a Fund's holdings with its investment objective. Tracking variance may also occur due to factors such as the size of a Fund, the maintenance of a cash reserve pending investment or to meet expected redemptions, changes made in the Fund's designated Index or the manner in which the Index is calculated or because the indexing and investment approach of the Investment Adviser does not produce the intended goal of the Fund. In the event the performance of a Fund is not comparable to the performance of its designated Index, the Board of Trustees will evaluate the reasons for the deviation and the availability of corrective measures. If substantial deviation in a Fund's performance were to continue for extended periods, it is expected that the Board of Trustees would consider recommending to shareholders possible changes to the Fund's investment objective. CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Funds is calculated by dividing the lesser of purchases or sales of portfolio investments for the reporting period by the monthly average value of the portfolio investments owned during the reporting period. The calculation excludes all securities, including options, whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover may vary greatly from year to year as well as within a particular year, and may be affected by, changes in the holdings of specific issuers, changes in country and currency weightings, cash requirements for redemption of shares and by requirements which enable the Funds to receive favorable tax treatment. For the fiscal year ended March 31, 1999, the turnover rates with respect to the U.S. Government, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt Fund, International Fixed Income, High Yield Municipal, High Yield Fixed Income, Income Equity, Stock Index, Growth Equity, Select Equity, Mid Cap Growth, Small Cap, International Growth Equity, International Select Equity and Technology Funds were 123.75%, 54.03%, 57.98%, 84.85%, 140.39%, 62.55%, 16.49%, 0.00%, 0.00%, 79.95%, 2.46%, 49.67%, 87.73%, 173.39%, 18.74%, 177.89%, 168.19% and 61.01%, respectively. The Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, MarketPower Fund, Small Cap Index Fund and Small Cap Growth Fund had not commenced operations during the fiscal year ended March 31, 1999. The Funds are not restricted by policy with regard to portfolio turnover and will make changes in their investment portfolio from time to time as business and economic conditions as well as market prices may dictate. 34 153 MISCELLANEOUS. Securities may be purchased on margin only to obtain such short-term credits as are necessary for the clearance of purchases and sales of securities. The Funds will not engage in selling securities short. The Funds may, however, make short sales against the box although the Funds have no current intention to do so in the coming year. "Selling short against the box" involves selling a security that a Fund owns for delivery at a specified date in the future. SPECIAL RISK FACTORS AND CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL INSTRUMENTS, FLORIDA MUNICIPAL INSTRUMENTS AND ARIZONA MUNICIPAL INSTRUMENTS Some of the risk factors relating to investments by the California, Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds in California, Florida, and Arizona municipal instruments are summarized below. This summary does not purport to be a comprehensive description of all relevant factors. Although the Trust has no reason to believe that the information summarized herein is not correct in all material respects, this information has not been independently verified for accuracy or thoroughness by the Trust. Rather, the information presented herein with respect to California municipal instruments was culled from official statements and prospectuses issued in connection with various securities offerings of the State of California and local agencies in California available as of the date of this Statement of Additional Information and, with respect to the Florida Intermediate Tax-Exempt and Arizona Tax-Exempt Funds, the information is derived principally from official statements relating to issues of Florida and Arizona municipal instruments released prior to the date of this Additional Statement. Further, any estimates and projections presented herein should not be construed as statements of fact. They are based upon assumptions which may be affected by numerous factors and there can be no assurance that target levels will be achieved. CALIFORNIA MUNICIPAL INSTRUMENTS General The financial condition of the State of California ("California"), its public authorities and local governments could affect the market values and marketability of, and therefore the net asset value per unit and the interest income of, the California Funds, or result in the default of existing obligations, including obligations which may be held by the California Funds. It should be noted that the creditworthiness of obligations issued by local issuers may be unrelated to the creditworthiness of California, and that there is no obligation on the part of California to make payment on such local obligations in the event of default in the absence of a specific guarantee or pledge provided by California. During the early 1990's, California experienced significant financial difficulties, which reduced its credit standing, but the State's finances have improved significantly since 1994, with ratings increases since 1996. The ratings of certain related debt of other issuers for which California has an outstanding lease purchase, guarantee or other contractual obligation (such as for state-insured hospital bonds) are generally linked directly to California's rating. Should the financial condition of California deteriorate again, its credit ratings could be reduced, and the market value and marketability of all outstanding notes and bonds issued by California, its public authorities or local governments could be adversely affected. 35 154 Economic Factors California's economy is the largest among the 50 states and one of the largest in the world. The State's population of almost 34 million represents over 12 percent of the total United States population and grew by 26 percent in the 1980s, more than double the national rate. Population growth slowed to less than 1 percent annually in 1994 and 1995, but rose to 1.8 percent in 1996 and 1.6 percent in 1997. During the early 1990's, net population growth in the State was due to births and foreign immigration, but in recent years, in-migration from the other states has increased. Total personal income in the State, at an estimated $902 billion in 1998, accounts for almost 13 percent of all personal income in the nation. Total employment is over 15 million, the majority of which is in the service, trade and manufacturing sectors. From mid-1990 to late 1993, the State suffered a recession with the worst economic, fiscal and budget conditions since the 1930s. Construction, manufacturing (especially aerospace), and financial services, among others, were all severely affected, particularly in Southern California. Employment levels stabilized by late 1993 and pre-recession job levels were reached in 1996. Unemployment, while remaining higher than the national average, has come down from its 10 percent recession peak to under 6 percent in early 1999. Economic indicators show a steady and strong recovery underway in California since the start of 1994 particularly in high technology manufacturing and services, including computer software, electronic manufacturing and motion picture/television production, and other services, entertainment and tourism, and both residential and commercial construction. International economic problems starting in 1997 had some moderating impact on California's economy, but negative impacts, such as a sharp drop in exports to Asia which have hurt the manufacturing and agricultural sectors, have apparently been offset by increased exports to Latin American and other nations, and a greater strength in services, computer software and construction. Current forecasts predict continued strong growth of the State's economy in 1999, with a slowdown in the rate of growth predicted in 2000 and beyond. Any delay or reversal of the recovery may create new shortfalls in State revenues. Constitutional Limitations on Taxes, Other Charges and Appropriations Limitation on Property Taxes. Certain California municipal instruments may be obligations of issuers which rely in whole or in part, directly or indirectly, on ad valorem property taxes as a source of revenue. The taxing powers of California local governments and districts are limited by Article XIIIA of the California Constitution, enacted by the voters in 1978 and commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1 percent of full cash value of the rate of ad valorem property taxes on real property and generally restricts the reassessment of property to 2 percent per year, except under new construction or change of ownership (subject to a number of exemptions). Taxing entities may, however, raise ad valorem taxes above the 1 percent limit to pay debt service on voter-approved bonded indebtedness. 36 155 Under Article XIIIA, the basic 1 percent ad valorem tax levy is applied against the assessed value of property as of the owner's date of acquisition (or as of March 1, 1975, if acquired earlier), subject to certain adjustments. This system has resulted in widely varying amounts of tax on similarly situated properties. Several lawsuits have been filed challenging the acquisition-based assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992. Article XIIIA prohibits local governments from raising revenues through ad valorem taxes above the 1 percent limit; it also requires voters of any governmental unit to give two-thirds approval to levy any "special tax." Court decisions, however, allowed a non-voter approved levy of "general taxes" which were not dedicated to a specific use. Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the voters of the State approved Proposition 218, called the "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local agencies to levy and collect both existing and future taxes, assessments, fees and charges. Article XIIIC requires that all new or increased local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes require a majority vote and taxes for specific purposes require a two-thirds vote. Further, any general purpose tax which was imposed, extended or increased without voter approval after December 31, 1994 must be approved by a majority vote within two years. Article XIIID contains several new provisions making it generally more difficult for local agencies to levy and maintain "assessments" for municipal services and programs. Article XIIID also contains several new provisions affecting "fees" and "charges", defined for purposes of Article XIIID to mean "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a [local government] upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service." All new and existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which generate revenues exceeding the funds required to provide the property related service or are used for unrelated purposes. There are new notice, hearing and protest procedures for levying or increasing property related fees and charges, and, except for fees or charges for sewer, water and refuse collection services (or fees for electrical and gas service, which are not treated as "property related" for purposes of Article XIIID), no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. In addition to the provisions described above, Article XIIIC removes limitations on the initiative power in matters of local taxes, assessments, fees and charges. Consequently, local voters could, by future initiative, repeal, reduce or prohibit the future imposition or increase of any local tax, assessment, fee or charge. It is unclear how this right of local initiative may be used in cases where taxes or charges have been or will be specifically pledged to secure debt issues. 37 156 The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of matters, and it is not possible at this time to predict with certainty the outcome of such determinations. Proposition 218 is generally viewed as restricting the fiscal flexibility of local governments, and for this reason, some ratings of California cities and counties have been, and others may be, reduced. Appropriations Limits. The State and its local governments are subject to an annual "appropriations limit" imposed by Article XIIIB of the California Constitution, enacted by the voters in 1979 and significantly amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits the State or any covered local government from spending "appropriations subject to limitation" in excess of the appropriations limit imposed. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes," which consist of tax revenues and certain other funds, including proceeds from regulatory licenses, user charges or other fees, to the extent that such proceeds exceed the cost of providing the product or service, but "proceeds of taxes" exclude most State subventions to local governments. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees, and certain other non-tax funds, including bond proceeds. Among the expenditures not included in the Article XIIIB appropriations limit are (1) the debt service cost of bonds issued or authorized prior to January 1, 1979, or subsequently authorized by the voters, (2) appropriations arising from certain emergencies declared by the Governor, (3) appropriations for certain capital outlay projects, (4) appropriations by the State of post-1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations made in certain cases of emergency. The appropriations limit for each year is adjusted annually to reflect changes in cost of living and population, and any transfers of service responsibilities between government units. The definitions for such adjustments were liberalized in 1990 to follow more closely growth in the State's economy. "Excess" revenues are measured over a two year cycle. Local governments must return any excess to taxpayers by rate reductions. The State must refund 50 percent of any excess, with the other 50 percent paid to schools and community colleges. With more liberal annual adjustment factors since 1988, and depressed revenues since 1990 because of the recession, few governments are currently operating near their spending limits, but this condition may change over time. Local governments may by voter approval exceed their spending limits for up to four years. During fiscal year 1986-87, State receipts from proceeds of taxes exceeded its appropriations limit by $1.1 billion, which was returned to taxpayers. Since that year, appropriations subject to limitation have been under the State limit. State appropriations were $6.8 billion under the limit for fiscal year 1998-99. Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of the California Constitution, the ambiguities and possible inconsistencies in their terms, and the impossibility of predicting future appropriations or changes in population and cost of living, and the probability of continuing legal challenges, it is not currently possible to determine fully the 38 157 impact of these Articles on California municipal instruments or on the ability of the State or local governments to pay debt service on such California municipal instruments. It is not possible, at the present time, to predict the outcome of any pending litigation with respect to the ultimate scope, impact or constitutionality of these Articles or the impact of any such determinations upon State agencies or local governments, or upon their ability to pay debt service on their obligations. Further initiatives or legislative changes in laws or the California Constitution may also affect the ability of the State or local issuers to repay their obligations. Obligations of the State of California Under the California Constitution, debt service on outstanding general obligation bonds is the second charge to the General Fund after support of the public school system and public institutions of higher education. As of May 1, 1999, the State had outstanding approximately $19.7 billion of long-term general obligation bonds, plus $246 million of general obligation commercial paper which will be refunded by long-term bonds in the future, and $6.6 billion of lease-purchase debt supported by the State General Fund. The State also had about $15.3 billion of authorized and unissued long-term general obligation bonds and lease-purchase debt. In FY 1997-98, debt service on general obligation bonds and lease purchase debt was approximately 4.4 percent of General Fund revenues. Recent Financial Results The principal sources of General Fund revenues in 1997-1998 were the California personal income tax (51 percent of total revenues), the sales tax (32 percent), bank and corporation taxes (11 percent), and the gross premium tax on insurance (2 percent). The State maintains a Special Fund for Economic Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to meet cash needs of the General Fund, but which is required to be replenished as soon as sufficient revenues are available. Year-end balances in the SFEU are included for financial reporting purposes in the General Fund balance. Because of the recession and an accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to 1995-96. Throughout the 1980's, State spending increased rapidly as the State population and economy also grew rapidly, including increased spending for many assistance programs to local governments, which were constrained by Proposition 13 and other laws. The largest State program is assistance to local public school districts. In 1988, an initiative (Proposition 98) was enacted which (subject to suspension by a two-thirds vote of the Legislature and the Governor) guarantees local school districts and community college districts a minimum share of State General Fund revenues (currently about 35 percent). Recent Budgets. As a result of the severe economic recession from 1990-94 and other factors, during this period the State experienced substantial revenue shortfalls, and greater than anticipated social service costs. The State accumulated and sustained a budget deficit in the budget reserve, the SFEU, approaching $2.8 billion at its peak at June 30, 1993. The Legislature 39 158 and Governor responded to these deficits by enacting a series of fiscal steps between FY1991-92 and FY1994-95, including significant cuts in health and welfare and other program expenditures, tax increases, transfers of program responsibilities and some funding sources from the State to local governments, and transfer of about $3.6 billion in annual local property tax revenues primarily from cities and counties to local school districts, thereby reducing State funding for schools. A consequence of the accumulated budget deficits in the early 1990's, together with other factors such as disbursement of funds to local school districts "borrowed" from future fiscal years and hence not shown in the annual budget, was to significantly reduce the State's cash resources available to pay its ongoing obligations. The State's cash condition became so serious that from late spring 1992 until 1995, the State had to rely on issuance of short term notes which matured in a subsequent fiscal year to finance its ongoing deficit, and pay current obligations. The last of these deficit notes was repaid in April, 1996. The State's financial condition improved markedly in the years from FY1995-96 onward, with a combination of better than expected revenues, slowdown in growth of social welfare programs, and continued spending restraint based on the actions taken in earlier years. The State's cash position also improved, and no external deficit borrowing has occurred over the fiscal year since FY 1994-95. The economy grew strongly during these fiscal years, and as a result, the General Fund took in substantially greater tax revenues (around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.1 billion in 1997-98, and $1.0 billion in 1998-99) than were initially planned when the budgets were enacted. These additional funds were largely directed to school spending as mandated by Proposition 98, and to make up shortfalls from reduced federal health and welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the recession years was finally eliminated. The Department of Finance estimates that the State's budget reserve (the SFEU) totaled about $1.8 billion at June 30, 1998 and $1.9 billion at June 30, 1999. The growth in General Fund revenues since the end of the recession resulted in significant increases in State funding for local school districts under Proposition 98. From the recession level of about $4,300 per pupil, annual State funding has increased to over $6,000 per pupil in FY 1999-2000. A significant amount of the new moneys have been directed to specific educational reforms, including reduction of class sizes in many grade levels. The improved budget condition also allowed annual increases in support for higher education in the State, permitting increased enrollment and reduction of student fees. Part of the 1997-98 Budget Act was completion of State welfare reform legislation to implement the new federal law passed in 1996. The new State program, called "CalWORKs," became effective January 1, 1998, and emphasizes programs to bring aid recipients into the workforce. As required by federal law, new time limits are placed on receipt of welfare aid. Generally, health and welfare costs have been contained even during the recent period of economic recovery, with the first real increases (after inflation) in welfare support levels occurring in 1999-2000. 40 159 FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21, 1998. After giving effect to line-item vetoes made by the Governor, the Budget plan resulted in spending of about $57.3 billion for the General Fund and $14.7 billion for Special Funds. The Budget Act assumed General Fund revenues and transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act, the Legislature passed a number of additional fiscal bills. Taking these into account, the Administration projected in September, 1998 that the balance in the SFEU at June 30, 1999 would be about $1.2 billion. One of the most important elements of the 1998-99 Budget Act was agreement on substantial tax cuts. The largest of these was a phased-in cut in the Vehicle License Fee (an annual tax on the value of cars registered in the State, the "VLF"). Starting on January 1, 1999, the VLF has been reduced by 25 percent. Under pre-existing law, VLF funds are automatically transferred to cities and counties, so the new legislation provided for the General Fund to make up the reductions. If State General Fund revenues continue to grow above certain targeted levels in future years, the cut could reach as much as 67.5 percent by the year 2003. The initial 25 percent VLF cut will be offset by about $500 million in General Fund money in FY 1998-99, and $1 billion annually for future years. Other tax cuts in FY 1998-99 included an increase in the dependent credit exemption for personal income tax filers, restoration of a renter's tax credit for taxpayers, and a variety of business tax relief measures. The total cost of these tax cuts was estimated at $1.4 billion for FY 1998-99. The Administration released new projections for the balance of FY 1998-99 on May 14, 1999 as part of the May Revision of the Governor's Proposed Budget for 1999-2000 (the "May Revision"). The May Revision revealed that the State's economy was much stronger in late 1998 and into 1999 than the Administration had thought when it made its first FY 1999-2000 Budget Proposal in January 1999. As a result, the May Revision updated 1998-99 General Fund revenues to be $57.9 billion, almost $1 billion above the original FY 1998-99 estimates, and over $1.6 billion above the Administration's January estimate. Most of the increase is from personal income taxes, reflecting stronger wage employment than previously estimated, and extraordinary growth in capital gain realizations resulting from the stock market's rise. The May Revision projected the SFEU will have a balance of almost $1.9 billion at June 30, 1999. Although, as noted, the Administration projected a budget reserve in the SFEU of about $1.9 billion on June 30, 1999, the General Fund fund balance on that date also reflects $1.0 billion of "loans" which the General Fund made to local schools in the recession years, representing cash outlays above the mandatory minimum funding level. Settlement of litigation over these transactions in July 1996 calls for repayment of these loans over the period ending in 2001-02, about equally split between outlays from the General Fund and from schools' entitlements. The 1998-99 Budget Act contained a $300 million appropriation from the General Fund toward this settlement. FY 1999-2000 Budget. The newly elected Governor, Gray Davis, released his proposed FY 1999-00 Budget in January 1999. It projected somewhat lower General Fund revenues than in earlier projections, due to slower economic growth which was expected in late 1998, but totaling an estimated $60.3 billion. The May Revision has sharply increased the revenue estimates, by over $2.7 billion, to a total of almost $63.0 billion, which would represent a 9 41 160 percent increase above FY 1998-99. Again, the greatest increase is expected in personal income taxes (about 10 percent year-over-year increase), with more moderate increases in sales taxes (6 percent) and corporate taxes (3 percent). The 1999-00 Budget Act was signed on June 29, 1999, only the second time in the decade the budget was in place at the start of the fiscal year. After the Governor used his line-item veto power to reduce expenditures by about $581 million, the final spending plan called for about $63.7 billion of General Fund expenditures, $16.1 billion of Special Fund expenditures, and $1.5 billion in bond funded expenditures. The Governor's final budget actions left the SFEU with an estimated balance of $881 million at June 30, 2000, but the Governor also reduced spending to set aside $300 million for future appropriation for either employee pay raises or potential litigation costs. If not fully used, these "set-aside" funds would increase the SFEU year-end balance. The final Budget Act generally provided increased funding for a wide range of programs. Education spending under Proposition 98 received the largest increase (over $2.3 billion above 1998-99), with other significant increases for higher education, health and welfare, natural resources and capital outlay. The budget provides several hundred million dollars in direct new aid to cities and counties. A proposal is being drafted to place a constitutional amendment on the ballot in 2000 to provide more extensive, permanent fiscal relief for local government. The final spending plan includes several targeted tax cuts for businesses, totaling under $100 million in 1999-00. The plan also includes a one-time, one-year additional cut of 10 percent in the Vehicle License Fee for calendar year 2000. This cut will cost the General Fund about $500 million in each of 1999-00 and 2000-01 to make up lost funds for local governments. Under the 1998 law, the VLF cut to 35 percent would become permanent in the year 2001 if General Fund revenues reach a certain specified level in 2000-01. Although the State's strong economy is producing record revenues to the State government, the State's budget continues to be under stress from mandated spending on education, a rising prison population, and social needs of a growing population with many immigrants. These factors which limit State spending growth also put pressure on local governments. There can be no assurances that, if economic conditions weaken, or other factors intercede, the State will not experience budget gaps in the future. Bond Rating The ratings on California's long-term general obligation bonds were reduced in the early 1990's from "AAA" levels which had existed prior to the recession. After 1996, the three major rating agencies raised their ratings of California's general obligation bonds, which as of July 1, 1999 were assigned ratings of "A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch IBCA. There can be no assurance that such ratings will be maintained in the future. It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated 42 161 to creditworthiness of obligations issued by the State of California, and that there is no obligation on the part of the State to make payment on such local obligations in the event of default. Legal Proceedings The State is involved in certain legal proceedings (described in the State's recent financial statements) that, if decided against the State, may require the State to make significant future expenditures or may substantially impair revenues. Trial courts have recently entered tentative decisions or injunctions which would overturn several parts of the State's recent budget compromises. The matters covered by these lawsuits include reductions in welfare payments and the use of certain cigarette tax funds for health costs. All of these cases are subject to further proceedings and appeals, and if California eventually loses, the final remedies may not have to be implemented in one year. Year 2000 Preparations The State and local governments, along with all other public and private institutions in the nation, face a major challenge to ensure that their computer systems, including microchips embedded into existing machinery, will not fail prior to or at the January 1, 2000 date which may not be recognized properly by software utilizing only two digits to identify a year. The new State Administration has placed a very high priority on "Year 2000" remediation and contingency planning. The State has a Department of Information Technology ("DOIT") which coordinates activities, provides technical assistance to State agencies and local governments, and reports on the status of remediation efforts by over 100 State departments and agencies. DOIT has reported that, as of early 1999, 372 of 564 "mission critical" systems in State government had been remediated (although final testing was still going on in some cases). Of the balance, 54 were being retired and 138 were in process. DOIT does not report on all State agencies. In addition to hardware and software changes, agencies are preparing business contingency plans in case of computer problems at 1/1/2000, and are actively coordinating with outside agencies, vendors, contractors and others with whom computer data is shared. The State Treasurer and State Controller, responsible for State fiscal controls and debt service payments, have reported they were fully remediated by December 31, 1998 and are spending the 1999 year in testing and confirmation of their systems. The State has expended and plans to spend many hundreds of millions of dollars on Year 2000 projects of all sorts, and has set aside several tens of millions of dollars in contingency funds to support late-coming needs. There is no survey of local government costs, or the overall status of their activities. It is likely that larger government agencies are better prepared at this time than smaller ones. Both the State and local governments are preparing emergency plans for Year 2000 computer difficulties similar to their normal planning for natural emergencies, such as floods or earthquakes. 43 162 Obligations of Other Issuers Other Issuers of California Municipal Instruments. There are a number of State agencies, instrumentalities and political subdivisions of the State that issue municipal instruments, some of which may be conduit revenue obligations payable from payments from private borrowers. These entities are subject to various economic risks and uncertainties, and the credit quality of the securities issued by them may vary considerably from the credit quality of obligations backed by the full faith and credit of the State. State Assistance. Property tax revenues received by local governments declined more than 50 percent following passage of Proposition 13. Subsequently, the California Legislature enacted measures to provide for the redistribution of the State's General Fund surplus to local agencies, the reallocation of certain State revenues to local agencies and the assumption of certain governmental functions by the State to assist municipal issuers to raise revenues. Total local assistance from the State's General Fund was budgeted at approximately 75 percent of General Fund expenditures in recent years, including the effect of implementing reductions in certain aid programs. To reduce State General Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9 billion of property tax revenues to school districts, representing loss of the post-Proposition 13 "bailout" aid. Local governments have in return received greater revenues and greater flexibility to operate health and welfare programs. However, except for agreement in 1997 on a new program for the State to substantially take over funding for local trial courts (saving cities and counties some $400 million annually), there has been no large-scale reversal of the property tax shift to help local government. To the extent the State should be constrained by its Article XIIIB appropriations limit, or its obligation to conform to Proposition 98, or other fiscal considerations, the absolute level, or the rate of growth, of State assistance to local governments may continue to be reduced. Any such reductions in State aid could compound the serious fiscal constraints already experienced by many local governments, particularly counties. Los Angeles County, the largest in the State, was forced to make significant cuts in services and personnel, particularly in the health care system, in order to balance its budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal Bankruptcy Court protection in June 1996, has significantly reduced county services and personnel, and faces strict financial conditions following large investment fund losses in 1994 which resulted in bankruptcy. Counties and cities may face further budgetary pressures as a result of changes in welfare and public assistance programs, which were enacted in August, 1997 in order to comply with the federal welfare reform law. Generally, counties play a large role in the new system, and are given substantial flexibility to develop and administer programs to bring aid recipients into the workforce. Counties are also given financial incentives if either at the county or statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties are also subject to financial penalties for failure to meet such targets. Counties remain responsible to provide "general assistance" for able-bodied indigents who are ineligible for other welfare programs. The long-term financial impact of the new CalWORKs system on local governments is still unknown. Assessment Bonds. California municipal instruments which are assessment bonds may be adversely affected by a general decline in real estate values or a slowdown in real estate sales 44 163 activity. In many cases, such bonds are secured by land which is undeveloped at the time of issuance but anticipated to be developed within a few years after issuance. In the event of such reduction or slowdown, such development may not occur or may be delayed, thereby increasing the risk of a default on the bonds. Because the special assessments or taxes securing these bonds are not the personal liability of the owners of the property assessed, the lien on the property is the only security for the bonds. Moreover, in most cases the issuer of these bonds is not required to make payments on the bonds in the event of delinquency in the payment of assessments or taxes, except from amounts, if any, in a reserve fund established for the bonds. California Long Term Lease Obligations. Based on a series of court decisions, certain long-term lease obligations, though typically payable from the general fund of the State or a municipality, are not considered "indebtedness" requiring voter approval. Such leases, however, are subject to "abatement" in the event the facility being leased is unavailable for beneficial use and occupancy by the municipality during the term of the lease. Abatement is not a default, and there may be no remedies available to the holders of the certificates evidencing the lease obligation in the event abatement occurs. The most common cases of abatement are failure to complete construction of the facility before the end of the period during which lease payments have been capitalized and uninsured casualty losses to the facility (e.g., due to earthquake). In the event abatement occurs with respect to a lease obligation, lease payments may be interrupted (if all available insurance proceeds and reserves are exhausted) and the certificates may not be paid when due. Although litigation is brought from time to time which challenges the constitutionality of such lease arrangements, the California Supreme Court issued a ruling in August, 1998 which reconfirmed the legality of these financing methods. Other Considerations The repayment of industrial development securities secured by real property may be affected by California laws limiting foreclosure rights of creditors. Securities backed by health care and hospital revenues may be affected by changes in State regulations governing cost reimbursements to health care providers under Medi-Cal (the State's Medicaid program), including risks related to the policy of awarding exclusive contracts to certain hospitals. Limitations on ad valorem property taxes may particularly affect "tax allocation" bonds issued by California redevelopment agencies. Such bonds are secured solely by the increase in assessed valuation of a redevelopment project area after the start of redevelopment activity. In the event that assessed values in the redevelopment project decline (e.g., because of a major natural disaster such as an earthquake), the tax increment revenue may be insufficient to make principal and interest payments on these bonds. Both Moody's and S&P suspended ratings on California tax allocation bonds after the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis. Proposition 87, approved by California voters in 1988, requires that all revenues produced by a tax rate increase go directly to the taxing entity which increased such tax rate to repay that entity's general obligation indebtedness. As a result, redevelopment agencies (which, typically, are the issuers of tax allocation securities) no longer receive an increase in tax 45 164 increment when taxes on property in the project area are increased to repay voter-approved bonded indebtedness. The effect of these various constitutional and statutory changes upon the ability of California municipal securities issuers to pay interest and principal on their obligations remains unclear. Furthermore, other measures affecting the taxing or spending authority of California or its political subdivisions may be approved or enacted in the future. Legislation has been or may be introduced which would modify existing taxes or other revenue-raising measures or which either would further limit or, alternatively, would increase the abilities of state and local governments to impose new taxes or increase existing taxes. It is not possible, at present, to predict the extent to which any such legislation will be enacted. Nor is it possible, at present, to determine the impact of any such legislation on California municipal instruments in which the Fund may invest, future allocations of state revenues to local governments or the abilities of state or local governments to pay the interest on, or repay the principal of, such California municipal instruments. Substantially all of California is within an active geologic region subject to major seismic activity. Northern California in 1989 and Southern California in 1994 experienced major earthquakes causing billions of dollars in damages. The federal government provided more than $13 billion in aid for both earthquakes, and neither event is expected to have any long-term negative economic impact. Any California Municipal Obligation in the Fund could be affected by an interruption of revenues because of damaged facilities, or, consequently, income tax deductions for casualty losses or property tax assessment reductions. Compensatory financial assistance could be constrained by the inability of (i) an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer to perform on its contracts of insurance in the event of widespread losses; or (iii) the federal or State government to appropriate sufficient funds within their respective budget limitations. FLORIDA MUNICIPAL INSTRUMENTS The financial condition of the State of Florida may be affected by various financial, social, economic and political factors. Those factors can be very complex, may vary from fiscal year to fiscal year, and are frequently the result of actions taken not only by the State and its agencies and instrumentalities but also by entities that are not under the control of the State. Adverse developments affecting the State's financing activities, its agencies or its political subdivisions could adversely affect the State's financial condition. The State's revenues increased from $32,957,715,000 during the 1996-97 fiscal year ended June 30, 1997 to $35,849,518,000 during the fiscal year ended June 30, 1998. The State's operating expenditures increased from $31,494,591,000 during the 1996-97 fiscal year ended June 30, 1997 to $33,373,020,000 during the 1997-98 fiscal year ended June 30, 1998. The Office of Economic and Demographic Research of the Florida Legislature also projected non-agricultural jobs to grow 3.5% and 3.1% in fiscal years 1998-99 and 1999-2000, respectively. The revenue growth in the 1998-1999 fiscal year is driven by the State's sales tax collections. The sales tax accounts for close to 75% of total revenues through March 31, 1999. A March 31, 1999 estimate shows an expected year-end surplus of $573.8 million. When this is 46 165 combined with the Budget Stabilization Fund balance of $786.9 million, Florida's total reserves are $1,360.7 million. The Constitution of the State of Florida limits the right of the State and its local governments to tax. The Constitution requires the State to have a balanced budget and to raise revenues to defray its operating expenses. The State may not borrow for the purpose of maintaining ordinary operating expenses, but may generally borrow for capital improvements. An amendment to the Florida Constitution adopted in 1994 requires that state revenues in excess of an allowed amount plus a growth factor must be contributed to a Budget Stabilization Fund until this fund reaches a certain amount at which time the excess state revenues must be distributed to the taxpayers. The growth factor is the average annual rate of growth in the state personal income over the most recent 20 quarters times the amount of state revenue allowed under the Constitution for the prior fiscal year. Included among the categories of revenues that are exempt from this revenue limitation are revenues pledged to state bonds and other payments related to debt. A two-thirds vote of the Florida legislature can raise the amount of the limit on state revenues. It is difficult to predict the impact of this amendment on Florida state finances, especially since courts have not interpreted it extensively. To the extent that local governments traditionally receive revenues from the state which are subject to or limited by this Constitutional amendment, the further distribution of such state revenues may be adversely impacted by the amendment. There are a number of methods by which the State of Florida may incur debt. The State may issue bonds backed by the State's full faith and credit to finance or refinance certain capital projects authorized by its voters. The total outstanding principal of State bonds pledging the full faith and credit of the State may not exceed 50% of the total tax revenues of the State for the two preceding fiscal years, excluding any tax revenues held in trust. The State also may issue certain bonds backed by the State's full faith and credit to finance or refinance pollution control, solid waste disposal and water facilities for local governments; county roads; school districts and capital public education projects without voter authorization. The State may also, pursuant to specific constitutional authorization, directly guarantee certain obligations of the State's authorities, agencies and instrumentalities. Payments of debt service on State bonds backed by the State's full faith and credit and State-guaranteed bonds and notes are legally enforceable obligations of the State. Revenue bonds to finance or refinance certain capital projects also may be issued by the State of Florida without voter authorization. However, revenue bonds are payable solely from funds derived directly from sources other than state tax revenues. The State of Florida currently imposes, among other taxes, an ad valorem tax on intangible property and a corporate income tax. The Florida Constitution prohibits the levying of a personal income tax. Certain other taxes the State of Florida imposes include: an estate or inheritance tax which is limited by the State's Constitution to an amount not in excess of the amount allowed to be credited upon or deducted from federal estate taxes or the estate taxes of another state; and a 6% sales tax on most goods and certain services with an option for counties to impose up to an additional 1% sales tax on such goods and services. In addition, counties chartered before June 1, 1976 or county with a consolidated county/municipal government may 47 166 assess up to a 1% discretionary sales surtax within the county for the development, construction, maintenance and operation of a fixed guideway rapid transit system. The Constitution reserves the right to charge an ad valorem tax on real estate and tangible personal property to Florida's local governments. All other forms of taxation are preempted to the State of Florida except as may be provided by general law. Motor vehicles, boats, airplanes, trailers, trailer coaches and mobile homes, as defined by law, may be subject to a license tax for their operation, but may not be subject to an ad valorem tax. Under the Constitution, ad valorem taxes may not be levied in excess of the following millage upon the assessed value of real estate and tangible personal property: for all county purposes, ten mills; for all municipal purposes, ten mills; for all school purposes, ten mills; for water management purposes for the northwest portion of the State, .05 mills; for water management purposes for the remaining portion of the State, one mill; and for all other special districts a millage authorized by law and approved by referendum. When authorized by referendum, the above millage caps may be exceeded for up to two years. Counties, school districts, municipalities, special districts and local governmental bodies with taxing powers may issue bonds to finance or refinance capital projects payable from ad valorem taxes in excess of the above millage cap when approved by referendum. It should be noted that several municipalities and counties have charters that further limit either ad valorem taxes or the millage that may be assessed. The Florida legislature has passed a number of mandates which limit or place requirements on local governments without providing the local governments with compensating changes in their fiscal resources. The Florida legislature enacted a comprehensive growth management act which forces local governments to establish and implement comprehensive planning programs to guide and control future development. This legislation prohibits public or private development that does not conform with the locality's comprehensive plan. Local governments may face greater requirements for services and capital expenditures than they had previously experienced if their locality experiences increased growth or development. The burden for funding these potential services and capital expenditures which has been left to the local governments may be quite large. The Florida Constitution limits the assessed value of homestead real property for ad valorem tax purposes to the lower of (A) three percent (3%) of the assessed value for the prior year; or (B) the percentage change in the Consumer Price Index for the preceding calendar year. In addition, no such assessed value shall exceed "just value" and such just value shall be reassessed (notwithstanding the 3% cap) as of January 1 of the year following a change of ownership of the assessed real property. Florida has grown dramatically since 1980 and as of April 1, 1997 ranked fourth nationally with an estimated population of 14.7 million. Florida's substantial population increases over the past few years are expected to continue. It is anticipated that corresponding increases in State revenues will be necessary during the next decade to meet increased burdens on the various public and social services provided by the State. Much of this growth is being funded by bonded revenues secured by the expanding real property tax base. As of 1997, real property values 48 167 exceed $724 billion. Residential property values account for over $400 billion in value while commercial and industrial property values exceed $100 billion. Florida's job market continues to reflect strong performance. The state's March 1999 unemployment rate was 4.1 percent, 0.3 percentage points lower than the year ago rate of 4.4 percent. Florida's unemployment rate was one of the lowest since October 1973 when it was 3.4 percent. The U.S. unemployment rate was 4.2 percent in March 1999, just above Florida's rate. Fueled by low interest rates, construction had the fastest growth rate at 5.8 percent and added 20,000 jobs over the year. Similarly, finance, insurance, and real estate and government also experienced year to year increases of 19,100 jobs and 16,400 jobs, respectively. The apparel and textiles industries lost 1,500 jobs due to tariffs and foreign competition. The State is gradually becoming less dependent on employment related to construction, agriculture and manufacturing, and more dependent on employment related to trade and services. Presently, services constitute 34.9% and trade 25.6% of the State's total non-farm jobs. Personal income in the State has been growing strongly the last several years and has generally outperformed both the nation as a whole and the Southeast in particular. The reasons for this are strong population growth and diversification of the economy. From 1992 through 1997, the State's per capita income rose an average of 5.0% per year, while the national per capita income increased an average of 4.8%. For 1997, the State's per capita personal income rose an average of 4.0% while the national per capita personal income rose 4.7%. In 1997, per capita personal income in Florida was $24,795, while the national per capita personal income was $25,298. The structure of the State's income differs from that of the nation and the Southeast. Because the State has a proportionately greater retirement age population, property income (dividends, interest and rent) and transfer payments (social security and pension benefits, among other sources of income) are a relatively more important source of income. Transfer payments, such as social security, are occasionally subject to legislative change. Tourism is one of Florida's most important industries. According to Visit Florida (formerly the Florida Tourism Commission), about 47 million people visited the State in 1997. Tourists to Florida effectively represent additional residents, spending their dollars predominantly at eating and drinking establishments, hotels and motels, and amusement and recreation parks. Their expenditures generate additional business activity and State tax revenues. The State's tourist industry over the years has become more sophisticated, attracting visitors year-round, thus to a degree, reducing its seasonality. The State also has a strong construction industry, with single and multi-family housing starts accounting for approximately 9.2% of total U.S. housing starts in 1997, while the State's population was only 5.5% of the nation's total population. The reason for such a dynamic construction industry was the rapid growth of the State's population. Since 1985, total housing starts have averaged approximately 148,000 per year. Total housing starts were 132,813 in 1997, and are projected to be 97,600 in 1998-99. Florida has experienced a diversifying economic base as technology related industry, healthcare and financial services have grown into leading elements of Florida's economy, complementing the State's previous reliance primarily on agriculture and tourism. 49 168 With the increasing costs and capital needs related to its growing population, Florida's ability to meet its expenses will be dependent in part upon the State's continued ability to foster business and economic growth. Florida has also increased its funding of capital projects through more frequent debt issuance rather than its historical pay-as-you go method. At the regional level, local economies within Florida perform differently according to their urban or rural qualities and level of economic diversification. The spectrum of local economies spans dense urban centers such as Miami and Tampa to rural agricultural regions of citrus, cattle ranching and sugar cane production. For example, Central Florida is a premier world-class resort/vacation destination with its economy driven by the presence of Disney World, studio theme parks and other tourist oriented recreational parks with a laser/optical research node and motion picture industries helping to diversify the Central Florida local economy. In contrast to the highly urban areas of Southeast Florida, North Florida and the Florida Panhandle are rural in many areas with local economies is dominated by the logging and paper industries, defense, tourism, state government and retirement. Florida has a moderate debt burden. As of June 30, 1998 full faith and credit bonds totaled $8.7 billion and revenue bonds totaled $5 billion for a total debt of $13.7 billion. Full faith and credit debt per capita was $577. In the 1998 fiscal year, debt service as a percent of Governmental Fund expenditures was 2.0%. In recent years debt issuance for the State has been increasing. The State brought a new indenture to the market in late Fiscal Year 1998, the Florida Lottery Bonds. These bonds will finance capital improvements for Florida schools. The payment on most Florida municipal instruments held by the Florida Intermediate Tax-Exempt Fund will depend upon the issuer's ability to meet its obligations. If the State or any of its political subdivisions were to suffer serious financial difficulties jeopardizing their ability to pay their obligations, the marketability of obligations issued by the State or localities within the State, and the value of the Florida Intermediate Tax-Exempt Fund's portfolio, could be adversely affected. ARIZONA MUNICIPAL INSTRUMENTS Under its Constitution, the State of Arizona is not permitted to issue general obligation bonds secured by the State's full faith and credit. However, agencies and instrumentalities of the State are authorized under specified circumstances to issue bonds secured by revenues. The State enters into certain lease transactions that are subject to annual renewal at its option. Local governmental units in the State are also authorized to incur indebtedness. The major source of financing for such local government indebtedness is an ad valorem property tax. In addition, to finance public projects, local governments may issue revenue bonds to be paid from the revenues of an enterprise or the proceeds of an excise tax, from assessment bonds payable from special proceeds of an excise tax, or from assessment bonds payable by special assessments. Arizona local governments have also financed public projects through leases that are subject to annual appropriation at the option of the local government. There are periodic attempts in the form of voter initiatives and legislative proposals to further limit the amount of annual increases in taxes that can be levied by the various taxing 50 169 jurisdictions without voter approval. It is possible that if such a proposal were enacted, there would be an adverse impact on State or local government financing. It is not possible to predict whether any such proposals will be enacted in the future or what would be their possible impact on state or local government financing. The State is required by law to maintain a balanced budget. To achieve this objective, it has in the past utilized a combination of spending reductions and tax increases. In recent years, the State's fiscal situation has improved, even while tax reduction measures have been enacted each year since 1992. In 1992, voters passed a measure that requires a two-thirds vote of the legislature to increase state taxes. The State's population, because of continued employment growth, is expected to record above-average growth rates. After population growth of 3% in 1997 and 2.9% in 1998, 2.8% growth is expected in 1999 and 2.6% in 2000. That translates into almost 132,000 more people in the state in 1999 and 126,000 in 2000. The State's diversified economic base is not dependent on any single industry. Principal economic sectors include services, manufacturing, mining, tourism, and the military. Agriculture, at one time a major sector, plays a much smaller role in the economy. For several decades, the population has grown at a substantially higher rate than the population of the United States. The economy of the State is growing. Since the current boom peaked in 1994, when employment grew by 6.8%, the rate of growth has slowed, but only modestly. Through November 1998 (the latest data available), employment was 4.7% higher than the year before. Different parts of the State have different growth rates and structures. The Phoenix metropolitan area accounts for 70.6% of all Arizona jobs and almost 80% of the State's employment growth. The Tucson area saw growth accelerate in 1998 by 3%, versus 1.8% in 1997. The balance of the State also grew at more moderate levels. On a percentage basis, this expansion has not been as strong as previous expansions. Yet, in terms of absolute employment growth, this expansion has created more jobs than any period of economic growth in the State's history. For example, since the beginning of the current expansion in March 1991, more than 580,000 jobs have been created. In comparison, 297,200 jobs were created in the 1975-1980 expansion, and about 450,000 jobs were created in the expansion that lasted from 1982 to 1990. According to the national Blue Chip Economic Indicators, after real GDP growth of 3.9% in 1997 and 3.6% in 1998, growth is expected to moderate to 2.2% in 1999. Inflation is expected to remain low and interest rates are also likely to be low and through most of 1999. As of 1998, 47% of all manufacturing employment in the Phoenix area and 25% in Pima County is in high technology. The national average is 14.3%. The high-tech areas include computers, telecommunications, electronic components, aviation, and instrumentation. In the Phoenix area, the economy is weighted towards electronic components employment, which 51 170 accounts for 27% of all manufacturing jobs. Tucson's high-tech manufacturing employment is more evenly spread among computers, electronic components, aviation and instrumentation. It is expected that international trade in the high-tech industry will continue to grow, which will be a positive for the Arizona economy. But in the near term, the unbalanced mix of employment could be a problem. Roughly 52% of Arizona manufacturing exports are of high-tech products; further, nearly 40% of the state's exports are to Japan, Malaysia, Taiwan, Hong Kong and Singapore, all of which are experiencing some degree of economic problems. In 1997, Arizona's total exports as a percent of personal income ranked fifth in the U.S. at 13.5%, compared to 9.2% for the nation. When analyzing data using only high-tech exports, Arizona ranked second at 7.1%, versus 2.1% nationally. Thus, the impact of the reduction in high-tech exports will likely affect Arizona more than other states. This is expected to result in some continued layoffs in the manufacturing sector. The unemployment rate, 4.1% for 1998, is also expected to remain relatively low, especially in the State's metropolitan areas. However, it is expected to increase in both 1999 and 2000. The current level of unemployment, the lowest in nearly three decades, suggests a tight labor market. The modest rise in unemployment projected for 1999 suggests that labor markets will moderately soften. After employment growth of 5.6% in 1996, 4.5% in 1997 and an estimated 4.6% in 1998, employment should increase by another 3.5% in 1999 with growth continuing at about 3% in 2000 and 2001. The Phoenix area's unemployment rate remains low, at about 2.7%. The outlook for continued, albeit slower, growth for the U.S. economy acts as a base for the Arizona economy. The state has been one of the top five employment-growth states for quite some time, and it is expected to remain in the top five through 1999. There are other positive factors as well. First, as of November 1998, manufacturing was 2.3% above the November 1997 rate. Second, the unemployment rate is low in greater Phoenix and for many other parts of Arizona. That suggests that job growth will continue. Third, California, the State's leading domestic trading partner, is expected to enjoy continued, albeit slower, growth. Fourth, single-family housing markets continue to boom. Although the absolute level of permits is expected to decline from 1998's record levels, the outlook is for a relatively strong housing market. Housing, which is expected to be up by about 15% in 1998, is expected to decrease by about 10% in 1999. The slowdown is expected to be in single-family activity. In 1999, even if single-family housing slows, commercial construction is expected to continue to do well throughout most of the year, despite higher vacancy rates in the Phoenix-area office and industrial markets. This is expected to prevent any significant problem in construction employment in 1999, despite the likelihood of a slowdown. Another uncertainty is the tourism market. Given the strong economy, tourist activity is expected to be strong. But declines in the value of the Canadian dollar, the peso and other currencies versus the U.S. dollar could hurt winter visitation in Arizona. 52 171 Personal income, after growing by 8% in 1996 and 7.3% in 1997, is expected to grow by another 8% in 1998, 7.8% in 1999, and 7% in 2000. Overall, General Fund revenues are expected to grow modestly, including 4% in FY 1999 and 5.7% in FY 2001. However, the FY 1999 rate of growth reflects the impact of the $120 million tax reduction program passed last year, and the FY 2000 revenue estimate includes an incremental reduction to account for an additional $60 million of tax reductions already enacted. The Governor's budget proposals in 1999 sought to limit overall spending, continue the growth of the State's "rainy day" funds, reflect conservative revenue forecasts to reflect a slowing economy, and propose for the 8th and 9th consecutive years tax reductions. State policy makers have been very successful in recent years in depositing monies into various accounts that have been established for a "rainy day." These monies are reserved for a true budget emergency precipitated by an economic downturn. By the end of FY 2001, the rainy day fund is expected to reach $425 million, or 7.08% of the General Fund revenues. OTHER INFORMATION ON CALIFORNIA, FLORIDA AND ARIZONA MUNICIPAL INSTRUMENTS Northern Trust believes that it is likely that sufficient California, Florida and Arizona municipal instruments and certain specified federal obligations should be available to satisfy the respective investment objectives, policies and limitations of the California, Florida Intermediate Tax-Exempt and the Arizona Tax-Exempt Funds. If Northern Funds' Board of Trustees, after consultation with Northern Trust, should for any reason determine that it is impracticable to satisfy a Fund's investment objective, policies and limitations because of the unavailability of suitable investments, the Board would re-evaluate the particular Fund's investment objective and policies and consider changes in its structure and name or possible dissolution. INVESTMENT RESTRICTIONS The Funds are subject to the fundamental investment restrictions enumerated below which may be changed with respect to a particular Fund only by a vote of the holders of a majority of such Fund's outstanding shares. No Fund may: (1) Make loans, except (a) through the purchase of debt obligations in accordance with the Fund's investment objective and policies, (b) through repurchase agreements with banks, brokers, dealers and other financial institutions, and (c) loans of securities. (2) Mortgage, pledge or hypothecate any assets (other than pursuant to reverse repurchase agreements) except to secure permitted borrowings. (3) Purchase or sell real estate or real estate limited partnerships, but this restriction shall not prevent a Fund from investing directly or indirectly in portfolio 53 172 instruments secured by real estate or interests therein or acquiring securities of real estate investment trusts or other issuers that deal in real estate. (4) Purchase or sell commodities or commodity contracts or oil or gas or other mineral exploration or development programs or leases, except that each Fund may, to the extent appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities, and (other than the Money Market Funds) may enter into futures contracts and related options and forward currency exchange contracts in accordance with its investment objective and policies. (5) Invest in companies for the purpose of exercising control. (6) Act as underwriter of securities, except as a Fund may be deemed to be an underwriter under the Securities Act of 1933 (the "1933 Act") in connection with the purchase and sale of portfolio instruments in accordance with its investment objective and portfolio management policies. (7) Write puts, calls or combinations thereof, except for transactions in options on securities, financial instruments, currencies and indices of securities; futures contracts; options on futures contracts; forward currency exchange contracts; short sales against the box; interest rate and currency swaps; and pair-off transactions. (This restriction does not apply to the Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, Small Cap Index Fund, Small Cap Growth Fund and MarketPower Fund. In addition, this restriction does not apply to any type of option, futures contract, forward contract, short sale, swap or pair-off transaction unless it involves a put, call or combination thereof written by a Fund.) (8) Purchase the securities of any issuer if such purchase would cause more than 10% of the voting securities of such issuer to be held by the Fund, except that up to 25% of the value of its total assets may be invested without regard to this 10% limitation; provided that this restriction does not apply to the International Fixed Income Fund, the Florida Intermediate Tax-Exempt Fund, the California Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the California Tax-Exempt Fund or the MarketPower Fund. (Investments by the Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund, Small Cap Index Fund, Small Cap Growth, Mid Cap Growth Fund, High Yield Municipal Fund and High Yield Fixed Income Fund in the securities of other investment companies are also not subject to this investment restriction.) (9) Purchase securities (other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements collateralized by such obligations) if, except for the Technology Fund, such purchase would cause 25% or more in the aggregate of the market value of the total assets of the Fund to be invested in the securities of one or more issuers having their principal business activities in the same industry, provided that with respect to each Money Market 54 173 Fund there is no limitation, and each Money Market Fund reserves freedom of action, when otherwise consistent with its investment policies, to concentrate its investments in obligations (other than commercial paper) issued or guaranteed by U.S. banks (including foreign branches of U.S. banks) and U.S. branches of foreign banks and repurchase agreements and securities loans collateralized by such bank obligations. For the purposes of this restriction, state and municipal governments and their agencies and authorities are not deemed to be industries; as to utility companies, the gas, electric, water and telephone businesses are considered separate industries; personal credit finance companies and business credit finance companies are deemed to be separate industries; and wholly-owned finance companies are considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents. The Technology Fund may not, except during temporary defensive periods, purchase the securities of any issuer, if, as a result of such purchase, less than 25% of the assets of the Technology Fund would be invested in the securities of issuers principally engaged in technology business activities. (Investments by the Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, Small Cap Index Fund, Small Cap Growth Fund, Mid Cap Growth Fund, MarketPower Fund, High Yield Municipal Fund and High Yield Fixed Income Fund in the securities of other investment companies are not subject to this investment restriction.) (10) Borrow money (other than pursuant to reverse repurchase agreements), except (a) as a temporary measure, and then only in amounts not exceeding 5% of the value of a Fund's total assets or (b) from banks, provided that immediately after any such borrowing all borrowings of the Fund do not exceed one-third of the Fund's total assets. The exceptions in (a) and (b) to this restriction are not for investment leverage purposes but are solely for extraordinary or emergency purposes or to facilitate management of a Fund by enabling Northern Funds to meet redemption requests when the liquidation of portfolio instruments is deemed to be disadvantageous or not possible. If due to market fluctuations or other reasons the total assets of a Fund fall below 300% of its borrowings, Northern Funds will reduce the borrowings of such Fund in accordance with the 1940 Act. In addition, as a matter of fundamental policy, the Funds may not enter into reverse repurchase agreements exceeding in the aggregate one-third of their respective total assets. (11) Purchase the securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of such Fund's total assets would be invested in such issuer, except that: (a) up to 50% of the value of the California Municipal Money Market Fund's total assets (so long as no more than 25% of the value of its total assets are invested in the securities of any one issuer) and up to 25% of the value of the total assets of each of the other Funds may be invested in any securities without regard to this 5% limitation; and (b) with respect to each Fund, such 5% limitation shall not apply to repurchase agreements collateralized by obligations of the U.S. Government, its agencies or instrumentalities. (This restriction does not apply to the International Fixed Income Fund, the Florida Intermediate Tax-Exempt Fund, the California Intermediate Tax-Exempt Fund, the Arizona Tax-Exempt Fund, the 55 174 California Tax-Exempt Fund and the MarketPower Fund.) (Investments by the Tax-Exempt Money Market Fund, Short-Intermediate U.S. Government Fund, Small Cap Index Fund, Small Cap Growth, High Yield Municipal Fund and High Yield Fixed Income Fund in the securities of other investment companies are also not subject to this investment restriction.) In addition, as a matter of fundamental policy, the Funds will not issue senior securities except as stated in the Prospectus or this Additional Statement. Also, as a matter of fundamental policy, changeable only with the approval of the holders of a majority of the outstanding shares of the Fund involved, at least 80% of the annual gross income of the Tax-Exempt Funds and the Municipal Funds will be derived from municipal instruments (as defined in the Prospectus), except in extraordinary circumstances such as when Northern Trust believes that market conditions indicate that a Fund should adopt a temporary defensive posture by holding uninvested cash or investing in taxable securities. Interest earned by the Tax-Exempt Funds on "private activity bonds" (if any) that is treated as an item of tax preference under the federal alternative minimum tax will not be deemed (but such interest earned by the Municipal Funds will be deemed) to have been derived from municipal instruments for purposes of determining whether the Tax-Exempt and the Municipal Funds meet this fundamental policy. As a non-fundamental investment restriction, the International Fixed Income, Florida Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt and MarketPower Funds may not hold, at the end of any tax quarter, more than 10% of the outstanding voting securities of any one issuer, except that up to 50% of the total value of the assets of each Fund may be invested in any securities without regard to this 10% limitation so long as no more than 25% of the total value of its assets is invested in the securities of any one issuer (except the U.S. Government, its agencies and instrumentalities). Also, as a non-fundamental investment restriction, these Funds will not hold any securities (except U.S. government securities) that would cause, at the end of any tax quarter, more than 5% of their respective total assets to be invested in the securities of any one issuer, except that up to 50% of the respective Fund's total assets may be invested without regard to this limitation so long as no more than 25% of the Fund's total assets are invested in any one issuer (except the U.S. government, its agencies and instrumentalities). Except as otherwise provided in Investment Restriction (9), for the purpose of such restriction in determining industry classification with respect to the Funds other than the International Funds and the Technology Fund, Northern Funds intends to use the industry classification titles in the Bloomberg Industry Group Classification. With respect to the International Funds, Northern Funds intends to use the Morgan Stanley Capital International industry classification titles. With respect to the Technology Fund, Northern Funds intends to consider an issuer to be principally engaged in technology business activities if such issuer is listed in the Morgan Stanley Index, the H&Q Index, the SoundView Technology Index, the technology grouping of the S&P 500 Index or any other comparable index. The freedom of action reserved in Investment Restriction (9) above with respect to U.S. branches of foreign banks is subject to the requirement that they are subject to the same regulation as domestic 56 175 branches of U.S. banks, and such freedom with respect to foreign branches of U.S. banks is subject to the requirement that the domestic parent be unconditionally liable in the event that a foreign branch fails to pay on its instruments for any reason. Securities held in escrow or separate accounts in connection with the Funds' investment practices described in this Additional Statement and in the Prospectus are not deemed to be mortgaged, pledged or hypothecated for purposes of the foregoing Investment Restrictions. A security is considered to be issued by the entity, or entities, whose assets and revenues back the security. A guarantee of a security is not deemed to be a security issued by the guarantor when the value of all securities issued and guaranteed by the guarantor, and owned by a Fund, does not exceed 10% of the value of the Fund's total assets. The Money Market, U.S. Government Money Market, U.S. Government Select Money Market, Municipal Money Market, Tax-Exempt Money Market and California Municipal Money Market Funds intend, as a non-fundamental policy, to diversify their investments in accordance with current SEC regulations. Investments in the securities of any single issuer (excluding cash, cash items, certain repurchase agreements, U.S. Government securities and securities of other investment companies) will be limited to not more than 5% of the value of a Fund's total assets at the time of purchase, except that (a) 25% of the total assets of the California Municipal Money Market Fund may be invested in fewer than five issuers; and 25% of the value of the total assets of the other Money Market Funds may be invested in the securities of any one issuer for a period of up to three Business Days. A security that has an unconditional guarantee meeting special SEC requirements (a "Guarantee") does not need to satisfy the foregoing issuer diversification requirements that would otherwise apply, but the Guarantee is instead subject to the following diversification requirements: Immediately after the acquisition of the security, a Money Market Fund may not have invested more than 10% of its total assets in securities issued by or subject to Guarantees from the same person, except that a Fund, subject to certain conditions, may invest up to 25% of its total assets in securities issued or subject to Guarantees of the same persons. This percentage is 100% if the Guarantee is issued by the U.S. Government or an agency thereof. In addition, the Municipal Money Market, Tax-Exempt Money Market and California Municipal Money Market Funds will limit their investments in certain conduit securities that are not rated in the highest short-term rating category as determined by two nationally recognized statistical rating organizations (each an "NRSRO") (or one NRSRO if the security is rated by only one NRSRO) or, if unrated, are not of comparable quality to First Tier Securities ("Second Tier Securities") to 5% of their total assets, with investments in any one such issuer being limited to no more than 1% of a Fund's total assets or $1 million, whichever is greater, measured at the time of purchase. Conduit securities subject to this limitation are municipal instruments that are not subject to a Guarantee and involve an arrangement whereunder a person, other than a municipal issuer, provides for or secures repayment of the security and are not: (i) fully and unconditionally guaranteed by a municipal issuer; or (ii) payable from the general revenues of the municipal issuer or other municipal issuers; or (iii) related to a project owned and operated by a municipal issuer; or (iv) related to a facility leased to and under the control of an industrial or commercial enterprise that is part of a public project which, as a whole, is owned and under the control of a municipal issuer. The Money Market, U.S. Government and U.S. Government Select Money Market Funds will limit 57 176 their investments in all Second Tier Securities (that are not subject to Guarantees) in accordance with the foregoing percentage limitations. In addition to the foregoing, each Money Market Fund is subject to additional diversification requirements imposed by SEC regulations on the acquisition of securities subject to other types of demand features and puts whereunder a Fund has the right to sell the securities to third parties. Each Investment Restriction which involves a maximum percentage (other than the restriction set forth above in Investment Restriction (10)) will not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of the Fund. The 1940 Act requires that if the asset coverage for borrowings at any time falls below the limits described in Investment Restriction (10), the Fund involved will, within three days thereafter (not including Sundays and holidays), reduce the amount of its borrowings to an extent that the net asset coverage of such borrowings shall conform to such limits. Although the foregoing Investment Restrictions would permit the Money Market Funds to acquire options, enter into forward currency contracts and engage in short sales and interest rate and currency swaps, they are not currently permitted to engage in these transactions under SEC regulations. In addition, the U.S. Government Select Money Market Fund does not intend to purchase any bank or corporate obligation during the current fiscal year. ADDITIONAL TRUST INFORMATION CLASSIFICATION AND HISTORY Northern Funds is an open-end, management investment company. Each Fund is classified as diversified under the 1940 Act, except the California Municipal Money Market, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt, International Fixed Income and MarketPower Funds. Each Fund is a series of the Trust which was formed as a Massachusetts business trust on October 12, 1993 under an Agreement and Declaration of Trust. TRUSTEES AND OFFICERS Information pertaining to the Trustees and officers of Northern Funds is set forth below.
- ---------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) PRINCIPAL OCCUPATION(S) AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------- Mr. James W. Cozad 72 Chairman of the Board of Vice Chairman of Amoco 12094 Lost Tree Way Trustees Corporation from September 1983 North Palm Beach, Florida 33408 to December 1989 and Chairman and CEO of
58 177
- ---------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) PRINCIPAL OCCUPATION(S) AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------- Whitman Corporation (holding company for Pepsi-Cola General Bottlers, Inc.), Midas International Corporation (automotive services) and Hussmann Corporation (refrigeration systems and equipment) from January 1990 until his retirement in May 1992. Retired Director of Whitman Corporation, Eli Lilly and Company (life science products), Inland Steel Company, Inland Steel Industries, Inc., Sears, Roebuck & Company and GATX Corporation (transportation, distribution and warehousing). - ---------------------------------------------------------------------------------------------------------------------- Mr. Wesley M. Dixon, Jr. 71 Trustee Director of Earl Kinship 400 Skokie Blvd., Suite 300 Capital Corporation since Northbrook, Illinois 60062 1985, Vice Chairman and Director of G.D. Searle & Co. (manufacture and sale of food products and pharmaceuticals) from 1977 to 1983 and President of G.D. Searle & Co. prior thereto. - ---------------------------------------------------------------------------------------------------------------------- Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & 1534 Basswood Circle Co. S.C. (accounting firm) from Glenview, Illinois 60025 1966 until his retirement in December 1989. Financial Consultant, Ernst & Young from 1992 to 1993 and 1997, Director of Household Bank, Federal Savings - ----------------------------------------------------------------------------------------------------------------------
59 178
- ---------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) PRINCIPAL OCCUPATION(S) AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------- Bank since May 1995, and Director of First Central National Life Insurance Company since July 1998. - ---------------------------------------------------------------------------------------------------------------------- Mr. Raymond E. George, Jr.(1) 69 Trustee Senior Vice President and 703 Prospect Avenue Senior Fiduciary Officer of The Winnetka, Illinois 60093 Northern Trust Company from 1990 until his retirement in October 1993. - ---------------------------------------------------------------------------------------------------------------------- Mr. Michael E. Murphy(1) 62 Trustee President of Sara Lee Suite 2222, 20 South Clark Street Foundation since November Chicago, Illinois 60603 1997. Vice Chairman and Chief Administrative Officer of Sara Lee Corporation (consumer products) from November 1994 to October 1997. Vice Chairman and Chief Financial and Administrative Officer of Sara Lee Corporation from July 1993 to November 1994. Executive Vice President and Chief Financial and Administrative Officer of Sara Lee Corporation from June 1979 to June 1993. Director of Payless Shoe Source, Inc., True North Communications, Inc., American General Corporation, GATX Corporation, and Bassett Furniture Industries, Inc. - ---------------------------------------------------------------------------------------------------------------------- Mary Jacobs Skinner, Esquire(1) 41 Trustee Partner in the law firm of One First National Plaza Sidley & Austin. Chicago, Illinois 06063 - ----------------------------------------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) PRINCIPAL OCCUPATION(S) AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------- Jylanne M. Dunne 39 President Senior Vice President for 4400 Computer Drive Distribution Services at First Westborough, MA 01581 Data Investor Services Group, Inc. ("FDISG") (since 1988). - ---------------------------------------------------------------------------------------------------------------------- Richard H. Rose 43 Vice President Vice President and Division 4400 Computer Drive Manager of Mutual Fund Westborough, MA 01581 Administration at FDISG (since 1994); Senior Vice President at The Boston Company Advisors, Inc. (prior thereto). - ---------------------------------------------------------------------------------------------------------------------- Brian R. Curran 31 Treasurer Director of Fund Administration 4400 Computer Drive and Accounting at FDISG (since Westborough, MA 01581 1997); Director of Fund Accounting at State Street Bank (February 1997 to October 1997); Senior Auditor at Price Waterhouse L.L.P. (February 1994 to February 1997); Manager of Fund Accounting at State Street Bank (prior thereto). - ---------------------------------------------------------------------------------------------------------------------- Judith E. Clear 33 Assistant Treasurer Client Treasury Manager of 4400 Computer Drive Mutual Fund Administration at Westborough, MA 01581 First Data Investor Services Group, Inc. (since 1997); Compliance Manager at Citizens Trust (1994 to 1996); Senior Fund Administration Analyst at Keystone Investor
61 180
- ---------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) PRINCIPAL OCCUPATION(S) AND ADDRESS AGE WITH TRUST DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------- Services Group (1988 to 1994); - ---------------------------------------------------------------------------------------------------------------------- Jeffrey A. Dalke 49 Secretary Partner in the law firm of One Logan Square Drinker Biddle & Reath LLP 18th and Cherry Streets Philadelphia, PA 19103-6996 - ---------------------------------------------------------------------------------------------------------------------- Linda J. Hoard 51 Assistant Secretary Counsel at FDISG (since 1998); 4400 Computer Drive Attorney Consultant for Westborough, MA 01581 Fidelity Investments, Investors Bank & Trust Company and FDISG (September 1994 to June 1998); Vice President and Assistant General Counsel at MFS Investment Management (prior thereto). - ---------------------------------------------------------------------------------------------------------------------- Therese Hogan 36 Assistant Secretary Director of the State 4400 Computer Drive Regulation Department at FDISG Westborough, MA 01581 (since 1994); Senior Legal Assistant at Palmer and Dodge (prior thereto). - ----------------------------------------------------------------------------------------------------------------------
(1) Messrs. George and Murphy and Ms. Skinner are considered to be "interested" Trustees of Northern Funds as defined in the 1940 Act. Certain of the Trustees and officers and the organizations with which they are associated have had in the past, and may have in the future, transactions with Northern Trust, First Data Investor Services Group, Inc. ("Investor Services Group") and their respective affiliates. Northern Funds has been advised by such Trustees and officers that all such transactions have been and are expected to be in the ordinary course of business and the terms of such transactions, including all loans and loan commitments by such persons, have been and are expected to be substantially the same as the prevailing terms for comparable transactions for other customers. As a result of the responsibilities assumed by Northern Funds' service providers under Northern Funds' Advisory Agreement, Transfer Agency Agreement, Custodian Agreement, Co-Administration Agreement and Distribution Agreement, Northern Funds itself requires no employees. 62 181 Each officer (except Mr. Dalke) holds comparable positions with certain other investment companies for which Investor Services Group provides services. Each Trustee, except the Chairman, earns an annual fee of $25,000 and an additional fee of $1,250 for each meeting attended, plus reimbursement of expenses incurred as a Trustee. The Chairman of the Board earns an annual fee of $30,000 and an additional fee of $1,250 for each meeting attended, plus reimbursement of expenses incurred as a Trustee. Northern Funds' officers do not receive fees from Northern Funds for services in such capacities, although Investor Services Group, of which certain officers are also officers, receives fees from Northern Funds for administrative services. Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives legal fees as counsel to Northern Funds. For the fiscal year ended March 31, 1999, the Trustees received the following compensation:
=========================================================================================== Pension or Retirement Total Aggregate Benefits Accrued Compensation Compensation from as Part of Trust from the Trust Name of Trustee the Trust Expense Complex* - ------------------------------------------------------------------------------------------- Silas S. Cathcart(1) $35,000 None $35,000 - ------------------------------------------------------------------------------------------- James W. Cozad $30,000 None $30,000 - ------------------------------------------------------------------------------------------- Wesley M. Dixon, Jr. $27,500 None $27,500 - ------------------------------------------------------------------------------------------- William J. Dolan, Jr. $30,000 None $30,000 - ------------------------------------------------------------------------------------------- Raymond E. George, Jr. $30,000 None $30,000 - ------------------------------------------------------------------------------------------- Michael E. Murphy $30,000 None $30,000 - ------------------------------------------------------------------------------------------- Mary Jacobs Skinner(2) $22,500 None $22,500 ===========================================================================================
* This column presents the same information as the first column because none of the Trustees served on a board of another mutual fund related to the Trust. (1) Mr. Cathcart retired from the Board of Trustees on September 30, 1999. (2) Ms. Skinner was appointed to the Board of Trustees on September 18, 1998. INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN Northern Trust is a wholly-owned subsidiary of The Northern Trust Corporation, a Chicago-based multi-bank holding company with subsidiaries in Colorado, Illinois, Florida, Michigan, New York, Arizona, Georgia, California and Texas. Northern Trust has for more than 100 years managed the assets of individuals, charitable organizations, foundations and large corporate investors. One of the nation's leading providers of trust and investment management services, Northern Trust first entered the mutual fund business in 1983 by offering money market funds to institutional clients. As part of its investment advisory services, Northern Trust offers 63 182 extensive research services to its clients. As of the date of this Additional Statement, nearly 300 financial institutions nationwide purchase Northern Trust's economic advisory services. As of _______, 1999, Northern Trust Corporation and its subsidiaries had approximately $____ billion in assets and $____ billion in deposits. Northern Trust is one of the strongest banking organizations in the United States and its clients include public and private retirement funds, endowments, foundations, trusts, corporations and individuals. Northern Funds complements the banking and personal trust services available through Northern Trust by allowing Northern Trust's banking and trust clients to consolidate the management of their finances and thereby move one step closer to one-stop financial shopping. Northern Funds utilizes a state-of-the-art investor services center. Also, trained investment representatives are available at Northern Trust's offices to assist investors in allocating their investments. Northern Trust believes it has built its organization by serving clients with integrity, a commitment to quality, and personal attention. Its stated mission with respect to all its financial products and services is to achieve unrivaled client satisfaction. Northern Trust manages the Funds through a team of professionals, led by portfolio managers who follow a disciplined process to develop investment strategies. The purpose of this approach is to promote consistent management. The portfolio managers draw upon the resources of Northern Trust's research department with specialists in economic analysis, investment strategy, credit quality and tax law, and which supplies information on interest rates, GNP growth, corporate profits and other factors. NTQA, also a wholly-owned subsidiary of Northern Trust Corporation, serves as investment adviser principally to defined benefit and defined contribution plans and manages over 60 equity and bond commingled and common trust funds. As of _______, 1999, the Investment Advisers and their affiliates administered approximately $____ trillion in assets, including $_____ billion for which the Investment Advisers had investment management responsibility, for clients including public and private retirement funds, endowments, foundations, trusts, corporations, other investment companies and individuals. Subject to the general supervision of the Board of Trustees, Northern Trust makes decisions with respect to and places orders for all purchases and sales of portfolio securities for the Funds (other than the Stock Index, Small Cap Index and Small Cap Funds), and also provides certain ancillary services. NTQA provides similar services to the Stock Index, Small Cap Index and Small Cap Funds. The Investment Advisers are also responsible for monitoring and preserving the records required to be maintained under the regulations of the SEC (with certain exceptions unrelated to its activities for Northern Funds). In making investment recommendations for the Funds, investment advisory personnel may not inquire or take into consideration whether issuers of securities proposed for purchase or sale for the Funds' accounts are customers of Northern Trust's commercial banking department. These requirements are designed to prevent investment advisory personnel for the Funds from knowing which companies have commercial business with Northern Trust and from purchasing securities where they know the proceeds will be used to repay loans to the bank. Northern Funds' Investment Advisory and Ancillary Services Agreement with Northern Trust and NTQA (the "Advisory Agreement") has been approved by the Board of Trustees, including the "non-interested" Trustees, and the initial shareholder of Northern Funds. The Advisory Agreement provides that in executing portfolio transactions and in selecting brokers or dealers (a) with respect to common and preferred stocks, the Investment Advisers shall use their 64 183 best judgment to obtain the best overall terms available, and (b) with respect to other securities, the Investment Advisers shall attempt to obtain best net price and execution. Transactions on U.S. stock exchanges involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. In assessing the best overall terms available for any transaction, the Investment Advisers are to consider all factors they deem relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. In evaluating the best overall terms available and in selecting the broker or dealer to execute a particular transaction, the Investment Advisers may consider the brokerage and research services provided to the Funds and/or other accounts over which the Investment Advisers or an affiliate of the Investment Advisers exercise investment discretion. A broker or dealer providing brokerage and/or research services may receive a higher commission than another broker or dealer would receive for the same transaction. These brokerage and research services may include industry and company analyses, portfolio services, quantitative data, market information systems and economic and political consulting and analytical services. Supplemental research information so received is in addition to, and not in lieu of, services required to be performed by the Investment Advisers and does not reduce the advisory fees payable to the Investment Advisers by the Funds. The Trustees will periodically review the commissions paid by the Funds to consider whether the commissions paid over representative periods of time appear to be reasonable in relation to the benefits inuring to the Funds. It is possible that certain of the supplemental research or other services received will primarily benefit one or more other investment companies or other accounts for which investment discretion is exercised. Conversely, a Fund may be the primary beneficiary of the research or services received as a result of portfolio transactions effected for such other account or investment company. For the fiscal years or periods indicated, the amount of commissions paid by each Fund was as follows:
======================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999 March 31, 1998 March 31, 1997 ========================================================================================================= Income Equity Fund $ 36,166 $ 91,382 $ 67,369 - --------------------------------------------------------------------------------------------------------- Stock Index Fund $ 12,651 $ 32,541 $ 27,972 - --------------------------------------------------------------------------------------------------------- Growth Equity Fund $ 252,010 $ 475,781 $ 364,847 - --------------------------------------------------------------------------------------------------------- Select Equity Fund $ 119,043 $ 312,832 $ 96,747 - --------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund(1) $ 46,823 N/A N/A - --------------------------------------------------------------------------------------------------------- Small Cap Fund $ 137,526 $ 324,908 $ 170,785 - --------------------------------------------------------------------------------------------------------- International Growth Equity Fund $1,717,776 $1,455,258 $2,043,586 - ---------------------------------------------------------------------------------------------------------
65 184
======================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999 March 31, 1998 March 31, 1997 ========================================================================================================= International Select Equity Fund $1,024,518 $ 610,796 $ 634,588 - --------------------------------------------------------------------------------------------------------- Technology Fund $ 84,102 $ 79,005 $ 40,228 - ---------------------------------------------------------------------------------------------------------
1. The Mid Cap Growth Fund commenced operations on March 31, 1998. No commissions were paid by the Funds to any "affiliated" persons (as defined in the 1940 Act) of the Funds. Transactions on foreign stock exchanges involve payment for brokerage commissions which are generally fixed. Over-the-counter issues, including corporate debt and government securities, are normally traded on a "net" basis (i.e., without commission) through dealers, or otherwise involve transactions directly with the issuer of an instrument. With respect to over-the-counter transactions, the Investment Advisers will normally deal directly with dealers who make a market in the instruments involved except in those circumstances where more favorable prices and execution are available elsewhere. The cost of foreign and domestic securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer's mark-up or mark-down. Northern Funds is required to identify any securities of its "regular brokers or dealers" or their parents which Northern Funds acquired during its most recent fiscal year. During the fiscal year ended March 31, 1999, the Money Market Fund acquired or sold securities of Bear Stearns & Co., Inc., Morgan (J.P.) & Co., Inc. and Lehman Brothers, Inc. As of March 31, 1999 the Money Market Fund owned securities of Bear Stearns & Co., Inc., Morgan (J.P.) & Co. and Lehman Brothers, Inc. in the amounts of $25,001,000, $55,374,000 and $335,214,000 respectively. During the fiscal year ended March 31, 1999, the U.S. Government Money Market Fund acquired or sold securities of ABN-AMRO and Lehman Brothers, Inc. As of March 31, 1999, the U.S. Government Money Market Fund owned securities of ABN-AMRO and Lehman Brothers, Inc. in the amounts of $20,000,000 and $28,564,000 respectively. During the fiscal year ended March 31, 1999, the U.S. Government Select Money Market Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the Municipal Money Market Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the California Municipal Money Market Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the U.S. Government Fund did not acquire or sell securities of its regular broker-dealers. 66 185 During the fiscal year ended March 31, 1999, the Intermediate Tax-Exempt Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999; the Florida Intermediate Tax-Exempt Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the Fixed Income Fund acquired or sold securities of Donaldson, Lufkin & Jenrette and Lehman Brothers, Inc. As of March 31, 1999, the Fixed Income Fund owned securities of Lehman Brothers, Inc. in the amount of $4,399,000. During the fiscal year ended March 31, 1999, the Tax-Exempt Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the California Tax-Exempt Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the International Fixed Income Fund sold securities of Banque Paribas. As of March 31, 1999, the International Fixed Income Fund did not own securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the High Yield Municipal Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the High Yield Fixed Income Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the Income Equity Fund did not acquire or sell securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the Stock Index Fund acquired or sold securities of Merrill Lynch & Co., Inc. As of March 31, 1999, the Stock Index Fund owned securities of Merrill Lynch & Co., Inc. in the amount of $478,000. During the fiscal year ended March 31, 1999, the Growth Equity Fund acquired or sold securities of Merrill Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co. As of March 31, 1999, the Growth Equity Fund owned securities of Merrill Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co. in the amount of $3,997,000 and $3,898,000. During the fiscal year ended March 31, 1999, the Select Equity Fund acquired or sold securities of Merrill Lynch & Co., Inc. As of March 31, 1999, the Select Equity Fund owned securities of Merrill Lynch & Co., Inc. in the amount of $619,000. During the fiscal year ended March 31, 1999, the Mid Cap Growth Fund did not acquire or sell securities of its regular broker-dealers. 67 186 During the fiscal year ended March 31, 1999, the Small Cap Fund sold securities of Banque Paribas. As of March 31, 1999, the Small Cap Fund did not own securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the International Growth Equity Fund sold securities of Deutsche Bank and Societe Generale Securities. As of March 31, 1999 the International Growth Equity Fund did not own securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the International Select Equity Fund sold securities of Banque Paribas and Societe Generale. As of March 31, 1999, the International Select Equity Fund did not own securities of its regular broker-dealers. During the fiscal year ended March 31, 1999, the Technology Fund sold securities of Banque Paribas. As of March 31, 1999, the Technology Fund did not own securities of its regular broker-dealers. During the fiscal year ended March 31, 1999 the Small Cap Index Fund, Small Cap Growth Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and MarketPower Fund had not yet commenced operations. During the fiscal year ending March 31, 1999, Northern Funds directed brokerage transactions to brokers because of research services provided. The amount of such transactions and related commissions were as follows: for the Income Equity Fund, $65,524,789 in research commission transactions and $30,231 in research commissions; for the Stock Index Fund, $32,559,925 in research commission transactions and $12,014 in research commissions; for the Growth Equity Fund, $242,523,742 in research commission transactions and $239,086 in research commissions; for the Select Equity Fund, $112,947,776 in research commission transactions and $94,548 in research commissions; for the Mid Cap Growth Fund, $79,512,853 in research commission transactions and $37,383 in research commissions; for the Small Cap Fund, $19,684,916 in research commission transactions and $17,506 in research commissions; for the International Growth Equity Fund, $405,230,730 in research commission transactions and $1,067,083 in research commissions; for the International Select Equity Fund, $196,523,961 in research commission transactions and $573,230 in research commissions; and for the Technology Fund, $227,815,831 in research commission transactions and $77,653 in research commissions. The Funds may participate, if and when practicable, in bidding for the purchase of portfolio securities directly from an issuer in order to take advantage of the lower purchase price available to members of a bidding group. The Funds will engage in this practice, however, only when the Investment Advisers believe such practice to be in the Funds' interests. Northern Trust's investment advisory duties for Northern Funds are carried out through its Trust Department. On occasions when an Investment Adviser deems the purchase or sale of a security to be in the best interests of a Fund as well as other fiduciary or agency accounts managed by it (including any other portfolio, investment company or account for which an 68 187 Investment Adviser acts as adviser), the Agreement provides that the Investment Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased for such Fund with those to be sold or purchased for such other accounts in order to obtain the best overall terms available with respect to common and preferred stocks and the best net price and execution with respect to other securities. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be most equitable and consistent with its fiduciary obligations to the Fund and other accounts involved. In some instances, this procedure may adversely affect the size of the position obtainable for the Fund or the amount of the securities that are able to be sold for the Fund. To the extent that the execution and price available from more than one broker or dealer are believed to be comparable, the Agreement permits each Investment Adviser, at its discretion but subject to applicable law, to select the executing broker or dealer on the basis of the Investment Adviser's opinion of the reliability and quality of the broker or dealer. The Advisory Agreement provides that the Investment Advisers may render similar services to others so long as their services under such Agreement are not impaired thereby. The Advisory Agreement also provides that Northern Funds will indemnify the Investment Advisers against certain liabilities (including liabilities under the federal securities laws relating to untrue statements or omissions of material fact and actions that are in accordance with the terms of the Agreement) or, in lieu thereof, contribute to resulting losses. From time to time, the Investment Advisers may voluntarily waive a portion or all of their fees otherwise payable to it with respect to the Funds. For the fiscal years or periods indicated, Northern Trust and NTQA received advisory fees, after fee waivers and reimbursements, as follows:
====================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ----------------------------------------------------------------------------------------------------------------- Money Market Fund $15,349,562 $ 9,490,597 $ 5,197,260 - ----------------------------------------------------------------------------------------------------------------- U.S. Government Money Market Fund $ 1,730,444 $ 1,364,316 $ 950,352 - ----------------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market $ 1,450,638 $ 673,956 $ 297,792 Fund - ----------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund $ 8,162,930 $ 6,064,365 $ 4,796,468 - ----------------------------------------------------------------------------------------------------------------- California Municipal Money Market Fund $ 1,091,368 $ 719,108 $ 494,616 - ----------------------------------------------------------------------------------------------------------------- U.S. Government Fund $ 1,895,842 $ 1,527,868 $ 1,199,667 - ----------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Fund $ 2,242,387 $ 1,973,661 $ 1,741,679 - ----------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt Fund $ 196,206 $ 125,977 $ 0 - ----------------------------------------------------------------------------------------------------------------- Fixed Income Fund $ 1,752,818 $ 1,105,332 $ 779,240 - -----------------------------------------------------------------------------------------------------------------
69 188
====================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ----------------------------------------------------------------------------------------------------------------- Tax-Exempt Fund $ 1,365,071 $ 1,035,810 $ 874,423 - ----------------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund $ 404,924 $ 88,551 N/A - ----------------------------------------------------------------------------------------------------------------- International Fixed Income Fund $ 118,107 $ 129,287 $ 111,384 - ----------------------------------------------------------------------------------------------------------------- High Yield Municipal Fund $ 0 N/A N/A - ----------------------------------------------------------------------------------------------------------------- High Yield Fixed Income Fund $ 0 N/A N/A - ----------------------------------------------------------------------------------------------------------------- Income Equity Fund $ 978,113 $ 818,335 $ 519,235 - ----------------------------------------------------------------------------------------------------------------- Stock Index Fund(4) $ 490,454 $ 226,431 $ 0 - ----------------------------------------------------------------------------------------------------------------- Growth Equity Fund $ 4,529,273 $ 3,339,695 $ 2,267,044 - ----------------------------------------------------------------------------------------------------------------- Select Equity Fund $ 1,249,368 $ 802,297 $ 369,460 - ----------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 216,101 N/A N/A - ----------------------------------------------------------------------------------------------------------------- Small Cap Fund(4) $ 2,669,690 $ 2,460,252 $ 1,468,705 - ----------------------------------------------------------------------------------------------------------------- International Growth Equity Fund $ 1,946,058 $ 1,756,185 $ 1,817,708 - ----------------------------------------------------------------------------------------------------------------- International Select Equity Fund $ 1,195,310 $ 1,138,571 $ 1,111,449 - ----------------------------------------------------------------------------------------------------------------- Technology Fund $ 1,757,940 $ 754,963 $ 198,909 - -----------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996 and the Technology Fund commenced operations on April 1, 1996. 4. NTQA assumed investment advisory responsibilities for these Funds on April 1, 1998. For the fiscal years or periods indicated, Northern Trust voluntarily waived and reimbursed advisory fees for each of the Funds as follows:
============================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - -------------------------------------------------------------------------------------------------------------- Money Market Fund $7,674,790 $4,745,304 $2,622,157 - -------------------------------------------------------------------------------------------------------------- U.S. Government Money Market Fund $ 865,224 $ 682,159 $ 519,441 - -------------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market Fund $ 725,320 $ 632,972 $ 419,570 - -------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund $4,081,471 $3,032,186 $2,417,444 - -------------------------------------------------------------------------------------------------------------- California Municipal Money Market Fund $ 545,685 $ 568,061 $ 497,282 - -------------------------------------------------------------------------------------------------------------- U.S. Government Fund $ 0 $ 0 $ 31,267 - --------------------------------------------------------------------------------------------------------------
70 189
============================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - -------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Fund $ 160,168 $ 140,974 $ 153,096 - -------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt Fund $ 23,427 $ 26,197 $ 53,960 - -------------------------------------------------------------------------------------------------------------- Fixed Income Fund $ 0 $ 0 $ 36,750 - -------------------------------------------------------------------------------------------------------------- Tax-Exempt Fund $ 97,545 $ 73,985 $ 99,421 - -------------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund $ 28,923 $ 53,795 N/A - -------------------------------------------------------------------------------------------------------------- International Fixed Income Fund $ 15,857 $ 10,037 $ 34,638 - -------------------------------------------------------------------------------------------------------------- High Yield Municipal Fund $ 10,562 N/A N/A - -------------------------------------------------------------------------------------------------------------- High Yield Fixed Income Fund $ 41,621 N/A N/A - -------------------------------------------------------------------------------------------------------------- Income Equity Fund $ 172,607 $ 144,411 $ 138,239 - -------------------------------------------------------------------------------------------------------------- Stock Index Fund(4) $ 245,227 $ 117,685 $ 70,191 - -------------------------------------------------------------------------------------------------------------- Growth Equity Fund $ 799,277 $ 589,353 $ 440,662 - -------------------------------------------------------------------------------------------------------------- Select Equity Fund $ 514,443 $ 330,356 $ 209,152 - -------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 93,569 N/A N/A - -------------------------------------------------------------------------------------------------------------- Small Cap Fund(4) $1,099,279 $1,013,041 $ 639,770 - -------------------------------------------------------------------------------------------------------------- International Growth Equity Fund $ 389,208 $ 351,234 $ 368,198 - -------------------------------------------------------------------------------------------------------------- International Select Equity Fund $ 239,060 $ 227,712 $ 225,196 - -------------------------------------------------------------------------------------------------------------- Technology Fund $ 351,585 $ 150,991 $ 89,958 - --------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996 and the Technology Fund commenced operations on April 1, 1996. 4. NTQA assumed investment advisory responsibilities for these Funds on April 1, 1998. Under its Transfer Agency Agreement with Northern Funds, Northern Trust has undertaken, among other things, to perform the following services: (1) answer shareholder inquiries and respond to requests for information regarding Northern Funds; (2) process purchase and redemption transactions; (3) establish and maintain shareholder accounts and subaccounts; (4) furnish confirmations in accordance with applicable law, and provide periodic account statements to each shareholder; (5) furnish proxy statements and proxies, annual and semi-annual financial statements, and dividend, distribution and tax notices to shareholders; (6) act as income disbursing agent; and (7) maintain appropriate records relating to its services. Northern Trust may appoint one or more sub-transfer agents in the performance of its services. As compensation for the services rendered by Northern Trust under the Transfer Agency Agreement and the assumption by Northern Trust of related expenses, Northern Trust is entitled 71 190 to a fee from Northern Funds, payable monthly, at an annual rate of .10% of the average daily net asset value of each of the Funds. For the fiscal years or periods indicated, the amount of transfer agency fees incurred by each of the Funds was as follows:
===================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------------ Money Market Fund $3,837,356 $2,372,628 $ 1,299,295 - ------------------------------------------------------------------------------------------------------------------ U.S. Government Money Market Fund $ 432,607 $ 341,076 $ 244,185 - ------------------------------------------------------------------------------------------------------------------ U.S. Government Select Money $ 362,656 $ 217,819 $ 119,115 Market Fund - ------------------------------------------------------------------------------------------------------------------ Municipal Money Market Fund $2,040,714 $1,516,077 $ 1,199,098 - ------------------------------------------------------------------------------------------------------------------ California Municipal Money Market $ 272,840 $ 214,526 $ 164,871 Fund - ------------------------------------------------------------------------------------------------------------------ U.S. Government Fund $ 252,777 $ 203,714 $ 164,123 - ------------------------------------------------------------------------------------------------------------------ Intermediate Tax-Exempt Fund $ 320,338 $ 281,949 $ 251,858 - ------------------------------------------------------------------------------------------------------------------ Florida Intermediate Tax-Exempt $ 29,284 $ 20,290 $ 6,302 Fund - ------------------------------------------------------------------------------------------------------------------ Fixed Income Fund $ 233,707 $ 147,377 $ 108,797 - ------------------------------------------------------------------------------------------------------------------ Tax-Exempt Fund $ 195,008 $ 147,971 $ 129,549 - ------------------------------------------------------------------------------------------------------------------ California Tax-Exempt Fund $ 57,846 $ 18,926 N/A - ------------------------------------------------------------------------------------------------------------------ International Fixed Income Fund $ 14,885 $ 15,480 $ 16,224 - ------------------------------------------------------------------------------------------------------------------ High Yield Municipal Fund $ 1,408 N/A N/A - ------------------------------------------------------------------------------------------------------------------ High Yield Fixed Income Fund $ 5,549 N/A N/A - ------------------------------------------------------------------------------------------------------------------ Income Equity Fund $ 115,071 $ 96,274 $ 65,560 - ------------------------------------------------------------------------------------------------------------------ Stock Index Fund $ 122,613 $ 57,352 $ 8,670 - ------------------------------------------------------------------------------------------------------------------ Growth Equity Fund $ 532,850 $ 392,901 $ 270,025 - ------------------------------------------------------------------------------------------------------------------ Select Equity Fund $ 146,983 $ 94,387 $ 48,045 - ------------------------------------------------------------------------------------------------------------------ Mid Cap Growth Fund $ 30,967 N/A N/A - ------------------------------------------------------------------------------------------------------------------ Small Cap Fund $ 314,078 $ 289,438 $ 175,244 - ------------------------------------------------------------------------------------------------------------------ International Growth Equity Fund $ 194,604 $ 175,617 $ 181,765 - ------------------------------------------------------------------------------------------------------------------
72 191
===================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------------ International Select Equity Fund $ 119,530 $ 113,856 $ 111,143 - ------------------------------------------------------------------------------------------------------------------ Technology Fund $ 175,792 $ 75,496 $ 23,916 - ------------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996; and the Technology Fund commenced operations on April 1, 1996. Northern Trust maintains custody of the assets of the Funds (other than the International Funds) pursuant to the terms of its Custodian Agreement with Northern Funds. Northern Trust maintains custody of the assets of the International Funds pursuant to the terms of its Foreign Custody Agreement with Northern Funds. Under each of these agreements, Northern Trust (l) holds each Fund's cash and securities, (2) maintains such cash and securities in separate accounts in the name of the Fund, (3) makes receipts and disbursements of funds on behalf of the Fund, (4) receives, delivers and releases securities on behalf of the Fund, (5) collects and receives all income, principal and other payments in respect of the Fund's investments held by Northern Trust under the agreement, and (6) maintains the accounting records of Northern Funds. Northern Trust may employ one or more subcustodians under the Custody Agreement, provided that Northern Trust shall, subject to certain monitoring responsibilities, have no more responsibility or liability to Northern Funds on account of any action or omission of any subcustodian so employed than such subcustodian has to Northern Trust and that the responsibility or liability of the subcustodian to Northern Trust shall conform to the resolution of the Trustees of Northern Funds authorizing the appointment of the particular subcustodian. Northern Trust may also appoint an agent to carry out such of the provisions of the Custody Agreement as Northern Trust may from time to time direct. Under its Foreign Custody Agreement, Northern Trust has entered into agreements with financial institutions and depositories located in foreign countries with respect to the custody of the International Funds' foreign securities. As compensation for the services rendered to each Fund (other than the International Funds) under the Custodian Agreement, and the assumption by Northern Trust of certain related expenses, Northern Trust is entitled to payment from each of the Funds as follows: (a) a basic custodial fee of (i) $18,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's average daily net assets to the extent they exceed $100 million, plus (b) a basic accounting fee of (i) $25,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's average daily net assets to the extent they exceed $50 million, plus (c) a fixed dollar fee for each trade in portfolio securities, plus (d) a fixed dollar fee for each time that Northern Trust as Custodian receives or transmits funds via wire, plus (e) reimbursement of expenses incurred by Northern Trust as Custodian for telephone, postage, courier fees, office supplies and duplicating. The fees referred to in clauses (c) and (d) are subject to annual upward adjustments based on increases in the Consumer Price Index for All Urban Consumers, provided that 73 192 Northern Trust may permanently or temporarily waive all or any portion of any upward adjustment. As compensation for the services rendered to the International Funds under the Foreign Custody Agreement, and the assumption by Northern Trust of certain related expenses, Northern Trust is entitled to payment from each of those Funds as follows: (i) $35,000 annually for each Fund, plus (ii) 9/100th of 1% annually of each Fund's average daily net assets, plus (iii) reimbursement for fees incurred by Northern Trust as foreign Custodian for telephone, postage, courier fees, office supplies and duplicating. As compensation for basic accounting services rendered to the International Funds by Northern Trust, Northern Trust is entitled to receive $25,000 for the first $50 million of each of those Fund's average daily net assets and 1/100th of 1% of each Fund's average daily net assets in excess of $50 million. Northern's fees under the Custodian Agreement and Foreign Custody Agreement are subject to reduction based on the Funds' daily uninvested cash balances (if any). [End of Page.] 74 193 For the fiscal years or periods indicated, the amount of custody and fund accounting fees incurred by each of the Funds was as follows:
================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------- Money Market Fund $844,081 $540,182 $319,698 - ------------------------------------------------------------------------------------------------------------- U.S. Government Money Market $136,794 $114,701 $ 90,285 Fund - ------------------------------------------------------------------------------------------------------------- U.S. Government Select Money $110,597 $ 79,062 $ 61,237 Market Fund - ------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund $478,551 $358,220 $280,150 - ------------------------------------------------------------------------------------------------------------- California Municipal Money $100,159 $ 86,643 $ 72,486 Market Fund - ------------------------------------------------------------------------------------------------------------- U.S. Government Fund $ 85,772 $ 72,223 $ 65,101 - ------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Fund $103,042 $ 91,127 $ 87,303 - ------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt $ 48,986 $ 46,979 $ 31,173 Fund - ------------------------------------------------------------------------------------------------------------- Fixed Income Fund $ 84,111 $ 64,094 $ 57,834 - ------------------------------------------------------------------------------------------------------------- Tax-Exempt Fund $ 78,492 $ 64,384 $ 60,461 - ------------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund $ 50,725 $ 48,223 N/A - ------------------------------------------------------------------------------------------------------------- International Fixed Income Fund $ 77,396 $ 74,075 $ 75,592 - ------------------------------------------------------------------------------------------------------------- High Yield Municipal Fund $ 14,132 N/A N/A - ------------------------------------------------------------------------------------------------------------- High Yield Fixed Income Fund $ 14,132 N/A N/A - ------------------------------------------------------------------------------------------------------------- Income Equity Fund $ 61,425 $ 56,325 $ 54,136 - ------------------------------------------------------------------------------------------------------------- Stock Index Fund $122,803 $133,408 $ 64,425 - ------------------------------------------------------------------------------------------------------------- Growth Equity Fund $143,431 $115,833 $ 92,102 - ------------------------------------------------------------------------------------------------------------- Select Equity Fund $ 72,051 $ 60,090 $ 51,726 - ------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 44,274 N/A N/A - ------------------------------------------------------------------------------------------------------------- Small Cap Fund $141,187 $136,631 $ 88,231 - ------------------------------------------------------------------------------------------------------------- International Growth Equity Fund $257,479 $228,550 $239,257 - ------------------------------------------------------------------------------------------------------------- International Select Equity Fund $182,139 $167,301 $168,250 - -------------------------------------------------------------------------------------------------------------
75 194
================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------- Technology Fund $ 78,748 $ 55,245 $ 63,987 - -------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996; and the Technology Fund commenced operations on April 1, 1996. Unless sooner terminated, Northern Funds' Advisory Agreement, Transfer Agency Agreement, Custodian Agreement and Foreign Custody Agreement will continue in effect with respect to a particular Fund until March 31, 2000, and thereafter for successive 12-month periods, provided that the continuance is approved at least annually (a) by the vote of a majority of the Trustees who are not parties to the agreement or "interested persons" (as such term is defined in the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval and (b) by the Trustees or by the vote of a majority of the outstanding shares of the Fund (as defined under "Description of Shares"). Each agreement is terminable at any time without penalty by Northern Funds (by specified Trustee or shareholder action) on 60 days' written notice to Northern Trust (or NTQA) and by Northern Trust (or NTQA) on 60 days' written notice to Northern Funds. Banking laws and regulations currently prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or any bank or non-bank affiliate thereof from sponsoring, organizing, controlling or distributing the shares of a registered open-end investment company continuously engaged in the issuance of its shares, but such banking laws and regulations do not prohibit such a holding company or affiliate or banks generally from acting as investment adviser, transfer agent or custodian to such an investment company, or from purchasing shares of such a company as agent for and upon the order of customers. Northern Trust and NTQA believe that they may perform the services contemplated by their agreements with Northern Funds without violation of such banking laws or regulations, which are applicable to them. It should be noted, however, that future changes in either federal or state statutes and regulations relating to the permissible activities of banks and their subsidiaries or affiliates, as well as future judicial or administrative decisions or interpretations of current and future statutes and regulations, could prevent Northern Trust and NTQA from continuing to perform such services for Northern Funds. Should future legislative, judicial or administrative action prohibit or restrict the activities of Northern Trust or NTQA in connection with the provision of services on behalf of Northern Funds, Northern Funds might be required to alter materially or discontinue its arrangements with Northern Trust and NTQA and change its method of operations. It is not anticipated, however, that any change in Northern Funds' method of operations would affect the net asset value per share of any Fund or result in a financial loss to any shareholder. Moreover, if current restrictions preventing a bank from legally sponsoring, organizing, controlling or distributing shares of an open-end investment company were relaxed, Northern Funds expects that Northern Trust and its affiliates would consider the possibility of offering to perform some or all of the 76 195 services now provided by Northern Funds Distributor, LLC. It is not possible, of course, to predict whether or in what form such restrictions might be relaxed or the terms upon which Northern Trust and its affiliates might offer to provide services for consideration by the Trustees. Northern Trust is active as an underwriter of municipal instruments. Under the 1940 Act, the Funds are precluded, subject to certain exceptions, from purchasing in the primary market those municipal instruments with respect to which Northern Trust is serving as a principal underwriter. In the opinion of Northern Trust, this limitation will not significantly affect the ability of the Funds to pursue their respective investment objectives. In the Advisory Agreement, Northern Trust agrees that the name "Northern" may be used in connection with Northern Funds' business on a royalty-free basis. Northern Trust has reserved to itself the right to grant the non-exclusive right to use the name "Northern" to any other person. The Advisory Agreement provides that at such time as the Agreement is no longer in effect, Northern Funds will cease using the name "Northern." CO-ADMINISTRATORS AND DISTRIBUTOR Northern Trust and Investor Services Group, 4400 Computer Drive, Westborough, Massachusetts 01581, act as co-administrators for the Funds under a Co-Administration Agreement with Northern Funds. Subject to the general supervision of Northern Funds' Board of Trustees, Northern Trust and Investor Services Group (the "Co-Administrators") provide supervision of all aspects of Northern Funds' non-investment advisory operations and perform various corporate secretarial, treasury and blue sky services, including but not limited to: (a) maintaining office facilities and furnishing corporate officers for Northern Funds; (b) furnishing data processing services, clerical services, and executive and administrative services and standard stationery and office supplies; (c) 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 Northern Funds' bills, preparing monthly reconciliation of Northern Funds' expense records, updating projections of annual expenses, preparing materials for review by the Board of Trustees and compliance testing; (d) preparing and submitting reports to Northern Funds' shareholders and the SEC; (e) preparing and printing financial statements; (f) preparing monthly Fund profile reports; (g) preparing and filing Northern Funds' federal and state tax returns (other than those required to be filed by Northern Funds' custodian and transfer agent) and providing shareholder tax information to Northern Funds' transfer agent; (h) assisting in marketing strategy and product development; (i) performing oversight/management responsibilities, such as the supervision and coordination of certain of Northern Funds' service providers; (j) effecting and maintaining, as the case may be, the registration of shares of Northern Funds for sale under the securities laws of various jurisdictions; (k) assisting in maintaining corporate records and good standing status of Northern Funds in its state of organization; and (l) 77 196 monitoring Northern Funds' arrangements with respect to services provided by Service Organizations to their customers who are the beneficial owners of shares. Subject to the limitations described below, as compensation for their administrative services and the assumption of related expenses, the Co-Administrators are entitled to a fee from each Fund, computed daily and payable monthly, at an annual rate of 0.15% of the average daily net assets of each Fund. Prior to October 1, 1999, Sunstone Financial Group, Inc., 207 E. Buffalo Street, Milwaukee, Wisconsin 53202 acted as Northern Funds' administrator pursuant to an administration agreement substantially similar to the Co-Administration Agreement currently in effect with Northern Trust and Investor Services Group. For the fiscal years or periods indicated, Sunstone received, after waivers, administrative fees as follows:
================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------- Money Market Fund $2,447,894 $1,186,568 $1,164,584 - ------------------------------------------------------------------------------------------------------------- U.S. Government Money Market $ 294,367 $ 217,652 $ 218,281 Fund - ------------------------------------------------------------------------------------------------------------- U.S. Government Select Money $ 226,085 $ 124,207 $ 23,962 Market Fund - ------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund $1,339,727 $ 929,212 $1,075,662 - ------------------------------------------------------------------------------------------------------------- California Municipal Money $ 176,849 $ 131,467 $ 81,496 Market Fund - ------------------------------------------------------------------------------------------------------------- U.S. Government Fund $ 171,664 $ 124,997 $ 195,647 - ------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Fund $ 215,890 $ 178,379 $ 301,417 - ------------------------------------------------------------------------------------------------------------- Florida Intermediate Tax-Exempt $ 17,638 $ 11,284 $ 7,174 Fund - ------------------------------------------------------------------------------------------------------------- Fixed Income Fund $ 154,709 $ 85,293 $ 129,589 - ------------------------------------------------------------------------------------------------------------- Tax-Exempt Fund $ 128,048 $ 92,041 $ 154,841 - ------------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund $ 35,426 $ 6,684 N/A - ------------------------------------------------------------------------------------------------------------- International Fixed Income Fund $ 10,053 $ 10,534 $ 19,435 - ------------------------------------------------------------------------------------------------------------- High Yield Municipal Fund $ 708 N/A N/A - ------------------------------------------------------------------------------------------------------------- High Yield Fixed Income Fund $ 2,958 N/A N/A - ------------------------------------------------------------------------------------------------------------- Income Equity Fund $ 78,886 $ 57,142 $ 77,746 - -------------------------------------------------------------------------------------------------------------
78 197
================================================================== Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------- Stock Index Fund $ 77,739 $ 30,318 $ 9,252 - ------------------------------------------------------------------------------------------------------------- Growth Equity Fund $ 349,439 $ 235,526 $ 320,662 - ------------------------------------------------------------------------------------------------------------- Select Equity Fund $ 94,686 $ 53,548 $ 56,368 - ------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund $ 14,391 N/A N/A - ------------------------------------------------------------------------------------------------------------- Small Cap Fund $ 224,567 $ 157,708 $ 208,264 - ------------------------------------------------------------------------------------------------------------- International Growth Equity Fund $ 132,079 $ 115,012 $ 219,176 - ------------------------------------------------------------------------------------------------------------- International Select Equity Fund $ 82,930 $ 74,312 $ 133,479 - ------------------------------------------------------------------------------------------------------------- Technology Fund $ 87,044 $ 41,187 $ 27,287 - -------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996; and the Technology Fund commenced operations on April 1, 1996. For the fiscal years or periods indicated, Sunstone waived administrative fees with respect to each Fund as follows:
======================================================================= Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------------ Money Market Fund $3,308,194 $2,372,408 $ 790,270 - ------------------------------------------------------------------------------------------------------------------ U.S. Government Money Market Fund $ 354,550 $ 293,967 $ 149,167 - ------------------------------------------------------------------------------------------------------------------ U.S. Government Select Money Market $ 317,904 $ 202,525 $ 155,378 Fund - ------------------------------------------------------------------------------------------------------------------ Municipal Money Market Fund $1,721,373 $1,344,926 $ 727,816 - ------------------------------------------------------------------------------------------------------------------ California Municipal Money Market Fund $ 232,414 $ 244,331 $ 166,479 - ------------------------------------------------------------------------------------------------------------------ U.S. Government Fund $ 207,505 $ 180,577 $ 51,170 - ------------------------------------------------------------------------------------------------------------------ Intermediate Tax-Exempt Fund $ 264,621 $ 244,548 $ 77,538 - ------------------------------------------------------------------------------------------------------------------ Florida Intermediate Tax-Exempt Fund $ 26,288 $ 19,151 $ 2,308 - ------------------------------------------------------------------------------------------------------------------ Fixed Income Fund $ 195,856 $ 135,774 $ 34,026 - ------------------------------------------------------------------------------------------------------------------ Tax-Exempt Fund $ 164,475 $ 129,918 $ 39,928 - ------------------------------------------------------------------------------------------------------------------
79 198
======================================================================= Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 1999(1) March 31, 1998(2) March 31, 1997(3) - ------------------------------------------------------------------------------------------------------------------ California Tax-Exempt Fund $ 51,343 $ 21,785 N/A - ------------------------------------------------------------------------------------------------------------------ International Fixed Income Fund $ 12,274 $ 12,687 $ 4,953 - ------------------------------------------------------------------------------------------------------------------ High Yield Municipal Fund $ 1,405 N/A N/A - ------------------------------------------------------------------------------------------------------------------ High Yield Fixed Income Fund $ 5,367 N/A N/A - ------------------------------------------------------------------------------------------------------------------ Income Equity Fund $ 93,722 $ 87,270 $ 20,875 - ------------------------------------------------------------------------------------------------------------------ Stock Index $ 106,182 $ 55,711 $ 3,836 - ------------------------------------------------------------------------------------------------------------------ Growth Equity Fund $ 449,843 $ 353,831 $ 85,494 - ------------------------------------------------------------------------------------------------------------------ Select Equity Fund $ 125,790 $ 88,034 $ 15,958 - ------------------------------------------------------------------------------------------------------------------ Mid Cap Growth Fund $ 32,060 N/A N/A - ------------------------------------------------------------------------------------------------------------------ Small Cap Fund $ 246,554 $ 276,453 $ 55,295 - ------------------------------------------------------------------------------------------------------------------ International Growth Equity Fund $ 159,830 $ 148,415 $ 54,062 - ------------------------------------------------------------------------------------------------------------------ International Select Equity Fund $ 96,366 $ 96,473 $ 33,602 - ------------------------------------------------------------------------------------------------------------------ Technology Fund $ 176,646 $ 72,057 $ 8,821 - ------------------------------------------------------------------------------------------------------------------
1. The High Yield Municipal Fund, High Yield Fixed Income, and Mid Cap Growth Funds commenced operations on December 31, 1998, December 31, 1998, and March 31, 1998, respectively. 2. The California Tax-Exempt Fund commenced operations on April 8, 1997. 3. The Florida Intermediate Tax-Exempt Fund commenced operations on August 15, 1996; the Stock Index Fund commenced operations on October 7, 1996; and the Technology Fund commenced operations on April 1, 1996. Unless sooner terminated, the Co-Administration Agreement will continue in effect until September 30, 2001, and thereafter for successive one-year terms with respect to each Fund, provided that the Agreement is approved annually (1) by the Board of Trustees or (2) 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 Northern Funds 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 Northern Funds and the other Co-Administrator. Northern Funds may terminate the Co-Administration Agreement prior to September 30, 2001 in the event that Northern Funds 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. Northern 80 199 Funds 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. Northern Funds has also entered into a Distribution Agreement under which Northern Funds Distributors, LLC, as agent, sells shares of each Fund on a continuous basis. Northern Funds Distributors, LLC pays the cost of printing and distributing prospectuses to persons who are not shareholders of Northern Funds (excluding preparation and typesetting expenses) and of certain other distribution efforts. No compensation is payable by Northern Funds to Northern Funds Distributors, LLC for such distribution services. Northern Funds Distributors, LLC is a wholly-owned subsidiary of Provident Distributors, Inc. ("PDI"). PDI, based in West Conshohocken, 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 Northern Funds 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 Northern Funds will indemnify Northern Funds Distributors, LLC against certain liabilities relating to untrue statements or omissions of material fact except those resulting from the reliance on information furnished to Northern Funds by Northern Funds Distributors, LLC, or those resulting from the willful misfeasance, bad faith or negligence of Northern Funds Distributors, LLC, or Northern Funds Distributors, LLC's breach of confidentiality. Under a Service Mark License Agreement with Northern Funds Distributors, LLC, Northern Trust Corporation agrees that the name "Northern Funds" may be used in connection with Northern Funds' business on a royalty-free basis. Northern Trust Corporation has reserved to itself the right to grant the non-exclusive right to use the name "Northern Funds" to any other person. The Agreement provides that at such time as the Agreement is no longer in effect, Northern Funds Distributors, LLC will cease using the name "Northern Funds." SERVICE ORGANIZATIONS As stated in the Funds' Prospectus, the Funds may enter into agreements from time to time with Service Organizations providing for support and/or distribution services to customers of the Service Organizations who are the beneficial owners of Fund shares. Under the agreements, the Funds may pay Service Organizations up to .25% (on an annualized basis) of the average daily net asset value of the shares beneficially owned by their customers. Support services provided by Service Organizations under their agreements may include: (a) processing dividend and distribution payments from a Fund; (b) providing information periodically to customers showing their share positions; (c) arranging for bank wires; (d) responding to customer inquiries; (e) providing subaccounting with respect to shares beneficially owned by customers or the information necessary for subaccounting; (f) forwarding shareholder communications; (g) assisting in processing share purchase, exchange and redemption requests from customers; (h) assisting customers in changing dividend options, account designations and 81 200 addresses; and (i) other similar services requested by the Funds. In addition, Service Organizations may provide assistance (such as the forwarding of sales literature and advertising to their customers) in connection with the distribution of Fund shares. The Funds' arrangements with Service Organizations under the agreements are governed by two Plans (a Service Plan and a Distribution and Service Plan), which have been adopted by the Board of Trustees. Because the Distribution and Service Plan contemplates the provision of services related to the distribution of Fund shares (in addition to support services), that Plan has been adopted in accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans, the Board of Trustees reviews, at least quarterly, a written report of the amounts expended in connection with the Funds' arrangements with Service Organizations and the purposes for which the expenditures were made. In addition, the Funds' arrangements with Service Organizations must be approved annually by a majority of the Trustees, including a majority of the Trustees who are not "interested persons" of the Funds as defined in the 1940 Act and have no direct or indirect financial interest in such arrangements (the "Disinterested Trustees"). The Board of Trustees believes that there is a reasonable likelihood that their arrangements with Service Organizations will benefit each Fund and its shareholders. Any material amendment to the arrangements with Service Organizations under the agreements must be approved by a majority of the Board of Trustees (including a majority of the Disinterested Trustees), and any amendment to increase materially the costs under the Distribution and Service Plan with respect to a Fund must be approved by the holders of a majority of the outstanding shares of the Fund involved. So long as the Distribution and Service Plan is in effect, the selection and nomination of the members of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Northern Funds will be committed to the discretion of such disinterested Trustees. For the fiscal period ended March 31, 1999, the Money Market Fund, U.S. Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Stock Index Fund, Select Equity Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund and Technology Fund paid fees of $25,567, $29,542, $146, $37, $37, $73, $110, $957, $37 and $2,103, respectively, under the Service Plan. No other Funds paid fees under either Plan. For the fiscal period ended March 31, 1998, the Money Market Fund, U.S. Government Money Market Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International Select Equity Fund and Technology Fund paid fees of $107, $40,296, $181, $145, $440, $368, $78 and $449, respectively, under the Service Plan. No other Funds paid fees under either Plan. For the fiscal period ended March 31, 1997, the Municipal Money Market Fund and the U.S. Government Money Market Fund paid fees of $98 and $59,754, respectively, under the Service Plan. No other Funds paid fees under either Plan. 82 201 COUNSEL AND AUDITORS Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103, serve as counsel to Northern Funds. Arthur Andersen LLP, independent accountants, 33 West Monroe Street, Chicago, Illinois 60603-5385 serve as auditors for Northern Funds. The financial statements dated March 31, 1999, incorporated by reference into this Additional Statement have been incorporated in reliance on the report of Arthur Andersen LLP given on the authority of said firm as experts in auditing and accounting. IN-KIND PURCHASES AND REDEMPTIONS Payment for shares of a Fund may, in the discretion of Northern Trust, be made in the form of securities that are permissible investments for the Fund as described in the Prospectus. For further information about this form of payment, contact the Transfer Agent. In connection with an in-kind securities payment, a Fund will require, among other things, that the securities be valued on the day of purchase in accordance with the pricing methods used by the Fund and that the Fund receive satisfactory assurances that it will have good and marketable title to the securities received by it; that the securities be in proper form for transfer to the Fund; and that adequate information be provided concerning the basis and other tax matters relating to the securities. Although each Fund generally will redeem shares in cash, each Fund reserves the right to pay redemptions by a distribution in-kind of securities (instead of cash) from such Fund. The securities distributed in-kind would be readily marketable and would be valued for this purpose using the same method employed in calculating the Fund's net asset value per share. If a shareholder receives redemption proceeds in-kind, the shareholder should 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. 83 202 DIRECTED REINVESTMENTS In addition to having your income dividends and/or capital gains distributions reinvested in shares of the Fund from which such distributions are paid, you may elect the directed reinvestment option and have dividends and capital gains distributions automatically invested in another Northern Fund. Reinvestments can only be directed to an existing Northern Funds account (which must meet the minimum investment requirement). Directed reinvestments may be used to invest funds from a regular account to another regular account, from a qualified plan account to another qualified plan account, or from a qualified plan account to a regular account. Directed reinvestments from a qualified plan account to a regular account may have adverse tax consequences including imposition of a penalty tax and, therefore, you should consult your own tax adviser before commencing these transactions. REDEMPTIONS AND EXCHANGES Exchange requests received on a Business Day prior to the time shares of the Funds involved in the request are priced will be processed on the date of receipt. "Processing" a request means that shares in the Fund from which the shareholder is withdrawing an investment will be redeemed at the net asset value per share next determined on the date of receipt. Shares of the new Fund into which the shareholder is investing will also normally be purchased at the net asset value per share next determined coincident to or after the time of redemption. Exchange requests received on a Business Day after the time shares of the Funds involved in the request are priced will be processed on the next Business Day in the manner described above. Northern Funds may redeem shares involuntarily to reimburse a Fund for any loss sustained by reason of the failure of a shareholder to make full payment for shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder which is applicable to Fund shares as provided in the Funds' Prospectus from time to time. Northern Funds 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. Northern Funds may also redeem shares involuntarily if the redemption is appropriate to carry out Northern Funds' responsibilities under the 1940 Act (see, e.g., "Amortized Cost Valuation"). 84 203 RETIREMENT PLANS Shares of the Funds may be purchased in connection with certain tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans, money purchase pension plans, target benefit plans and individual retirement accounts. Further information about how to participate in these plans, the fees charged and the limits on contributions can be obtained from Northern Trust. To invest through any of the tax-sheltered retirement plans, please call Northern Trust for information and the required separate application. To determine whether the benefits of a tax-sheltered retirement plan are available and/or appropriate, a shareholder should consult with a tax adviser. EXPENSES Except as set forth above and in this Additional Statement, each Fund is responsible for the payment of its expenses. These expenses include, without limitation, the fees and expenses payable to Northern Trust and Investor Services Group, brokerage fees and commissions, fees for the registration or qualification of Fund shares under federal or state securities laws, expenses of the organization of Northern Funds, taxes, interest, costs of liability insurance, fidelity bonds, indemnification or contribution, any costs, expenses or losses arising out of any liability of, or claim for damages or other relief asserted against Northern Funds for violation of any law, legal, tax and auditing fees and expenses, expenses of preparing and printing prospectuses, statements of additional information, proxy materials, reports and notices and the printing and distributing of the same to the Funds' shareholders and regulatory authorities, compensation and expenses of its Trustees, payments to Service Organizations, fees of industry organizations such as the Investment Company Institute, and miscellaneous and extraordinary expenses incurred by Northern Funds. Northern Trust and Investor Services Group, intend to voluntarily reimburse a portion of the Funds' expenses and/or reduce their advisory and co-administrative fees from the Funds during the current fiscal year. The result of these reimbursements and fee reductions will be to increase the performance of the Funds during the periods for which the reductions and reimbursements are made. PERFORMANCE INFORMATION MONEY MARKET FUNDS From time to time Northern Funds may advertise quotations of "yields" and "effective yields" with respect to each Money Market Fund, and the Municipal Money Market Fund, Tax-Exempt Money Market Fund and the California Municipal Money Market Fund may advertise their "tax-equivalent yields" and "tax-equivalent effective yields." These yield figures will fluctuate, are based on historical earnings and are not intended to indicate future performance. "Yield" refers to the net investment income generated by an investment in the Fund over a seven-day period identified in the advertisement. This net investment income is then "annualized." That is, the amount of net investment income generated by the investment during that week is 85 204 assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. In arriving at quotations as to "yield," Northern Funds first determines the net change during the period in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, then divides such net change by the value of the account at the beginning of the period to obtain the base period return, and then multiplies the base period return by 365/7. "Effective yield" is calculated similarly but, when annualized, the net investment income earned by an investment in the Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. The "effective yield" with respect to the shares of a Money Market Fund is computed by adding 1 to the base period return (calculated as above), raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The "tax-equivalent yield" demonstrates the level of taxable yield necessary to produce an after-tax yield equivalent to a Fund's tax-free yield. It is calculated by taking that portion of the seven-day "yield" which is tax-exempt and adjusting it to reflect the tax savings associated with a stated tax rate. The "tax-equivalent current yield" will always be higher than the Fund's yield. "Tax-equivalent yield" is computed by dividing the tax-exempt portion of the yield by 1 minus a stated income tax rate and then adding the quotient to the taxable portion of the yield, if any. There may be more than one tax-equivalent yield if more than one stated income tax rate is used. The "tax-equivalent effective yield" demonstrates the level of taxable yield necessary to produce an after-tax yield equivalent to a Fund's tax-free effective yield. It is calculated by taking that portion of the seven-day "effective yield" which is tax-exempt and adjusting it to reflect the tax savings associated with a stated tax rate. The "tax-equivalent effective yield" will always be higher than the Fund's effective yield. "Tax-equivalent effective yield" is computed by dividing the tax-exempt portion of the effective yield by 1 minus a stated income tax-rate, and then adding the quotient to the taxable portion of the effective yield, if any. There may be more than one tax-equivalent effective yield, if more than one stated income tax rate is used. The annualized yield of each Money Market Fund for the seven-day period ended March 31, 1999 was as follows(1): 86 205
- -------------------------------------------------------------------------------------------------------------------------------- Effective Tax-Equivalent Tax-Equivalent Yield Yield Yield Effective Yield - -------------------------------------------------------------------------------------------------------------------------------- Money Market Fund 4.50% 4.60% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Money Market Fund 4.46% 4.56% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market Fund 4.38% 4.47% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund 2.49% 2.52% 3.61% 3.65% - -------------------------------------------------------------------------------------------------------------------------------- California Municipal Money Market Fund 2.41% 2.44% 3.49% 3.54% - --------------------------------------------------------------------------------------------------------------------------------
1. An income tax rate of 31% is used in the calculation of tax-equivalent yield and tax-equivalent effective yield. The information set forth in the foregoing table reflects certain fee reductions and expense limitations. See "Additional Trust Information - Investment Adviser, Transfer Agent and Custodian" and "Co-Administrators and Distributor." In the absence of such fee reductions and expense limitations, the annualized yield of each Fund for the same seven-day period would have been as follows(1):
- -------------------------------------------------------------------------------------------------------------------------------- Effective Tax-Equivalent Tax-Equivalent Yield Yield Yield Effective Yield - -------------------------------------------------------------------------------------------------------------------------------- Money Market Fund 4.16% 4.25% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Money Market Fund 4.09% 4.18% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Select Money Market Fund 4.00% 4.08% N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund 2.15% 2.17% 3.12% 3.14% - -------------------------------------------------------------------------------------------------------------------------------- California Municipal Money Market Fund 2.06% 2.08% 2.99% 3.01% - --------------------------------------------------------------------------------------------------------------------------------
1. An income tax rate of 31% is used in the calculation of tax-equivalent yield and tax-equivalent effective yield. A Money Market Fund may also quote, from time to time, total return information using the formula described in the following section. 87 206 NON-MONEY MARKET FUNDS The Non-Money Market Funds calculate their total returns separately on an "average annual total return" basis for various periods. Average annual total return reflects the average annual percentage change in value of an investment in the Fund over the measuring period. Total returns for each Non-Money Market Fund may also be calculated on an "aggregate total return" basis for various periods. Aggregate total return reflects the total percentage change in value over the measuring period. Both methods of calculating total return reflect changes in the price of the shares and assume that any dividends and capital gain distributions made by a Fund during the period are reinvested in the shares of the Fund. When considering average total return figures for periods longer than one year, it is important to note that the annual total return of a Fund for any one year in the period might have been more or less than the average for the entire period. The Non-Money Market Funds may also advertise from time to time the total return on a year-by-year or other basis for various specific periods by means of quotations, charts, graphs or schedules. A Non-Money Market Fund calculates its "average annual total return" by determining the average annual compounded rate of return during specified periods that equates the initial amount invested to the ending redeemable value of such investment according to the following formula: 1 (ERV)- T = (---)n - 1 ( P ) Where: T = average annual total return; ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year (or other) periods at the end of the applicable period (or a fractional portion thereof); P = hypothetical initial payment of $1,000; and n = period covered by the computation, expressed in years. A Non-Money Market Fund calculates its "aggregate total return" by determining the aggregate compounded rates of return during specified periods that likewise equate the initial amount invested to the ending redeemable value of such investment. The formula for calculating aggregate total return is as follows: [(ERV)] Aggregate Total Return = T = [(---)] - 1 [( P )] The calculations set forth below are made assuming that (a) all dividends and capital gain distributions are reinvested on the reinvestment dates at the price per share existing on the reinvestment date, and (b) all recurring fees charged to all shareholder accounts are included. 88 207 The ending redeemable value (variable "ERV" in the formula) is determined by assuming complete redemption of the hypothetical investment after deduction of all nonrecurring charges at the end of the measuring period. 89 208
FOR PERIODS ENDED MARCH 31, 1999 AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE TOTAL RETURNS (%) SINCE SINCE 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION ------ ------ ------- --------- ------ ------ ------- --------- U.S. GOVERNMENT FUND 6.01% 5.99% N/A 5.99% 6.01% 33.74% N/A 33.74% (4/1/94 inception) INTERMEDIATE TAX-EXEMPT FUND 4.88% 5.27% N/A 5.27% 4.88% 29.28% N/A 29.28% (4/1/94 inception) FLORIDA INTERMEDIATE 5.38% N/A N/A 6.28% 5.38% N/A N/A 17.36% TAX-EXEMPT FUND (8/15/96 inception) FIXED INCOME FUND 5.18% 7.35% N/A 7.35% 5.18% 42.55% N/A 42.55% (4/1/94 inception) TAX-EXEMPT FUND 5.47% 6.73% N/A 6.73% 5.47% 38.50% N/A 38.50% (4/1/94 inception) CALIFORNIA TAX-EXEMPT FUND 6.20% N/A N/A 9.09% 6.20% N/A N/A 18.80% (4/8/97 inception) INTERNATIONAL FIXED INCOME 9.68% 6.78% N/A 6.78% 9.68% 38.84% N/A 38.84% FUND (4/1/94 inception) INCOME EQUITY FUND 0.67% 13.18% N/A 13.18% 0.67% 85.70% N/A 85.70% (4/1/94 inception) STOCK INDEX FUND 17.78% N/A N/A 28.82% 17.78% N/A N/A 87.49% (10/7/96 inception) GROWTH EQUITY FUND 24.72% 22.54% N/A 22.54% 24.72% 176.29% N/A 176.29% (4/1/94 inception)
90 209
FOR PERIODS ENDED MARCH 31, 1999 AVERAGE ANNUAL TOTAL RETURNS (%) AGGREGATE TOTAL RETURNS (%) SINCE SINCE 1 YEAR 5 YEAR 10 YEAR INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION ------ ------ ------- --------- ------ ------ ------- --------- SELECT EQUITY FUND 28.79% N/A N/A 24.90% 28.79% N/A N/A 203.19% (4/6/94 inception) MID CAP GROWTH FUND 17.19% N/A N/A 17.19% 17.19% N/A N/A 17.19% (3/31/98 inception) SMALL CAP FUND (23.46)% 8.92% N/A 8.92% (23.46)% 53.32% N/A 53.32% (4/1/94 inception) INTERNATIONAL GROWTH EQUITY 13.04% 8.28% N/A 8.28% 13.04% 48.82% N/A 48.82% FUND (4/1/94 inception) INTERNATIONAL SELECT EQUITY 9.16% N/A N/A 7.44% 9.16% N/A N/A 43.08% FUND (4/5/94 inception) TECHNOLOGY FUND 79.97% N/A N/A 49.16% 79.97% N/A N/A 231.84% (4/1/96 inception)
91 210 The yield of a Non-Money Market Fund is computed based on the Fund's net income during a specified 30-day (or one month) period. More specifically, the Fund's yield is computed by dividing the per share net income during the relevant period by the net asset value per share on the last day of the period and annualizing the result on a semi-annual basis. A Non-Money Market Fund calculates its 30-day (or one month) standard yield in accordance with the method prescribed by the SEC for mutual funds: [(a-b )6 ] [(--- ) ] Yield = 2 [(cd + 1) - 1] [( ) ] Where: a = dividends and interest earned during the period; b = expenses accrued for the period (net of reimbursements); c = average daily number of shares outstanding during the period entitled to receive dividends; and d = net asset value per share on the last day of the period. Based on the foregoing calculations, for the 30-day period ended March 31, 1999, the yields for the U.S. Government, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt, International Fixed Income, High Yield Municipal, High Yield Fixed Income and Income Equity Funds, after fee waivers, were 4.77%, 3.26%, 3.42%, 5.20%, 3.84%, 3.77%, 2.55%, 3.26%, 7.43% and 2.83%, respectively. Also for the 30-day period ended March 31, 1999, the yields for the U.S. Government, Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Fixed Income, Tax-Exempt, California Tax-Exempt, International Fixed Income, High Yield Municipal and High Yield Fixed Income Funds, absent fee waivers, were 4.60%, 3.04%, 3.00%, 4.92%, 3.61%, 3.46%, 1.56%, (0.91)%, 6.24% and 2.45%, respectively. A Non-Money Market Fund's "tax-equivalent" yield is computed by: (a) dividing the portion of the Fund's yield (calculated as above) that is exempt from federal income tax by one minus a stated federal income tax rate; and (b) adding the quotient to that portion, if any, of the Fund's yield that is not exempt from federal income tax. For the 30-day period ended March 31, 1999, and using a federal income tax rate of 31%, the 30-day tax-equivalent yields, after fee waivers, were 4.72%, 4.96%, 5.57%, 5.46% and 4.72% for the Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds, respectively. Also, for the 30-day period ended March 31, 1999, and using a federal income tax rate of 31%, the 30-day tax-equivalent yields, absent fee waivers, were 4.41%, 4.35%, 5.23%, 5.01% and (0.91)% for the Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds, respectively. 92 211 GENERAL INFORMATION The performance information set forth above includes the reinvestment of dividends and distributions. Certain performance information set forth above reflects fee waivers in effect; in the absence of fee waivers, these performance figures would be reduced. Any fees imposed by Northern Trust, NTQA or other Service Organizations on their customers in connection with investments in the Funds are not reflected in Northern Funds' calculations of performance for the Funds. Each Fund's performance will fluctuate, unlike bank deposits or other investments which pay a fixed yield for a stated period of time. Past performance is not necessarily indicative of future return. Actual performance will depend on such variables as portfolio quality, average portfolio maturity, the type of portfolio instruments acquired, changes in interest rates, portfolio expenses and other factors. Performance is one basis investors may use to analyze a Fund as compared to other funds and other investment vehicles. However, performance of other funds and other investment vehicles may not be comparable because of the foregoing variables, and differences in the methods used in valuing their portfolio instruments, computing net asset value and determining performance. The performance of each Fund may be compared to those of other mutual funds with similar investment objectives and to stock, bond and other relevant indices or to rankings prepared by independent services or other financial or industry publications that monitor the performance of mutual funds. For example, the performance of a Fund may be compared to data prepared by Lipper Analytical Services, Inc. or to the S&P 500 Index, the S&P MidCap 400 Index, the Russell 2000 or 1000 Small Stock Index, the Consumer Price Index or the Dow Jones Industrial Average. In addition, performance of the U.S. Government and Fixed Income Funds may be compared to the Lehman Brothers Government Bond Index (or its two components, the Treasury Bond Index and Agency Bond Index), the Lehman Brothers Corporate Bond Index, the Lehman Brothers Intermediate Government Bond Index and the Lehman Brothers Government/Corporate Bond Index. Performance of the Intermediate Tax-Exempt and Tax-Exempt Funds may be compared to the Lehman Brothers Municipal Bond or 5-Year Municipal Bond Indices; performance of the California Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund California Intermediate Index; performance of the Florida Intermediate Tax-Exempt Fund may be compared to the Lehman Brothers Florida Intermediate Tax-Exempt Index; performance of the Arizona Tax-Exempt Fund may be compared to the Lehman Brothers Arizona Municipal Bond Index; performance of the California Tax-Exempt Fund may be compared to the Lehman Brothers California Municipal Exempt Index and performance of the California Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund may be compared to the Lehman Brothers Mutual Fund Intermediate Municipal Index. Performance of the High Yield Municipal Fund may be compared to Lehman Brothers Municipal Non-Investment Grade Bond Index. Performance of the High Yield Fixed Income Fund may be compared to Merrill Lynch High Yield Master II Index, Lehman Brothers High Yield Corporate Bond Index and Salomon Brothers Extended High-Yield Market Index. Performance of the Income Equity Fund may be compared to the Merrill Lynch Investment Grade Convertible Bond Index. Performance of the International Funds may be compared to the Mortan Stanley Capital International Europe, 93 212 Australia and Far East Index ("EAFE"), the Morgan Stanley EAFE blended with Emerging Markets Free Index and the J.P. Morgan International Government Bond Index. Performance of the Technology Fund may be compared to the Morgan Stanley Index, the Hambrecht and Quist Technology Index, the SoundView Technology Index, the technology grouping of the S&P 500 Index and any other comparable technology index. Performance data as reported in national financial publications such as Money, Forbes, Barron's, The Wall Street Journal and The New York Times, or in publications of a local or regional nature, may also be used in comparing the performance of a Fund. From time to time, the Funds may also quote the mutual fund ratings of Morningstar, Inc. and other services in their advertising materials. Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the Consumer Price Index), and combinations of various capital markets. The performance of these capital markets is based on the returns of different indices. The Funds may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. Performance comparisons may also include the value of a hypothetical investment in any of these capital markets. The risks associated with the security types in any capital market may or may not correspond directly to those of the Funds. The Funds may also compare performance to that of other compilations or indices that may be developed and made available in the future. The Funds may also from time to time include discussions or illustrations of the effects of compounding in advertisements. "Compounding" refers to the fact that, if dividends or other distributions on a Fund investment are reinvested by being paid in additional Fund shares, any future income or capital appreciation of a Fund would increase the value, not only of the original investment in the Fund, but also of the additional Fund shares received through reinvestment. The Funds may include discussions or illustrations of the potential investment goals of a prospective investor (including materials that describe general principles of investing, such as asset allocation, diversification, risk tolerance, and goal setting, questionnaires designed to help create a personal financial profile, worksheets used to project savings needs based on assumed rates of inflation and hypothetical rates of return and action plans offering investment alternatives), investment management techniques, policies or investment suitability of a Fund (such as value investing, market timing, dollar cost averaging, asset allocation, constant ratio transfer, automatic account rebalancing, the advantages and disadvantages of investing in tax-deferred and taxable investments), economic and political conditions, the relationship between sectors of the economy and the economy as a whole, the effects of inflation and historical performance of various asset classes, including but not limited to, stocks, bonds and Treasury bills. From time to time advertisements, sales literature, communications to shareholders or other materials may summarize the substance of information contained in shareholder reports (including the investment composition of a Fund), as well as the views of Northern Trust and NTQA as to current market, economic, trade and interest rate trends, legislative, regulatory and monetary developments, investment strategies and related matters believed to be of relevance to a Fund. In addition, selected indices may be used to illustrate historic performance of selected asset classes. The Funds may also include in advertisements, sales literature, communications to 94 213 shareholders or other materials, charts, graphs or drawings which illustrate the potential risks and rewards of investment in various investment vehicles, including but not limited to, stocks, bonds, treasury bills and shares of a Fund. In addition, advertisements, sales literature, communications to shareholders or other materials may include a discussion of certain attributes or benefits to be derived by an investment in a Fund and/or other mutual funds, shareholder profiles and hypothetical investor scenarios, timely information on financial management, tax and retirement planning and investment alternative to certificates of deposit and other financial instruments. Such sales literature, communications to shareholders or other materials may include symbols, headlines or other material which highlight or summarize the information discussed in more detail therein. Materials may include lists of representative clients of Northern Trust and NTQA. Materials may refer to the CUSIP numbers of the Funds and may illustrate how to find the listings of the Funds in newspapers and periodicals. Materials may also include discussions of other Funds, products, and services. The Funds may quote various measures of volatility and benchmark correlation in advertising. In addition, the Funds may compare these measures to those of other funds. Measures of volatility seek to compare the historical share price fluctuations or total returns to those of a benchmark. Measures of benchmark correlation indicate how valid a comparative benchmark may be. Measures of volatility and correlation may be calculated using averages of historical data. The Funds may advertise examples of the effects of periodic investment plans, including the principle of dollar cost averaging. In such a program, an investor invests a fixed dollar amount in a Fund at periodic intervals, thereby purchasing fewer shares when prices are high and more shares when prices are low. While such a strategy does not assure a profit or guard against loss in a declining market, the investor's average cost per share can be lower than if fixed numbers of shares are purchased at the same intervals. In evaluating such a plan, investors should consider their ability to continue purchasing shares during periods of low price levels. A Fund may advertise its current interest rate sensitivity, duration, weighted average maturity or similar maturity characteristics. Advertisements and sales materials relating to a Fund may include information regarding the background and experience of its portfolio managers. NET ASSET VALUE As stated in the Prospectus, each Money Market Fund seeks to maintain a net asset value of $1.00 per share and, in this connection, values its instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This method values a security at its cost on the date of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during 95 214 which value, as determined by amortized cost, is higher or lower than the price a Fund would receive if the Fund sold the instrument. During such periods the yield to investors in the Fund may differ somewhat from that obtained in a similar entity which uses available indications as to market value to value its portfolio instruments. For example, if the use of amortized cost resulted in a lower (higher) aggregate Fund value on a particular day, a prospective investor in the Fund would be able to obtain a somewhat higher (lower) yield and ownership interest than would result from investment in such similar entity and existing investors would receive less (more) investment income and ownership interest. However, Northern Funds expects that the procedures and limitations referred to in the following paragraphs of this section will tend to minimize the differences referred to above. Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the Funds' operations and delegating special responsibilities involving portfolio management to Northern Trust, has established procedures that are intended, taking into account current market conditions and the Funds' investment objectives, to stabilize the net asset value of each Money Market Fund, as computed for the purposes of purchases and redemptions, at $1.00 per share. The Trustees' procedures include periodic monitoring of the difference (the "Market Value Difference") between the amortized cost value per share and the net asset value per share based upon available indications of market value. Available indications of market value consist of actual market quotations or appropriate substitutes which reflect current market conditions and include (a) quotations or estimates of market value for individual portfolio instruments and/or (b) values for individual portfolio instruments derived from market quotations relating to varying maturities of a class of money market instruments. In the event the Market Value Difference exceeds 1/2 of 1%, the Trustees' procedures provide that the Trustees will take such steps as they consider appropriate (e.g., selling portfolio instruments to shorten average portfolio maturity or to realize capital gains or losses, reducing or suspending shareholder income accruals, redeeming shares in kind, or utilizing a net asset value per share based upon available indications of market value which under such circumstances would vary from $1.00) to eliminate or reduce to the extent reasonably practicable any material dilution or other unfair results to investors or existing shareholders which might arise from Market Value Differences. In particular, if losses were sustained by a Fund, the number of outstanding shares might be reduced in order to maintain a net asset value per share of $1.00. Such reduction would be effected by having each shareholder proportionately contribute to the Fund's capital the necessary shares to restore such net asset value per share. Each shareholder will be deemed to have agreed to such contribution in these circumstances by investing in the Fund. Rule 2a-7 requires that each Money Market Fund limit its investments to instruments which Northern Trust determines to present minimal credit risks and which are "Eligible Securities" as defined by the SEC and described in the Prospectus. The Rule also requires that each Money Market Fund maintain a dollar-weighted average portfolio maturity (not more than 90 days) appropriate to its policy of maintaining a stable net asset value per share and precludes the purchase of any instrument deemed under the Rule to have a remaining maturity of more than 397 days. Should the disposition of a portfolio security result in a dollar-weighted average portfolio maturity of more than 90 days, the Rule requires a Money Market Fund to invest its available cash in such a manner as to reduce such maturity to the prescribed limit as soon as reasonably practicable. 96 215 Securities held by the other Funds that are listed on a recognized U.S. or foreign securities exchange are valued at the last quoted sales price on the securities exchange on which the securities are primarily traded, except that securities listed on an exchange in the United Kingdom are valued at the average of the closing bid and ask prices. If securities listed on a U.S. exchange are not traded on a valuation date, they will be valued at the last quoted bid price. If securities traded on a foreign securities exchange are not traded on a valuation date, they will be valued at the most recent quoted sales price. Securities that are traded in the U.S. over-the-counter markets, absent a last quoted sales price, are valued at the last quoted bid price. Securities which are traded in the foreign over-the-counter markets are valued at the last sales price, except that such securities traded in the United Kingdom are valued at the average of the closing bid and ask prices. Any securities for which no current quotations are readily available are valued at fair value as determined in good faith by Northern Trust under the supervision of the Board of Trustees. Temporary short-term investments are valued at amortized cost which Northern Trust has determined, pursuant to Board authorization, approximates market value. Securities may be valued on the basis of prices provided by independent pricing services when those prices are believed to reflect the fair market value of the securities. Northern Trust is not required to calculate the net asset value of a Fund on days during which no shares are tendered to a Fund for redemption and no orders to purchase or sell shares are received by a Fund, or on days on which there is an insufficient degree of trading in the Fund's portfolio securities for changes in the value of such securities to affect materially the net asset value per share. TAXES The following summarizes certain additional tax considerations generally affecting the Funds and their shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussions here and in the Prospectus are not intended as a substitute for careful tax planning. Potential investors should consult their tax advisers with specific reference to their own tax situations. The discussions of federal and state tax consequences in the Prospectus and this Additional Statement are based on the Code and the laws and regulations issued thereunder as in effect on the date of this Additional Statement. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. FEDERAL - GENERAL INFORMATION Each Fund intends to qualify as a regulated investment company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company, each Fund is generally exempt from federal income tax on its net investment income and realized capital gains which it distributes to shareholders, provided that it distributes an amount equal to at least the sum of 90% of its tax- 97 216 exempt income and 90% of its investment company taxable income (net investment income and the excess of net short-term capital gain over net long-term capital loss), if any, for the year (the "Distribution Requirement") and satisfies certain other requirements of the Code that are described below. In addition to satisfaction of the Distribution Requirement, each Fund must derive with respect to a taxable year at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans and gains from the sale or other disposition of stock or securities or foreign currencies, or from other income derived with respect to its business of investing in such stock, securities, or currencies (the "Income Requirement"). In addition to the foregoing requirements, at the close of each quarter of its taxable year, at least 50% of the value of each Fund's assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to which a Fund has not invested more than 5% of the value of its total assets in securities of such issuer and as to which a Fund does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of each Fund's total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which such Fund controls and which are engaged in the same or similar trades or businesses. Each Fund intends to distribute to shareholders any excess of net long-term capital gain over net short-term capital loss ("net capital gain") for each taxable year. Such gain is distributed as a capital gain dividend and is taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held the shares, whether such gain was recognized by the Fund prior to the date on which a shareholder acquired shares of the Fund and whether the distribution was paid in cash or reinvested in shares. In addition, investors should be aware that any loss realized upon the sale, exchange or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of any capital gain dividends that have been paid with respect to such shares. Dividends and distributions from each Fund will generally be taxable to you in the tax year in which they are paid, with one exception. Dividends and distributions declared by a Fund in October, November or December and paid in January are taxed as though they were paid by December 31. In the case of corporate shareholders, distributions of a Fund for any taxable year generally qualify for the dividends received deduction to the extent of the gross amount of "qualifying dividends" from domestic corporations received by the Fund for the year. A dividend usually will be treated as a "qualifying dividend" if it has been received from a domestic corporation. A portion of the dividends paid by the Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund, MarketPower Fund, Mid Cap Growth, Small Cap Index Fund, Small Cap Fund, Small Cap Growth Fund and Technology Fund, may constitute "qualifying dividends." The other Funds, however, are not expected to pay qualifying dividends. 98 217 If for any taxable year any Fund does not qualify as a regulated investment company, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders. In such event, all distributions (whether or not derived from exempt-interest income) would be taxable as ordinary income to the extent of such Fund's current and accumulated earnings and profits and would be eligible for the dividends received deduction in the case of corporate shareholders. The Code imposes a non-deductible 4% excise tax on regulated investment companies that fail to currently distribute an amount equal to specified percentages of their ordinary taxable income and capital gain net income (excess of capital gains over capital losses). Each Fund intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income each calendar year to avoid liability for this excise tax. Although each Fund expects to qualify as a "regulated investment company" and to be relieved of all or substantially all federal income taxes, depending upon the extent of its activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located or in which it is otherwise deemed to be conducting business, each Fund may be subject to the tax laws of such states or localities. FEDERAL - TAX-EXEMPT INFORMATION As described in the Prospectus, the Municipal Money Market, California Municipal Money Market, Tax-Exempt Money Market, Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt and High Yield Municipal Funds are designed to provide investors with federally tax-exempt interest income. The Funds are not intended to constitute a balanced investment program and are not designed for investors seeking capital appreciation or maximum tax-exempt income irrespective of fluctuations in principal. Shares of the Funds would not be suitable for tax-exempt institutions or for retirement plans qualified under Section 401 of the Code, H.R. 10 plans and individual retirement accounts because such plans and accounts are generally tax-exempt and, therefore, would not gain any additional benefit from the Funds' dividends being tax-exempt. In addition, the Funds may not be an appropriate investment for persons or entities that are "substantial users" of facilities financed by private activity bonds or "related persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations to include a non-exempt person which regularly uses a part of such facilities in its trade or business and whose gross revenues derived with respect to the facilities financed by the issuance of bonds are more than 5% of the total revenues derived by all users of such facilities, which occupies more than 5% of the usable area of such facilities or for which such facilities or a part thereof were specifically constructed, reconstructed or acquired. "Related persons" include certain related natural persons, affiliated corporations, partnerships and their partners and S corporations and their shareholders. In order for the Municipal Money Market, California Municipal Money Market, Tax-Exempt Money Market, Intermediate Tax-Exempt, California Intermediate Tax-Exempt, Florida Intermediate Tax-Exempt, Tax-Exempt, Arizona Tax-Exempt, California Tax-Exempt or High Yield Municipal Funds to pay federal exempt-interest dividends with respect to any taxable year, at the close of each taxable quarter at least 50% of the aggregate value of the Fund must consist 99 218 of tax-exempt obligations. An exempt-interest dividend is any dividend or part thereof (other than a capital gain dividend) paid by a Fund and designated as an exempt-interest dividend in a written notice mailed to shareholders not later than 60 days after the close of the Fund's taxable year. However, the aggregate amount of dividends so designated by a Fund cannot exceed the excess of the amount of interest exempt from tax under Section 103 of the Code received by the Fund during the taxable year over any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid by a Fund with respect to any taxable year which qualifies as federal exempt-interest dividends will be the same for all shareholders receiving dividends from the Fund with respect to such year. Interest on indebtedness incurred by a shareholder to purchase or carry shares of a tax exempt Fund generally is not deductible for federal income tax purposes to the extent attributable to exempt-interest-dividends. If a shareholder holds Fund shares for six months or less, any loss on the sale or exchange of those shares will be disallowed to the extent of the amount of exempt-interest dividends earned with respect to the shares. The Treasury Department, however, is authorized to issue regulations reducing the six-month holding requirement to a period of not less than the greater of 31 days or the period between regular distributions for investment companies that regularly distribute at least 90% of its net tax-exempt interest. No such regulations had been issued as of the date of this Additional Statement. Corporate taxpayers will be required to take into account all exempt-interest dividends from the Tax-Exempt Funds and the Municipal Funds in determining certain adjustments for alternative minimum tax purposes. The Funds will determine annually the percentages of their respective net investment income which are exempt from tax, which constitute an item of tax preference for purposes of the federal alternative minimum tax, and which are fully taxable, and will apply these percentages uniformly to all dividends declared from net investment income during that year. These percentages may differ significantly from the actual percentages for any particular day. Shareholders will be advised annually as to the federal income tax consequences of distributions made by the Funds. 100 219 TAXATION OF CERTAIN FINANCIAL INSTRUMENTS The tax principles applicable to transactions in financial instruments and futures contacts and options that may be engaged in by a Fund, and investments in passive foreign investment companies ("PFICs"), are complex and, in some cases, uncertain. Such transactions and investments may cause a Fund to recognize taxable income prior to the receipt of cash, thereby requiring the Fund to liquidate other positions, or to borrow money, so as to make sufficient distributions to shareholders to avoid corporate-level tax. Moreover, some or all of the taxable income recognized may be ordinary income or short-term capital gain, so that the distributions may be taxable to shareholders as ordinary income. In addition, in the case of any shares of a PFIC in which a Fund invests, the Fund may be liable for corporate-level tax on any ultimate gain or distributions on the shares if the Fund fails to make an election to recognize income annually during the period of its ownership of the shares. SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA FUNDS Assuming each of the California Funds qualifies as a regulated investment company, it will be relieved of liability for California state franchise and corporate income tax to the extent its earnings are distributed to its shareholders. Each of the California Funds may be taxed on its undistributed taxable income. If for any year one of the California Funds does not qualify as a regulated investment company, all of that Fund's taxable income (including interest income on California municipal instruments for franchise tax purposes only) may be subject to California state franchise or income tax at regular corporate rates. If, at the close of each quarter of its taxable year, at least 50% of the value of the total assets of a regulated investment company, or series thereof, consists of obligations the interest on which, if held by an individual, is exempt from taxation by California ("California municipal instruments") then a regulated investment company, or series thereof, will be qualified to pay dividends exempt from California state personal income tax to its non-corporate shareholders (hereinafter referred to as "California exempt-interest dividends"). "Series" of a regulated investment company is defined as a segregated portfolio of assets, the beneficial interest in which is defined as a series of stock of the company. Each of the California Funds intends to qualify under the above requirements so that it can pay California exempt-interest dividends. If one of the California Funds fails to so qualify, no part of that Fund's dividends to shareholders will be exempt from the California state personal income tax. Each of the California Funds may reject purchase orders for shares if it appears desirable to avoid failing to so qualify. Within 60 days after the close of its taxable year, each of the California Funds will notify each shareholder of the portion of the dividends paid by the Fund to the shareholder with respect to such taxable year which is exempt from California state personal income tax. The total amount of California exempt-interest dividends paid by the Fund with respect to any taxable year cannot exceed the excess of the amount of interest received by the Fund for such year on California municipal instruments over any amounts that, if the Fund were treated as an individual, would be considered expenses related to tax-exempt income or amortizable bond 101 220 premium and would thus not be deductible under federal income or California state personal income tax law. The percentage of total dividends paid by the Fund with respect to any taxable year which qualifies as California exempt-interest dividends will be the same for all shareholders receiving dividends from the Fund with respect to such year. In cases where shareholders are "substantial users" or "related persons" with respect to California municipal instruments held by one of the California Funds, such shareholders should consult their tax advisers to determine whether California exempt-interest dividends paid by the Fund with respect to such obligations retain California state personal income tax exclusion. In this connection, rules similar to those regarding the possible unavailability of federal exempt-interest dividend treatment to "substantial users" are applicable for California state tax purposes. See "Federal - Tax-Exempt Information" above. To the extent any dividends paid to shareholders are derived from the excess of net long-term capital gains over net short-term capital losses, such dividends will not constitute California exempt-interest dividends and will generally be taxed as long-term capital gains under rules similar to those regarding the treatment of capital gain dividends for federal income tax purposes. See "Federal - General Information" above. Moreover, interest on indebtedness incurred by a shareholder to purchase or carry shares of one of the California Funds is not deductible for California state personal income tax purposes if that Fund distributes California exempt-interest dividends during the shareholder's taxable year. In addition, any loss realized by a shareholder of the California Funds upon the sale of shares held for six months or less may be disallowed to the extent of any exempt-interest dividends received with respect to such shares. Moreover, any loss realized upon the redemption of shares within six months from the date of purchase of such shares and following receipt of a long-term capital gains distribution will be treated as long-term capital loss to the extent of such long-term capital gains distribution. Finally, any loss realized upon the redemption of shares within thirty days before or after the acquisition of other shares of the same Fund may be disallowed under the "wash sale" rules. California may tax income derived from repurchase agreements involving federal obligations because such income represents a premium paid at the time the government obligations are repurchased rather than interest paid by the issuer of the obligations. The foregoing is only a summary of some of the important California state personal income tax considerations generally affecting the California Funds and their shareholders. No attempt is made to present a detailed explanation of the California state personal income tax treatment of the California Funds or their shareholders, and this discussion is not intended as a substitute for careful planning. Further, it should be noted that the portion of a Fund's dividends constituting California exempt-interest dividends is excludable from income for California state personal income tax purposes only. Any dividends paid to shareholders subject to California state franchise tax or California state corporate income tax may therefore be taxed as ordinary dividends to such purchasers notwithstanding that all or a portion of such dividends is exempt from California state personal income tax. Accordingly, potential investors in one of the California Funds, including, in particular, corporate investors which may be subject to either 102 221 California franchise tax or California corporate income tax, should consult their tax advisers with respect to the application of such taxes to the receipt of Fund dividends and as to their own California state tax situation, in general. SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE FLORIDA INTERMEDIATE TAX-EXEMPT FUND The State of Florida does not currently impose an income tax on individuals. Thus, individual shareholders of the Florida Intermediate Tax-Exempt Fund will not be subject to any Florida income tax on distributions received from the Fund. However, Florida does currently impose an income tax on certain corporations. Consequently, distributions may be taxable to corporate shareholders. The State of Florida currently imposes an "intangibles tax" at the annual rate of 2 mills or 0.20% on certain securities and other intangible assets owned by Florida residents. Every natural person is entitled to an exemption of the first $20,000 of the value of taxable property against the first mill of the annual tax. Spouses filing jointly are entitled to a $40,000 exemption. With respect to the second mill, natural persons are entitled to an exemption of the first $100,000 of otherwise taxable property (joint filers are entitled to a $200,000 exemption). Taxpayers are limited to only one exemption under each provision. Notes, bonds and other obligations issued by the State of Florida or its municipalities, counties, and other taxing districts, or by the United States Government, its agencies and certain U.S. territories and possessions (such as Guam, Puerto Rico and the Virgin Islands) as well as cash are exempt from this intangibles tax. If on December 31 of any year at least 90 percent of the net asset value of the portfolio of the Florida Intermediate Tax-Exempt Fund consists solely of such exempt assets, then the Fund's shares will be exempt from the Florida intangibles tax payable in the following year. In order to take advantage of the exemption from the intangibles tax in any year, it may be necessary for the Fund to sell some of its non-exempt assets held in its portfolio during the year and reinvest the proceeds in exempt assets including cash prior to December 31. Transaction costs involved in restructuring the portfolio in this fashion would likely reduce the Fund's investment return and might exceed any increased investment return the Fund achieved by investing in non-exempt assets during the year. Outside the State of Florida, income distributions may be taxable to shareholders under state or local law as dividend income even though all or a portion of such distributions may be derived from interest on tax-exempt obligations or U.S. Government obligations which, if realized directly, would be exempt from such income taxes. Shareholders are advised to consult their tax advisers concerning the application of state and local taxes. SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE ARIZONA TAX-EXEMPT FUND Individuals, trusts and estates who are subject to Arizona income tax will not be subject to such tax on dividends paid by the Arizona Tax-Exempt Fund, to the extent that such dividends qualify as exempt-interest dividends of a regulated investment company under Section 852(b)(5) of the Code and are attributable to either (i) obligations of the State of Arizona or its political subdivisions thereof or (ii) obligations issued by the governments of Guam, Puerto Rico, or the 103 222 Virgin Islands. In addition, dividends paid by the Arizona Tax-Exempt Fund which are attributable to interest payments on direct obligations of the United States government will not be subject to Arizona income tax to the extent the Arizona Tax-Exempt Fund qualifies as a regulated investment company under Subchapter M of the Code. Other distributions from the Arizona Tax-Exempt Fund, however, such as distributions of short-term or long-term capital gains, will generally not be exempt from Arizona income tax. There are no municipal income taxes in Arizona. Moreover, because shares of the Arizona Tax-Exempt Fund are intangibles, they are not subject to Arizona property tax. Shareholders of the Arizona Tax-Exempt Fund should consult their tax advisors about other state and local tax consequences of their investment in the Arizona Tax-Exempt Fund. DESCRIPTION OF SHARES The Trust Agreement permits Northern Funds' Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest of one or more separate series representing interests in different investment portfolios. Northern Funds may hereafter create series in addition to Northern Funds' existing series, which represent interests in thirty portfolios, each of which is discussed in this Additional Statement. Under the terms of the Trust Agreement, each share of each Fund has a par value of $.0001, represents a proportionate interest in the particular Fund with each other share of its class and is entitled to such dividends and distributions out of the income belonging to the Fund as are declared by the Trustees. Upon any liquidation of a Fund, shareholders of each class of a Fund are entitled to share pro rata in the net assets belonging to that class available for distribution. Shares do not have any preemptive or conversion rights. The right of redemption is described under "Redeeming and Exchanging Shares" in the Prospectus. Pursuant to the terms of the 1940 Act, the right of a shareholder to redeem shares and the date of payment by a Fund may be suspended for more than seven days (a) for any period during which the New York Stock Exchange is closed, other than the customary weekends or holidays, or trading in the markets the Fund normally utilizes is closed or is restricted as determined by the SEC, (b) during any emergency, as determined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of instruments owned by it or fairly to determine the value of its net assets, or (c) for such other period as the SEC may by order permit for the protection of the shareholders of the Fund. Northern Funds may also suspend or postpone the recordation of the transfer of its shares upon the occurrence of any of the foregoing conditions. In addition, Northern Funds reserves the right to adopt, by action of the Trustees, a policy pursuant to which it may, without shareholder approval, redeem upon not less than 30 days' notice all of a Fund's shares if such shares have an aggregate value below a designated amount and if the Trustees determine that it is not practical, efficient or advisable to continue the operation of such Fund and that any applicable requirements of the 1940 Act have been met. Shares when issued as described in the Prospectus are validly issued, fully paid and nonassessable, except as stated below. In the interests of economy and convenience, certificates representing shares of the Funds are not issued. The proceeds received by each Fund for each issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights 104 223 of creditors, will be specifically allocated to and constitute the underlying assets of that Fund. The underlying assets of each Fund will be segregated on the books of account, and will be charged with the liabilities in respect to that Fund and with a share of the general liabilities of Northern Funds. Expenses with respect to the portfolios of Northern Funds are normally allocated in proportion to the net asset value of the respective portfolios except where allocations of direct expenses can otherwise be fairly made. Shareholders are entitled to one vote for each full share held and proportionate fractional votes for fractional shares held. Each Fund entitled to vote on a matter will vote in the aggregate and not by Fund, except as required by law or when the matter to be voted on affects only the interests of shareholders of a particular Fund. Rule 18f-2 under the 1940 Act provides that any matter required by the provisions of the 1940 Act or applicable state law, or otherwise, to be submitted to the holders of the outstanding voting securities of an investment company such as Northern Funds shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each investment portfolio affected by such matter. Rule 18f-2 further provides that an investment portfolio shall be deemed to be affected by a matter unless the interests of each investment portfolio in the matter are substantially identical or the matter does not affect any interest of the investment portfolio. Under the Rule, the approval of an investment advisory agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a fundamental investment policy would be effectively acted upon with respect to an investment portfolio only if approved by a majority of the outstanding shares of such investment portfolio. However, the Rule also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees are exempt from the separate voting requirements stated above. The term "majority of the outstanding shares" of either Northern Funds or a particular Fund or investment portfolio means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment policy, the vote of the lesser of (i) 67% or more of the shares of Northern Funds or such Fund or portfolio present at a meeting, if the holders of more than 50% of the outstanding shares of Northern Funds or such Fund or portfolio are present or represented by proxy, or (ii) more than 50% of the outstanding shares of Northern Funds or such Fund or portfolio. As of September 30, 1999 Northern and its affiliates held of record substantially all of the outstanding shares of the Non-Money Market Funds as agent, custodian, trustee or investment adviser on behalf of their customers. At such date, The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois 60675, and its affiliate banks held as beneficial owner five percent or more of the outstanding shares of the Non-Money Market Funds because they possessed sole or shared voting or investment power with respect to such shares. As of May 19, 1999 the names and share ownership of the entities or individuals which held of record or beneficially more than 5% of the outstanding shares of any Fund were as follows: Money Market Fund: Northern Trust Bank - Miami on behalf of its customers, 9.6%, Short Term Investment Fund, 18.0%, Northern Trust Bank - M&I Sweep Account, 5.5%; U.S. Government Money Market Fund: Northern Trust Bank - Miami on behalf of its customers, 9.5%, Northern 105 224 Trust Bank - M&I Sweep Account, 12.5%; Municipal Money Market Fund: Northern Trust Bank - Miami on behalf of its customers, 25.9%; U.S. Government Select Money Market Fund: Northern Trust Bank - Miami on behalf of its customers, 29.9%; Florida Intermediate Tax-Exempt Fund: Abraham General Partnership, 9.4%, Donaldson, Lufkin & Jenrette, 9.4% and John C. Schumann, Jr., 7.2%; California Municipal Money Market Fund: Northern Trust Bank - M&I Sweep Account, 9.6%; Stock Index Fund: CCT Comb Funds, 8.5%; Select Equity Fund: Donaldson, Lufkin & Jenrette, 11.6%; International Select Equity Fund: James L. Knight 1969 Trust, 5.9%; California Tax-Exempt Fund: Julius Epstein Residuary T/U/W, 5.5%; Small Cap Index Fund: Dupont JB, 5.8% and CCT Comb Funds, 10.8%; High Yield Fixed Income Fund: The Northern Trust Company Pension Plan, 5.0% and William B. Graham, 7.3%; High Yield Municipal Fund: William D. Cox, 5.8%. The address of all of the above persons is c/o The Northern Trust Bank, 50 S. LaSalle Street, Chicago, Illinois 60675. As of September 30, 1999, Northern Trust possessed sole or shared voting or investment power for its customer accounts with respect to more than 50% of the outstanding shares of Northern Funds. As of the same date, Northern Fund's Trustees and officers as a group owned less than 1% of the outstanding shares of each Fund. As a general matter, Northern Funds does not hold annual or other meetings of shareholders. This is because the Trust Agreement provides for shareholder voting only for the election or removal of one or more Trustees, if a meeting is called for that purpose, and for certain other designated matters. Each Trustee serves until the next meeting of shareholders, if any, called for the purpose of considering the election or reelection of such Trustee or of a successor to such Trustee, and until the election and qualification of his successor, if any, elected at such meeting, or until such Trustee sooner dies, resigns, retires or is removed by the shareholders or two-thirds of the Trustees. In addition, the Trustees have adopted a by-law (changeable without shareholder approval) that provides that a Trustee will cease to serve as a Trustee effective as of the last calendar day in the semi-annual fiscal period of Northern Funds in which the earlier of the following events occurs: (a) the date such Trustee attains the age of seventy-three years; and (b) the twelfth anniversary of the date of such Trustee's written acceptance to serve as a Trustee. Northern Funds does not presently intend to hold annual meetings of shareholders except as required by the 1940 Act or other applicable law. Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of shareholders to vote upon the removal of any Trustee when so requested in writing by the record holders of 10% or more of the outstanding shares. To the extent required by law, Northern Funds will assist in shareholder communications in connection with the meeting. Under Massachusetts law, there is a possibility that shareholders of a business trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. The Trust Agreement contains an express disclaimer of shareholder (as well as Trustee and officer) liability for acts or obligations of Northern Funds and requires that notice of such disclaimer be given in each contract, undertaking or instrument entered into or executed by Northern Funds or the Trustees. The Trust Agreement provides for indemnification out of Trust 106 225 property of any shareholder charged or held personally liable for the obligations or liabilities of Northern Funds solely by reason of being or having been a shareholder of Northern Funds and not because of such shareholder's acts or omissions or for some other reason. The Trust Agreement also provides that Northern Funds shall, upon proper and timely request, assume the defense of any charge made against any shareholder as such for any obligation or liability of Northern Funds and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which Northern Funds itself would be unable to meet its obligations. The Trust Agreement provides that each Trustee of Northern Funds will be liable for his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee ("disabling conduct"), and for nothing else, and will not be liable for errors of judgment or mistakes of fact or law. The Trust Agreement provides further that Northern Funds will indemnify Trustees and officers of Northern Funds against liabilities and expenses incurred in connection with litigation and other proceedings in which they may be involved (or with which they may be threatened) by reason of their positions with Northern Funds, except that no Trustee or officer will be indemnified against any liability to Northern Funds or its shareholders to which he would otherwise be subject by reason of disabling conduct. The Trust Agreement provides that each shareholder, by virtue of becoming such, will be held to have expressly assented and agreed to the terms of the Trust Agreement and to have become a party thereto. FINANCIAL STATEMENTS The audited financial statements and related report of the Trust's independent auditors, contained in the annual report to shareholders for the fiscal year ended March 31, 1999 (the "Annual Report") are hereby incorporated herein by reference. No other part of the Annual Report is incorporated by reference herein. Copies of the Annual Report may be obtained, without charge, from the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by calling 1-800-595-9111. OTHER INFORMATION The Prospectus and this Additional Statement do not contain all the information included in the Registration Statement filed with the SEC under the 1933 Act with respect to the securities offered by Northern Funds' Prospectus. Certain portions of the Registration Statement have been omitted from the Prospectus and this Additional Statement pursuant to the rules and regulations of the SEC. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the SEC in Washington, D.C. Statements contained in the Prospectus or in this Additional Statement as to the contents of any contract or other documents referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the 107 226 Registration Statement of which the Prospectus and this Additional Statement form a part, each such statement being qualified in all respects by such reference. 108 227 APPENDIX A COMMERCIAL PAPER RATINGS A Standard & Poor's ("S&P") commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The following summarizes the rating categories used by Standard and Poor's for commercial paper: "A-1" - Obligations are rated in the highest category indicating that the obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. "A-2" - Obligations are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. "A-3" - Obligations exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. "B" - Obligations are regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. "C" - Obligations are currently vulnerable to nonpayment and are dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. "D" - Obligations are in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The "D" rating will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually senior debt obligations not having an original maturity in excess of one year, unless explicitly noted. The following summarizes the rating categories used by Moody's for commercial paper: "Prime-1" - Issuers (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established A-1 228 industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. "Prime-2" - Issuers (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. "Prime-3" - Issuers (or supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. "Not Prime" - Issuers do not fall within any of the Prime rating categories. The three rating categories of Duff & Phelps for investment grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating category. The following summarizes the rating categories used by Duff & Phelps for commercial paper: "D-1+" - Debt possesses the highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. "D-1" - Debt possesses very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. "D-1-" - Debt possesses high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. "D-2" - Debt possesses good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. "D-3" - Debt possesses satisfactory liquidity and other protection factors qualify issues as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. "D-4" - Debt possesses speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. A-2 229 "D-5" - Issuer has failed to meet scheduled principal and/or interest payments. Fitch IBCA short-term ratings apply to debt obligations that have time horizons of less than 12 months for most obligations, or up to three years for U.S. public finance securities. The following summarizes the rating categories used by Fitch IBCA for short-term obligations: "F1" - Securities possess the highest credit quality. This designation indicates the strongest capacity for timely payment of financial commitments and may have an added "+" to denote any exceptionally strong credit feature. "F2" - Securities possess good credit quality. This designation indicates a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. "F3" - Securities possess fair credit quality. This designation indicates that the capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. "B" - Securities possess speculative credit quality. This designation indicates minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions. "C" - Securities possess high default risk. This designation indicates that default is a real possibility and that the capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment. "D" - Securities are in actual or imminent payment default. Thomson BankWatch short-term ratings assess the likelihood of an untimely payment of principal and interest of debt instruments with original maturities of one year or less. The following summarizes the ratings used by Thomson BankWatch: "TBW-1" - This designation represents Thomson BankWatch's highest category and indicates a very high likelihood that principal and interest will be paid on a timely basis. "TBW-2" - This designation represents Thomson BankWatch's second-highest category and indicates that while the degree of safety regarding timely repayment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-1." "TBW-3" - This designation represents Thomson BankWatch's lowest investment-grade category and indicates that while the obligation is more susceptible to adverse developments (both internal and external) than those with higher ratings, the capacity to service principal and interest in a timely fashion is considered adequate. A-3 230 "TBW-4" - This designation represents Thomson BankWatch's lowest rating category and indicates that the obligation is regarded as non-investment grade and therefore speculative. CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS The following summarizes the ratings used by Standard & Poor's for corporate and municipal debt: "AAA" - An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. "AA" - An obligation rated "AA" differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. "A" - An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. "BBB" - An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. "BB" - An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. "B" - An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. "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 A-4 231 conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. "CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment. "C" - The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. "D" - An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. "r" - This symbol is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include: obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk - such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters. The following summarizes the ratings used by Moody's for corporate and municipal long-term debt: "Aaa" - Bonds are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. "Aa" - Bonds are judged to be of high quality by all standards. Together with the "Aaa" group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in "Aaa" securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the "Aaa" securities. "A" - Bonds possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. A-5 232 "Baa" - Bonds are considered as medium-grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. "Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these ratings provide questionable protection of interest and principal ("Ba" indicates speculative elements; "B" indicates a general lack of characteristics of desirable investment; "Caa" are of poor standing; "Ca" represents obligations which are speculative in a high degree; and "C" represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default. Con. (---) - Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operating experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from "Aa" through "Caa". The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of its generic rating category. The following summarizes the long-term debt ratings used by Duff & Phelps for corporate and municipal long-term debt: "AAA" - Debt is considered to be of the highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. "AA" - Debt is considered to be of high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. "A" - Debt possesses protection factors which are average but adequate. However, risk factors are more variable in periods of greater economic stress. "BBB" - Debt possesses below-average protection factors but such protection factors are still considered sufficient for prudent investment. Considerable variability in risk is present during economic cycles. "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 A-6 233 rated "DD" is a defaulted debt obligation, and the rating "DP" represents preferred stock with dividend arrearages. To provide more detailed indications of credit quality, the "AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major categories. The following summarizes the ratings used by Fitch IBCA for corporate and municipal bonds: "AAA" - Bonds considered to be investment grade and of the highest credit quality. These ratings denote the lowest expectation of credit risk and are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. "AA" - Bonds considered to be investment grade and of very high credit quality. These ratings denote a very low expectation of credit risk and indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. "A" - Bonds considered to be investment grade and of high credit quality. These ratings denote a low expectation of credit risk and indicate strong capacity for timely payment of financial commitments. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. "BBB" - Bonds considered to be investment grade and of good credit quality. These ratings denote that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. "BB" - Bonds considered to be speculative. These ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic changes over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. "B" - Bonds are considered highly speculative. These ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. "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. A-7 234 "DDD," "DD" and "D" - Bonds are in default. Securities are not meeting obligations and are extremely speculative. "DDD" designates the highest potential for recovery of amounts outstanding on any securities involved and "D" represents the lowest potential for recovery. To provide more detailed indications of credit quality, the Fitch IBCA ratings from and including "AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major rating categories. Thomson BankWatch assesses the likelihood of an untimely repayment of principal or interest over the term to maturity of long term debt and preferred stock which are issued by United States commercial banks, thrifts and non-bank banks; non-United States banks; and broker-dealers. The following summarizes the rating categories used by Thomson BankWatch for long-term debt ratings: "AAA" - This designation indicates that the ability to repay principal and interest on a timely basis is extremely high. "AA" - This designation indicates a very strong ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. "A" - This designation indicates that the ability to repay principal and interest is strong. Issues rated "A" could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. "BBB" - This designation represents the lowest investment-grade category and indicates an acceptable capacity to repay principal and interest. Issues rated "BBB" are more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. "BB," "B," "CCC" and "CC" - These designations are assigned by Thomson BankWatch to non-investment grade long-term debt. Such issues are regarded as having speculative characteristics regarding the likelihood of timely payment of principal and interest. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. "D" - This designation indicates that the long-term debt is in default. PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a plus or minus sign designation which indicates where within the respective category the issue is placed. A-8 235 MUNICIPAL NOTE RATINGS A Standard and Poor's rating reflects the liquidity concerns and market access risks unique to notes due in three years or less. The following summarizes the ratings used by Standard & Poor's Ratings Group for municipal notes: "SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay principal and interest. Those issues determined to possess very strong characteristics are given a plus (+) designation. "SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. "SP-3" - The issuers of these municipal notes exhibit speculative capacity to pay principal and interest. Moody's ratings for state and municipal notes and other short-term loans are designated Moody's Investment Grade ("MIG") and variable rate demand obligations are designated Variable Moody's Investment Grade ("VMIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. The following summarizes the ratings by Moody's Investors Service, Inc. for short-term notes: "MIG-1"/"VMIG-1" - This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. "MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of protection that are ample although not so large as in the preceding group. "MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all security elements accounted for but lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. "MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. "SG" - This designation denotes speculative quality. Debt instruments in this category lack of margins of protection. Fitch IBCA and Duff & Phelps use the short-term ratings described under Commercial Paper Ratings for municipal notes. A-9 236 APPENDIX B As stated in the Prospectus, the Funds (other than the Money Market Funds) may enter into certain futures transactions. Such transactions are described in this Appendix. I. Interest Rate Futures Contracts Use of Interest Rate Futures Contracts. Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased and sold with payment for the full purchase price of the bond being made in cash, generally within five business days after the trade. In the futures market, only a contract is made to purchase or sell a bond in the future for a set price on a certain date. Historically, the prices for bonds established in the futures markets have tended to move generally in the aggregate in concert with the cash market prices and have maintained fairly predictable relationships. Accordingly, a Fund may use interest rate futures contracts as a defense, or hedge, against anticipated interest rate changes. As described below, this would include the use of futures contract sales to protect against expected increases in interest rates and futures contract purchases to offset the impact of interest rate declines. A Fund presently could accomplish a similar result to that which it hopes to achieve through the use of futures contracts by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase, or conversely, selling short-term bonds and investing in long-term bonds when interest rates are expected to decline. However, because of the liquidity that is often available in the futures market, the protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest being earned by a Fund, by using futures contracts. Interest rate future contracts can also be used by a Fund for non-hedging (speculative) purposes to increase total return. Description of Interest Rate Futures Contracts. An interest rate futures contract sale would create an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchase would create an obligation by a Fund, as purchaser, to take delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Although interest rate futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery of securities. Closing out a futures contract sale is effected by the Fund's entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price of the sale exceeds the price of the offsetting purchase, the Fund is immediately paid the difference and thus B-1 237 realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the Fund entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. Interest rate futures contracts are traded in an auction environment on the floors of several exchanges -- principally, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. A public market now exists in futures contracts covering various financial instruments including long-term U.S. Treasury Bonds and Notes; Government National Mortgage Association (GNMA) modified pass-through mortgage backed securities; three-month U.S. Treasury Bills; and ninety-day commercial paper. The Funds may trade in any interest rate futures contracts for which there exists a public market, including, without limitation, the foregoing instruments. II. Index Futures Contracts General. A stock or bond index assigns relative values to the stocks or bonds included in the index, which fluctuates with changes in the market values of the stocks or bonds included. Some stock index futures contracts are based on broad market indexes, such as Standard & Poor's 500 or the New York Stock Exchange Composite Index. In contrast, certain exchanges offer futures contracts on narrower market indexes, such as the Standard & Poor's 100 or indexes based on an industry or market indexes, such as Standard & Poor's 100 or indexes based on an industry or market segment, such as oil and gas stocks. Futures contracts are traded on organized exchanges regulated by the Commodity Futures Trading Commission. Transactions on such exchanges are cleared through a clearing corporation, which guarantees the performance of the parties to each contract. To the extent consistent with its investment objective, a Fund may also engage in transactions, from time to time, in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom). A Fund may sell index futures contracts in order to offset a decrease in market value of its portfolio securities that might otherwise result from a market decline. A Fund may do so either to hedge the value of its portfolio as a whole, or to protect against declines, occurring prior to sales of securities, in the value of the securities to be sold. Conversely, a Fund will purchase index futures contracts in anticipation of purchases of securities. A long futures position may be terminated without a corresponding purchase of securities. In addition, a Fund may utilize index futures contracts in anticipation of changes in the composition of its portfolio holdings. For example, in the event that a Fund expects to narrow the range of industry groups represented in its holdings it may, prior to making purchases of the actual securities, establish a long futures position based on a more restricted index, such as an index comprised of securities of a particular industry group. A Fund may also sell futures B-2 238 contracts in connection with this strategy, in order to protect against the possibility that the value of the securities to be sold as part of the restructuring of the portfolio will decline prior to the time of sale. Index futures contracts may also be used by a Fund for non-hedging (speculative) purposes to increase total return. III. Futures Contracts on Foreign Currencies A futures contract on foreign currency creates a binding obligation on one party to deliver, and a corresponding obligation on another party to accept delivery of, a stated quantity of foreign currency, for an amount fixed in U.S. dollars. Foreign currency futures may be used by a Fund to hedge against exposure to fluctuations in exchange rates between the U.S. dollar and other currencies arising from multinational transactions. IV. Margin Payments Unlike purchases or sales of portfolio securities, no price is paid or received by a Fund upon the purchase or sale of a futures contract. Initially, a Fund will be required to deposit with the broker or in a segregated account with a custodian or sub-custodian an amount of liquid assets, known as initial margin, based on the value of the contract. The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract assuming all contractual obligations have been satisfied. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying instruments fluctuates making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." For example, when a particular Fund has purchased a futures contract and the price of the contract has risen in response to a rise in the underlying instruments, that position will have increased in value and the Fund will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where the Fund has purchased a futures contract and the price of the future contract has declined in response to a decrease in the underlying instruments, the position would be less valuable and the Fund would be required to make a variation margin payment to the broker. Prior to expiration of the futures contract, Northern Trust or NTQA may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate to terminate the Fund's position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Fund, and the Fund realizes a loss or gain. V. Risks of Transactions in Futures Contracts There are several risks in connection with the use of futures by a Fund. One risk arises because of the imperfect correlation between movements in the price of the futures and movements in the price of the instruments which are the subject of the hedge. The price of the B-3 239 future may move more than or less than the price of the instruments being hedged. If the price of the futures moves less than the price of the instruments which are the subject of the hedge, the hedge will not be fully effective but, if the price of the instruments being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at all. If the price of the instruments being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the futures. If the price of the futures moves more than the price of the hedged instruments, the Fund involved will experience either a loss or gain on the futures which will not be completely offset by movements in the price of the instruments which are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of instruments being hedged and movements in the price of futures contracts, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of instruments being hedged if the volatility over a particular time period of the prices of such instruments has been greater than the volatility over such time period of the futures, or if otherwise deemed to be appropriate by the Investment Advisers. Conversely, a Fund may buy or sell fewer futures contracts if the volatility over a particular time period of the prices of the instruments being hedged is less than the volatility over such time period of the futures contract being used, or if otherwise deemed to be appropriate by the Investment Advisers. It is also possible that, where a Fund has sold futures to hedge its portfolio against a decline in the market, the market may advance and the value of instruments held in the Fund may decline. If this occurred, the Fund would lose money on the futures and also experience a decline in value in its portfolio securities. When futures are purchased to hedge against a possible increase in the price of securities or a currency before a Fund is able to invest its cash (or cash equivalents) in an orderly fashion, it is possible that the market may decline instead; if the Fund then concludes not to invest its cash at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures contract that is not offset by a reduction in the price of the instruments that were to be purchased. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the instruments being hedged, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Rather than meeting additional margin deposit requirements, investors may close futures contracts through off-setting transactions which could distort the normal relationship between the cash and futures markets. Second, with respect to financial futures contracts, the liquidity of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced thus producing distortions. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortion in the futures market, and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Investment Adviser may still not result in a successful hedging transaction over a short time frame. B-4 240 Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appear to be active secondary markets, there is no assurance that a liquid secondary market on any exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures investment position, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset on a futures contract. Further, it should be noted that the liquidity of a secondary market in a futures contract may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. The trading of futures contracts is also subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments. Successful use of futures by a Fund is also subject to the Investment Advisers' ability to predict correctly movements in the direction of the market. For example, if a particular Fund has hedged against the possibility of a decline in the market adversely affecting securities held by it and securities prices increase instead, the Fund will lose part or all of the benefit to the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. A Fund may have to sell securities at a time when it may be disadvantageous to do so. VI. Options on Futures Contracts A Fund may purchase and write options on the futures contracts described above. A futures option gives the holder, in return for the premium paid, the right to buy (call) from or sell (put) to the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder, or writer, of an option has the right to terminate its position prior to the scheduled expiration of the option by selling, or purchasing an option of the same series, at which time the person entering into the closing transaction will realize a gain or loss. A Fund will be required to deposit initial margin and variation margin with respect to put and call options on futures contracts written by it pursuant to brokers' requirements similar to those described above. Net option premiums received will be included as initial margin deposits. As an example, B-5 241 in anticipation of a decline in interest rates, a Fund may purchase call options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Fund intends to purchase. Similarly, if the value of the securities held by a Fund is expected to decline as a result of an increase in interest rates, the Fund might purchase put options or sell call options on futures contracts rather than sell futures contracts. Investments in futures options involve some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase or sale of an option also entails the risk that changes in the value of the underlying futures contract will not correspond to changes in the value of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. VII. Other Matters Accounting for futures contracts will be in accordance with generally accepted accounting principles. B-6 242 PART C OTHER INFORMATION
ITEM 23. EXHIBITS -------- The following exhibits are incorporated herein by reference: (a) (1) Agreement and Declaration of Trust dated October 12, 1993 filed as Exhibit 1(a) to Post-Effective Amendment No. 11 to Registrant's Registration Statement on Form N-1A, filed on July 29, 1996 ("PEA No. 11"). (2) Amendment No. 1 to Agreement and Declaration of Trust filed as Exhibit 1(b) to PEA No. 11. (3) Amendment No. 2 to Agreement and Declaration of Trust filed as Exhibit 1(c) to PEA No. 11. (4) Amendment No. 3 to Agreement and Declaration of Trust filed as Exhibit 1(d) to PEA No. 11. (5) Amendment No. 4 to Agreement and Declaration of Trust filed as Exhibit 1(e) to PEA No. 11. (6) Amendment No. 5 to Agreement and Declaration of Trust dated May 26, 1995 filed as Exhibit 1(f) to Post-Effective Amendment No. 9 to Registrant's Registration Statement on Form N-1A, filed on June 12, 1996 ("PEA No. 9"). (7) Amendment No. 6 to Agreement and Declaration of Trust dated August 6, 1996 filed as Exhibit 1(g) to Post-Effective Amendment No. 12 to Registrant's Registration Statement on Form N-1A, filed on October 30, 1996 ("PEA No. 12"). (8) Amendment No. 7 to Agreement and Declaration of Trust dated August 6, 1996 filed as Exhibit 1(h) to PEA No. 12. (9) Amendment No. 8 to Agreement and Declaration of Trust dated February 12, 1996 filed as Exhibit 1(i) to Post-Effective Amendment No. 15 to Registrant's Registration Statement on Form N-1A, filed on February 26, 1997 ("PEA No. 15"). (10) Amendment No. 9 to Agreement and Declaration of Trust dated February 12, 1997 filed as Exhibit 1(j) to Post-Effective Amendment No. 16 to
C-1 243 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 PEA No. 25. (b) (1) By-Laws filed as Exhibit 2 to PEA No. 11. (2) Amendment to the By-Laws dated August 4, 1994 filed as Exhibit 2(a) to PEA No. 11. (3) Amendment No. 2 to the By-Laws dated May 22, 1997 filed as Exhibit 2(b) to PEA No. 16. (c) None. (d) (1) Investment Advisory and Ancillary Services Agreement between Registrant and The Northern Trust Company dated April 1, 1994 ("Investment Advisory Agreement") filed as Exhibit 5 to PEA No. 11. (2) Addendum No. 1 to the Investment Advisory Agreement dated November 29, 1994 filed as Exhibit 5(a) to PEA No. 11. (3) Addendum No. 2 to the Investment Advisory Agreement dated March 29, 1996 filed as Exhibit 5(b) to PEA No. 9. (4) Addendum No. 3 to the Investment Advisory Agreement dated August 7, 1996 filed as Exhibit 5(c) to PEA No. 12. (5) Addendum No. 4 to the Investment Advisory Agreement dated March 24, 1997 filed as Exhibit 5(d) to PEA No. 16.
C-2 244 (6) Addendum No. 5 to the Investment Advisory Agreement dated February 12, 1997 filed as Exhibit 5(e) to PEA No. 19. (7) Addendum No. 6 to the Investment Advisory Agreement dated November 18, 1997 filed as Exhibit 5(f) to PEA No. 19. (8) Assumption Agreement between The Northern Trust Company and Northern Trust Quantitative Advisors, Inc. dated April 1, 1998 filed as exhibit 5(g) to Post-Effective Amendment No. 20 to Registrant's Registration Statement on Form N-1A, filed on July 31, 1998 ("PEA No. 20"). (9) Addendum No. 7 to the Investment Advisory Agreement dated December 21, 1998 filed as Exhibit (d)(9) to PEA No. 22. (f) None. (g) (1) Custodian Agreement between Registrant and The Northern Trust Company dated April 1, 1994 ("Custodian Agreement") filed as Exhibit 8(a) to PEA No. 11. (2) Addendum No. 1 to the Custodian Agreement dated November 29, 1994 filed as Exhibit 8(d) to PEA No. 11. (3) Addendum No. 2 to the Custodian Agreement dated March 29, 1996 filed as Exhibit 8(f) to PEA No. 9. (4) Foreign Custody Agreement between the Registrant and The Northern Trust Company dated April 1, 1994 filed as Exhibit 8(g) to PEA No. 11. (5) Addendum No. 3 to the Custodian Agreement dated August 7, 1996 filed as Exhibit 8(i) to PEA No. 12. (6) Addendum No. 4 to the Custodian Agreement dated August 7, 1996 filed as Exhibit 8(j) to PEA No. 12. (7) Addendum No. 5 to the Custodian Agreement dated March 24, 1997 filed as Exhibit 8(n) to PEA No. 16. (8) Addendum No. 6 to the Custodian Agreement dated February 12, 1997 filed as Exhibit 8(l) to PEA No. 19.
C-3 245 (9) Addendum No. 7 to the Custodian Agreement dated November 18, 1997 filed as Exhibit 8(o) to PEA No. 19. (10) Addendum No. 1 to the Foreign Custody Agreement dated April 1, 1998 filed as Exhibit 8(p) to PEA No. 19. (11) Foreign Custody Monitoring Agreement between the Registrant and The Northern Trust Company dated February 18, 1998 filed as exhibit 8(r) to PEA No. 20. (12) Addendum No. 8 to the Custodian Agreement dated December 21, 1998 filed as Exhibit (g)(12) to PEA No. 22. (h) (1) Transfer Agency Agreement between Registrant and The Northern Trust Company dated April 1, 1994 ("Transfer Agency Agreement") filed as Exhibit 8(b) to PEA No. 11. (2) Addendum No. 1 to the Transfer Agency Agreement dated November 29, 1994 filed as Exhibit 8(c) to PEA No. 11. (3) Addendum No. 2 to the Transfer Agency Agreement dated March 29, 1996 filed as Exhibit 8(e) to PEA No. 9. (4) Addendum No. 3 to the Transfer Agency Agreement dated August 7, 1996 filed as Exhibit 8(h) to PEA No. 12. (5) Addendum No. 4 to the Transfer Agency Agreement dated March 24, 1997 filed as Exhibit 8(m) to PEA No. 16. (6) Addendum No. 5 to the Transfer Agency Agreement dated February 12, 1997 filed as Exhibit 8(k) to PEA No. 19. (7) Addendum No. 6 to the Transfer Agency Agreement dated November 18, 1997 filed as Exhibit 8(q) to PEA No. 19. (8) Addendum No. 7 to the Transfer Agency Agreement dated December 21, 1998 filed as Exhibit (h)(11) to PEA No. 22. (i) Opinion of Hale & Dorr LLP filed as Exhibit (i) to PEA No. 25. (k) None.
C-4 246 (l) (1) Purchase Agreement between Registrant and The Northern Trust Company dated March 31, 1994 filed as Exhibit 13(a) to PEA No. 11. (2) Purchase Agreement between Registrant and Miriam M. Allison dated March 14, 1994 filed as Exhibit 13(b) to PEA No. 11. (3) Purchase Agreement between Registrant and Miriam M. Allison dated March 31, 1998 for shares of the Mid Cap Growth Fund filed as Exhibit (l)(3) to PEA No. 22. (4) Purchase Agreement between Registrant and Miriam M. Allison dated December 31, 1998 for shares of the High Yield Fixed Income Fund filed as Exhibit (l)(4) to PEA No. 22. (5) Purchase Agreement between Registrant and Miriam M. Allison dated December 31, 1998 for shares of the High Yield Municipal Fund filed as Exhibit (l)(5) to PEA No. 22. (n) None.
The following exhibits to the Registration Statement are filed herewith electronically pursuant to EDGAR rules: (a) (15) Amendment No. 14 to Agreement and Declaration of Trust dated October 1, 1999. (a) (16) Form of Amendment No. 15 to Agreement and Declaration of Trust dated _______________, 1999. (b) (4) Amendment No. 3 to the By-Laws dated September 15, 1999. (d) (10) Addendum No. 8 to the Investment Advisory Agreement dated September 15, 1999. (d) (11) Form of Addendum No. 9 to the Investment Advisory Agreement dated _______, 1999. (e) (1) Distribution Agreement between Registrant and Northern Funds Distributors, LLC dated October 1, 1999. (e) (2) Form of Amended and Restated Schedule A to the Distribution Agreement dated ________, 1999.
C-5 247 (g) (13) Addendum No. 9 to the Custodian Agreement dated September 15, 1999. (g) (14) Form of Addendum No. 10 to the Custodian Agreement dated _________, 1999. (h) (9) Addendum No. 8 to the Transfer Agency Agreement dated September 15, 1999. (h) (10) Form of Addendum No. 9 to the Transfer Agency Agreement dated ________, 1999. (h) (11) Amended and Restated Service Plan, adopted as of April 1, 1999 and most recently revised as of September 15, 1999, and Related Agreement. (h) (12) Co-Administration Agreement among Registrant, First Data Investor Services Group, Inc. and The Northern Trust Company dated October 1, 1999. (h) (13) Form of Amended and Restated Schedule A to the Co-Administration Agreement dated _________, 1999. (j) (1) Consent of Drinker Biddle & Reath LLP. (j) (2) Consent of Independent Public Accountants. (l) (6) Purchase Agreement between Registrant and Miriam M. Allison dated September 3, 1999 for shares of the Small Cap Index Fund. (l) (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. (l) (8) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Small Cap Growth Fund. (l) (9) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Short-Intermediate U.S. Government Fund. (l) (10) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the California Intermediate Tax-Exempt Fund.
C-6 248 (l) (11) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Arizona Tax-Exempt Fund. (l) (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. (m) Amended and Restated Distribution and Service Plan, adopted April 1, 1994 and most recently revised as of September 15, 1999, and Related Agreement.
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 filed herewith as Exhibit (h)(11). Section 3.1 of the Distribution Agreement between the Registrant and Northern Funds Distributors, LLC provides for indemnification of Northern Funds Distributors, LLC, in connection with certain claims and liabilities to which Northern Funds Distributors, LLC, in its capacity as Registrant's Distributor, may be subject. A copy of the Distribution Agreement is filed herewith 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: C-7 249 6.3 Indemnification of Shareholders. No Shareholder shall be subject to any personal liability whatsoever to any person in connection with property of the Trust or the acts, obligations or affairs of the Trust or any Series thereof. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities, to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) out of the property of the Trust for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The indemnification and reimbursement required by the preceding sentence shall be made only out of assets of the one or more Series whose Shares were held by said Shareholder at the time the act or event occurred which gave rise to the claim against or liability of said Shareholder. The rights accruing to a Shareholder under this Section shall not impair any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust or any Series thereof to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. Section 6.4 of Registrant's Agreement and Declaration of Trust, a copy of which is incorporated by reference herein as Exhibit (a)(1), provides for indemnification of Trustees and officers, as follows: 6.4 Indemnification of Trustees, Officers, etc. The Trust shall indemnify each of its Trustees and officers and persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person") against all liabilities, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and expenses, including reasonable accountants' and counsel fees, incurred by any Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a Trustee or officer, director or trustee, except that no Covered Person shall be indemnified against any liability to the Trust or its Shareholders to C-8 250 which such Covered Person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office (such willful misfeasance, bad faith, gross negligence or reckless disregard being referred to herein as "Disabling Conduct"). Expenses, including accountants' and counsel fees so incurred by any such Covered Person (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties), may be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of (a) an undertaking by or on behalf of such Covered Person to repay amounts so paid to the Trust if it is ultimately determined that indemnification of such expenses is not authorized under this Article VI and either (b) such Covered Person provides security for such undertaking, (c) the Trust is insured against losses arising by reason of such payment, or (d) a majority of a quorum of disinterested, non-party Trustees, or independent legal counsel in a written opinion, determines, based on a review of readily available facts, that there is reason to believe that such Covered Person ultimately will be found entitled to indemnification. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to Trustees, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a Trustee, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER The Northern Trust Company, Registrant's investment adviser, is a full service commercial bank and also provides a full range of trust and fiduciary services. Set forth below is a list of all of the directors, senior officers and those officers primarily responsible for Registrant's affairs of The Northern Trust Company and, with respect to each such person, the name and business address of the company (if any) with which such person has been connected at any time within the last two fiscal years, as well as the capacity in which such person was connected. C-9 251
NAME AND PRINCIPAL NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY - ----------------------- ---------------- ------------- 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
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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
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NAME AND PRINCIPAL NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY - ----------------------- ---------------- ------------- Barry G. Hastings Northern Trust Corporation President and Chief President and Chief 50 South LaSalle Street Operating Officer Operating Officer Chicago, IL 60675 and Director and Director Northern Trust of California Corporation Director 355 South Grand Avenue Los Angeles, CA 90017 Northern Trust of Florida Corporation Vice Chairman of the 700 Brickell Avenue Board and Director 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-12 254
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
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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-14 256
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-15 257
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-16 258
NAME AND PRINCIPAL NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY - ----------------------- ---------------- ------------- Harold B. Smith Northern Trust Corporation Director Director 50 South LaSalle Street Chicago, IL 60675 Illinois Tool Works Inc. Chairman of the 3600 West Lake Avenue Executive Committee Glenview, IL 60025-5811 and Director W. W. Grainger, Inc. Director 5500 West Howard Street Skokie, IL 60077 Northwestern Mutual Life Trustee Insurance Co. 720 East Wisconsin Avenue Milwaukee, WI 53202 William D. Smithburg Northern Trust Corporation Director Chairman 50 South LaSalle Street Director Chicago, IL 60675 The Quaker Oats Company Retired 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-17 259
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-18 260
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
ITEM 27. PRINCIPAL UNDERWRITER (a) None C-19 261 (b) To the best of Registrant's knowledge, the directors and executive officers of Northern Funds Distributors, LLC, distributor for Registrant, are as follows:
POSITIONS AND OFFICES WITH POSITIONS AND NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT - ------------------ --------------------- ------------- Jane Haegele Director None Four Falls Corporate Center 6th Floor West Conshohocken, PA 19428 Philip H. Rinnander President and Secretary None Four Falls Corporate Center 6th Floor West Conshohocken, PA 19428 Jason A. Greim Vice President and Treasurer None Four Falls Corporate Center 6th Floor West Conshohocken, PA 19428
(c) None ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The Agreement and Declaration of Trust, By-laws and minute books of the Registrant are in the physical possession of Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103. Records relating to First Data Investor Services Group, Inc.'s functions as co-administrator for the Registrant are located at 101 Federal Street, Boston, Massachusetts 02110. Records relating to Northern Funds Distributors, LLC's functions as distributor, for the Registrant are located at Four Falls Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428-2961. All other accounts, books and other documents required to be maintained under Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are in the physical possession of The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois 60675 or 801 S. Canal Street, Chicago, Illinois 60607 (relating to transfer agent). ITEM 29. MANAGEMENT SERVICES Not Applicable. ITEM 30. UNDERTAKINGS Not Applicable. C-20 262 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. 27 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia and State of Pennsylvania on the 15th day of October, 1999. NORTHERN FUNDS By: /s/ Brian R. Curran ------------------------------- Brian R. Curran Treasurer Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 27 to Registrant's Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Name Title Date ---- ----- ---- /*/ James W. Cozad* Trustee October 15, 1999 - --------------------------------- James W. Cozad /*/ Wesley M. Dixon, Jr.* Trustee October 15, 1999 - --------------------------------- Wesley M. Dixon, Jr. /*/ William J. Dolan, Jr.* Trustee October 15, 1999 - --------------------------------- William J. Dolan, Jr. /*/ Raymond E. George, Jr.* Trustee October 15, 1999 - --------------------------------- Raymond E. George, Jr. /*/ Michael E. Murphy* Trustee October 15, 1999 - --------------------------------- Michael E. Murphy /*/ Mary Jacobs Skinner* Trustee October 15, 1999 - --------------------------------- Mary Jacobs Skinner /*/ Jylanne M. Dunne* President October 15, 1999 - --------------------------------- Jylanne M. Dunne (Chief Executive Officer) /s/ Brian R. Curran Treasurer October 15, 1999 - --------------------------------- Brian R. Curran (Chief Financial and Accounting Officer) *By: /s/ Brian R. Curran - --------------------------------- Brian R. Curran, Attorney-in-fact
263 NORTHERN FUNDS (A Massachusetts Business Trust) CERTIFICATE OF SECRETARY I. The foregoing resolution was duly adopted by the Board of Trustees of Northern Funds at a Meeting of the Board of Trustees held on September 15, 1999, and remains in effect on the date hereof: RESOLVED, that the form of Power of Attorney presented to this meeting appointing Richard H. Rose, Brian R. Curran, Linda J. Hoard, Jylanne M. Dunne and Jeffrey A. Dalke as attorneys in-fact for the Trustees and for the President and Treasurer with regard to all filings or amendments to the Trust's Registration Statement with the Securities and Exchange Commission made on or after the effectiveness of the Co-Administration Agreement be, and hereby is, approved. II. The Co-Administration Agreement between Northern Funds, The Northern Trust Company and First Data Investor Services Group, Inc. became effective as of October 1, 1999. IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of October, 1999. /s/ Jeffrey A. Dalke --------------------------- Jeffrey A. Dalke Secretary 264 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 Commonwealth of Massachusetts (the "Trust"), does hereby make, constitute and appoint Richard H. Rose, Brian R. Curran, Linda J. Hoard, Jylanne M. Dunne, and Jeffrey A. Dalke, 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, of 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 15th day of September, 1999. /s/ James W. Cozad --------------------------- James W. Cozad /s/ Wesley M. Dixon, Jr. --------------------------- Wesley M. Dixon, Jr. /s/ William J. Dolan, Jr. --------------------------- William J. Dolan, Jr. -1- 265 /s/ Raymond E. George, Jr. --------------------------- Raymond E. George, Jr. /s/ Michael E. Murphy --------------------------- Michael E. Murphy /s/ Mary Jacobs Skinner --------------------------- Mary Jacobs Skinner -2- 266 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the President of Northern Funds, a business trust organized under the laws of The Commonwealth of Massachusetts (the "Trust"), does hereby make, constitute and appoint Richard H. Rose, Brian R. Curran, Linda J. Hoard and Jeffrey A. Dalke, 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, of 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 her name this 15th day of September, 1999. /s/ Jylanne M. Dunne --------------------------- Jylanne M. Dunne -3- 267 NORTHERN FUNDS EXHIBIT INDEX
(a) (15) Amendment No. 14 to Agreement and Declaration of Trust dated October 1, 1999. (a) (16) Form of Amendment No. 15 to Agreement and Declaration of Trust dated _______________, 1999. (b) (4) Amendment No. 3 to the By-Laws dated September 15, 1999. (d) (10) Addendum No. 8 to the Investment Advisory Agreement dated September 15, 1999. (d) (11) Form of Addendum No. 9 to the Investment Advisory Agreement dated _______, 1999. (e) (1) Distribution Agreement between Registrant and Northern Funds Distributors, LLC dated October 1, 1999. (e) (2) Form of Amended and Restated Schedule A to the Distribution Agreement dated ________, 1999. (g) (13) Addendum No. 9 to the Custodian Agreement dated September 15, 1999. (g) (14) Form of Addendum No. 10 to the Custodian Agreement dated ________, 1999. (h) (9) Addendum No. 8 to the Transfer Agency Agreement dated September 15, 1999. (h) (10) Form of Addendum No. 9 to the Transfer Agency Agreement dated ________, 1999. (h) (11) Amended and Restated Service Plan, adopted as of April 1, 1999 and most recently revised as of September 15, 1999, and Related Agreement. (h) (12) Co-Administration Agreement among Registrant, First Data Investor Services Group, Inc. and The Northern Trust Company dated October 1, 1999.
268 (h) (13) Form of Amended and Restated Schedule A to the Co-Administration Agreement dated _________, 1999. (j) (1) Consent of Drinker Biddle & Reath LLP. (j) (2) Consent of Independent Public Accountants. (l) (6) Purchase Agreement between Registrant and Miriam M. Allison dated September 3, 1999 for shares of the Small Cap Index Fund. (l) (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. (l) (8) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Small Cap Growth Fund. (l) (9) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Short-Intermediate U.S. Government Fund. (l) (10) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the California Intermediate Tax-Exempt Fund. (l) (11) Purchase Agreement between Registrant and Martin C. Gawne dated September 30, 1999 for shares of the Arizona Tax-Exempt Fund. (l) (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. (m) Amended and Restated Distribution and Service Plan, adopted April 1, 1994 and most recently revised as of September 15, 1999, and Related Agreement.
-2- EX-99.B.(A)(15) 2 AMENDMENT NO. 14 TO AGMT AND DECL. OF TRUST 1 EXHIBIT (a)(15) NORTHERN FUNDS AMENDMENT NO. 14 TO AGREEMENT AND DECLARATION OF TRUST WHEREAS, Section 7.3 of the Agreement and Declaration of Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the "Trust") provides that the Declaration may be amended by an instrument in writing executed by a majority of the Trustees of the Trust and setting forth such amendment and reciting that it was hereby adopted by the Trustees; NOW, THEREFORE, the undersigned, being a majority of the Trustees of the Trust, hereby: (1) amend the Declaration to change the designation and name of the Initial Classes of the "Growth Equity Shares," "Income Equity Shares," "Small Cap Shares," "Select Equity Shares," "International Growth Equity Shares," "International Select Equity Shares," "International Fixed Income Shares," "Fixed Income Shares," "U.S. Government Shares," "Intermediate Tax-Exempt Shares," "Tax-Exempt Shares," "Money Market Shares," "U.S. Government Money Market Shares," "Municipal Money Market Shares," and "Mid-Cap Growth Fund" to the Initial Classes of the "Growth Equity Fund," "Income Equity Fund," "Small Cap Fund," "Select Equity Fund," "International Growth Equity Fund," "International Select Equity Fund," "International Fixed Income Fund," "Fixed Income Fund," "U.S. Government Fund," "Intermediate Tax-Exempt Fund," "Tax-Exempt Fund," "Money Market Fund," "U.S. Government Money Market Fund," "Municipal Money Market Fund," and "Mid Cap Growth Fund," respectively; (2) amend the Declaration to change the principal place of business of the Trust outside of Massachusetts, which is now designated on the first page of the Declaration, to 50 South LaSalle Street, Chicago, Illinois 60675; and (3) determine that, pursuant to Section 7.3 of the Declaration, the foregoing amendment shall be effective as of the date set forth below. WITNESS our hands as of this 1st day of October, 1999. /s/ James W. Cozad /s/ Raymond E. George, Jr. - ---------------------------- ---------------------------------- James W. Cozad Raymond E. George, Jr. /s/ Wesley M. Dixon, Jr. /s/ Michael E. Murphy - ---------------------------- ---------------------------------- Wesley M. Dixon, Jr. Michael E. Murphy /s/ William J. Dolan, Jr. /s/ Mary Jacobs Skinner - ---------------------------- ---------------------------------- William J. Dolan, Jr. Mary Jacobs Skinner EX-99.B.(A)(16) 3 FORM OF AMDMT NO. 15 TO AGMT AND DECL. OF TRUST 1 EXHIBIT (a)(16) NORTHERN FUNDS AMENDMENT NO. 15 TO AGREEMENT AND DECLARATION OF TRUST WHEREAS, Section 4.1 of the Agreement and Declaration of Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the "Trust") provides that the Declaration may be amended to establish and designate new Series or Classes of Shares by an instrument in writing executed by a majority of the Trustees of the Trust and setting forth such establishment and designation and the relative rights and preferences of such Series or Classes; NOW, THEREFORE, the undersigned, being a majority of the Trustees of the Trust, hereby: (1) amend the Declaration by designating and establishing one additional Series and Class of Shares ("Additional Series and Classes") to be known as the Initial Class of the "MarketPower Fund," the Additional Series and Class to have the relative rights and preferences set forth in Section 4.2(a) through (m) of the Declaration; and (2) determine that, pursuant to Section 7.3 of the Declaration, the foregoing amendment shall be effective as of the date set forth below. WITNESS our hands as of this ____ day of _______________, 1999. -------------------------------- Raymond E. George, Jr. - ----------------------------- -------------------------------- James W. Cozad Michael E. Murphy - ----------------------------- -------------------------------- Wesley M. Dixon, Jr. Mary Jacobs Skinner - ----------------------------- William J. Dolan, Jr. EX-99.B.(B)(4) 4 AMDMT NO. 3 TO BY-LAWS 1 EXHIBIT (b)(4) NORTHERN FUNDS BY-LAW AMENDMENT NO. 3 ADOPTED ON SEPTEMBER 15, 1999 ARTICLE 5 OFFICES, FISCAL YEAR AND SEAL * * * RESOLVED, that Section 5.1 of the By-Laws of Northern Funds be, and hereby is, amended and restated as set forth below: 5.1 Offices. The Trust shall maintain an office of record in Boston, Massachusetts, which office may be the office of any resident agent appointed by the Trust if located in that city. The Trust may maintain one or more other offices, including its principal office, outside of Massachusetts, in such cities as the Trustees may determine from time to time. Unless the Trustees otherwise determine, the principal office of the Trust shall be located in Chicago, Illinois. EX-99.B.(D)(10) 5 ADDENDUM NO. 8 TO INVST. ADVISORY AGMT. 1 EXHIBIT (d)(10) NORTHERN FUNDS ADDENDUM NO. 8 TO THE INVESTMENT ADVISORY AGREEMENT This Addendum, dated as of the 15th day of September, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois state bank. WHEREAS, the Trust and the Investment Adviser have entered into an Investment Advisory and Ancillary Services Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated March 24, 1997, by Addendum No. 5 dated February 12, 1997, by Addendum No. 6 dated November 18, 1997 and by Addendum No. 7 dated December 21, 1998 (the "Advisory Agreement") pursuant to which the Trust has appointed the Investment Adviser to act as investment adviser to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock Index Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund and the High Yield Fixed Income Fund; and WHEREAS, Section 1(b) of the Advisory Agreement provides that in the event the Trust establishes one or more additional investment portfolios with respect to which it desires to retain the Investment Adviser to act as investment adviser under the Advisory Agreement, the Trust shall so notify the Investment Adviser in writing and if the Investment Adviser is willing to render such services it shall notify the Trust in writing, and the compensation to be paid to the Investment Adviser shall be that which is agreed to in writing by the Trust and the Investment Adviser; and WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the Trust has notified the Investment Adviser that it is establishing the Tax-Exempt Money Market and the Small Cap Growth Funds (the "Funds"), and that it desires to retain the Investment Adviser to act as the investment adviser for the Funds, and the Investment Adviser has notified the Trust that it is willing to serve as investment adviser for the Funds; 2 NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints the Investment Adviser to act as investment adviser to the Trust for the Funds in accordance with the terms set forth in the Advisory Agreement. The Investment Adviser hereby accepts such appointment and agrees to render the services set forth in the Advisory Agreement for the compensation herein provided. 2. Compensation. For the services provided and the expenses assumed pursuant to the Advisory Agreement regarding each Fund, the Trust will pay the Investment Adviser, and the Investment Adviser will accept as full compensation therefor from the Trust, a fee at the annual rate of 0.60% of the Tax-Exempt Money Market Fund's and 1.20% of the Small Cap Growth Fund's average net assets. 3. Capitalized Terms. From and after the date hereof, the term "Current Funds" as used in the Advisory Agreement shall be deemed to include the Funds. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Advisory Agreement. 4. Miscellaneous. The initial term of the Advisory Agreement with respect to the Funds shall continue, unless sooner terminated in accordance with the Advisory Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Advisory Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. All signatures need not appear on the same copy of this Addendum. IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. NORTHERN FUNDS Attest: /s/ Diane Anderson By: /s/ Silas S. Cathcart ------------------------ ----------------------- Title: President THE NORTHERN TRUST COMPANY Attest: /s/ Diane Anderson By: /s/ Archibald E. King ------------------------ ----------------------- Title: Vice President -2- EX-99.B.(D)(11) 6 FORM OF ADDENDUM NO. 9 TO INVST ADVS. AGMT. 1 EXHIBIT (d)(11) NORTHERN FUNDS ADDENDUM NO. 9 TO THE INVESTMENT ADVISORY AGREEMENT This Addendum, dated as of the ____ day of _______________, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois state bank. WHEREAS, the Trust and the Investment Adviser have entered into an Investment Advisory and Ancillary Services Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated March 24, 1997, by Addendum No. 5 dated February 12, 1997, by Addendum No. 6 dated November 18, 1997, by Addendum No. 7 dated December 21, 1998 and by Addendum No. 8 dated September 15, 1999 (the "Advisory Agreement") pursuant to which the Trust has appointed the Investment Adviser to act as investment adviser to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock Index Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, Tax-Exempt Money Market Fund and the Small Cap Growth Fund; and WHEREAS, Section 1(b) of the Advisory Agreement provides that in the event the Trust establishes one or more additional investment portfolios with respect to which it desires to retain the Investment Adviser to act as investment adviser under the Advisory Agreement, the Trust shall so notify the Investment Adviser in writing and if the Investment Adviser is willing to render such services it shall notify the Trust in writing, and the compensation to be paid to the Investment Adviser shall be that which is agreed to in writing by the Trust and the Investment Adviser; and WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the Trust has notified the Investment Adviser that it is establishing the MarketPower Fund (the "Fund"), and that it desires to retain the Investment Adviser to act as the investment adviser for the Fund and the Investment Adviser has notified the Trust that it is willing to serve as investment adviser for the Fund; 2 NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints the Investment Adviser to act as investment adviser to the Trust for the Fund in accordance with the terms set forth in the Advisory Agreement. The Investment Adviser hereby accepts such appointment and agrees to render the services set forth in the Advisory Agreement for the compensation herein provided. 2. Compensation. For the services provided and the expenses assumed pursuant to the Advisory Agreement regarding the Fund, the Trust will pay the Investment Adviser, and the Investment Adviser will accept as full compensation therefor from the Trust, a fee at the annual rate of 1.20% of the MarketPower Fund's average net assets. 3. Capitalized Terms. From and after the date hereof, the term "Current Funds" as used in the Advisory Agreement shall be deemed to include the Fund. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Advisory Agreement. 4. Miscellaneous. The initial term of the Advisory Agreement with respect to the Fund shall continue, unless sooner terminated in accordance with the Advisory Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Advisory Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. All signatures need not appear on the same copy of this Addendum. IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. NORTHERN FUNDS Attest: By: -------------------------- --------------------------------- Title: --------------------- THE NORTHERN TRUST COMPANY Attest: By: -------------------------- --------------------------------- Title: --------------------- -2- EX-99.B.(E)(1) 7 DIST. AGMT. BTWN. RGST. AND NORTHERN FUNDS DIST. 1 EXHIBIT (e)(1) DISTRIBUTION AGREEMENT THIS AGREEMENT is made as of this 1st day of October, 1999 (the "Agreement") by and between Northern Funds (the "Fund"), a Massachusetts business trust, and Northern Funds Distributors, LLC, a Wisconsin limited liability company (the "Distributor"). WHEREAS, the Fund is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and is currently offering shares of beneficial interest (the "Shares"), representing interests in investment portfolios of the Fund identified on Schedule A hereto (the "Portfolios") which are registered with the Securities and Exchange Commission (the "SEC") pursuant to the Fund's Registration Statement on Form N-1A (the "Registration Statement"); and WHEREAS, the Fund desires to retain the Distributor as distributor for the Portfolios to provide for the sale and distribution of the Shares of the Portfolios identified on Schedule A and for such additional classes or series as the Fund may issue, and the Distributor is prepared to provide such services commencing on the date first written above. NOW THEREFORE, in consideration of the premises and mutual covenants set forth herein and intending to be legally bound hereby the parties hereto agree as follows: 1. SERVICE AS DISTRIBUTOR 1.1 The Fund hereby appoints the Distributor as exclusive distributor of the Shares covered by the Registration Statement then in effect under the Securities Act of 1933, as amended (the "1933 Act"), on the terms and for the periods set forth in this Agreement. The Distributor hereby accepts such appointment and agrees to render the services and perform the duties set forth in this Agreement without compensation. The Distributor will have no liability for payment for the purchase of Shares by unaffiliated investors sold pursuant to this Agreement or with respect to redemptions or repurchases of Shares. 1.2 The Distributor agrees to sell Shares of each of the Portfolios, as agent, from time to time during the term of this Agreement at the Shares' then current net asset value (with any purchase price adjustments, as applicable). The net asset value of the Shares shall be determined in the manner provided in the then current prospectus and statement of additional information relating to the Shares (collectively, the "Prospectus" and "Statement of Additional Information"), and when determined shall be applicable to all transactions as provided in the Prospectus. The net asset value of the Shares shall be calculated by the Fund or by another entity on behalf of the Fund. The Distributor shall have no duty to inquire into, or liability for, the accuracy of the net asset value per Share as calculated. 1.3 The Distributor agrees to use appropriate efforts to solicit orders for the sale of the Shares. The Distributor shall, at its own expense, finance appropriate activities which are primarily intended to result in the sale of Shares, including, but not limited to, the 2 distribution services set forth in Schedule B to this Agreement. It is contemplated that the Distributor may enter into selling agreements with securities dealers, financial institutions and other industry professionals, such as investment advisers, accountants and estate planning firms, with respect to the offering of Shares to the public. The Distributor will require each dealer with whom the Distributor has a selling agreement to conform to the applicable provisions of the Registration Statement, with respect to the public offering price of the Shares, and the Distributor shall not cause the Fund to withhold the placing of purchase orders so as to make a profit thereby. 1.4 The Fund understands that the Distributor is now, and may in the future be, the distributor of the shares of several investment companies or series (collectively, the "Investment Entities"), including Investment Entities having investment objectives similar to those of the Portfolios. The Fund further understands that investors and potential investors in the Portfolios may invest in shares of such other Investment Entities. The Fund agrees that the Distributor's duties to such Investment Entities shall not be deemed in conflict with its duties to the Fund under this Section 1.4. 1.5 The Distributor shall not utilize any materials in connection with the sale or offering of Shares except the Fund's then current Prospectus and Statement of Additional Information and such other materials as the Fund shall provide or approve. The Fund agrees to furnish the Distributor with sufficient copies of any and all communications with the public or other materials which the Fund intends to use in connection any sales of Shares, in adequate time for the Distributor to file and clear such materials with the proper authorities before they are put in use. The Distributor and the Fund may agree that any such material does not need to be filed subsequent to distribution. In addition, the Fund agrees not to use any such materials until so filed and cleared for use, if required, by appropriate authorities as well as by the Distributor. 1.6 All activities by the Distributor and its agents and employees, as distributor of the Shares, shall comply with all applicable laws, rules and regulations, including, without limitation, all rules and regulations made or adopted by the SEC or the National Association of Securities Dealers. 1.7 The Distributor will transmit any orders received by it for purchase or redemption of the Shares to the transfer agent for the Fund. 1.8 Whenever in its judgment such action is warranted, the Fund may decline to accept any orders for, or make any sales of, the Shares until such time as the Fund deems it advisable to accept such orders and to make such sales, and the Fund shall notify the Distributor promptly of any such determination. 1.9 The Fund agrees to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the qualification of the Shares for sale in such states where Shares are offered for sale. The Fund shall notify the Distributor in writing of the states in which the Shares are to be sold -2- 3 and shall notify the Distributor in writing of any changes to the information contained in the previous notification. 1.10 The Fund shall furnish from time to time, for use in connection with the sale of the Shares, such information with respect to the Fund and the Shares as the Distributor may reasonably request; and the Fund warrants that the statements contained in any such information shall fairly show or represent what they purport to show or represent. The Fund shall also furnish the Distributor upon request with: (a) audited annual statements and unaudited semi-annual statements of a Portfolio's books and accounts prepared by the Fund, (b) quarterly earnings statements of a Portfolio prepared by the Fund, (c) a monthly itemized list of the securities in a Portfolio, (d) monthly balance sheets as soon as practicable after the end of each month, and (e) from time to time such additional information regarding the financial condition of a Portfolio as the Distributor may reasonably request. 1.11 The Fund represents to the Distributor that all Registration Statements and Prospectuses filed by the Fund with the SEC under the 1933 Act with respect to the Shares have been prepared in conformity with the requirements of the 1933 Act and the rules and regulations of the SEC thereunder. As used in this Agreement, the term "Registration Statement" shall mean any Registration Statement and any Prospectus and any Statement of Additional Information relating to the Fund filed with the SEC and any amendments or supplements thereto at any time filed with the SEC. Except as to information included in the Registration Statement in reliance upon information provided to the Fund by the Distributor or any affiliate of the Distributor expressly for use in the Registration Statement, the Fund represents and warrants to the Distributor that any Registration Statement, when such Registration Statement becomes effective, will contain statements required to be stated therein in conformity with the 1933 Act and the rules and regulations of the SEC; that all statements of fact contained in any such Registration Statement will be true and correct when such Registration Statement becomes effective; and that no Registration Statement when such Registration Statement becomes effective will include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading to a purchaser of the Shares. The Distributor may but shall not be obligated to propose from time to time such amendment or amendments to any Registration Statement and such supplement or supplements to any Prospectus as, in the light of future developments, may, in the opinion of the Distributor's counsel, be necessary or advisable. The Distributor shall promptly notify the Fund of any advice given to it by its counsel regarding the necessity or advisability of amending or supplementing such Registration Statement. If the Fund shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Fund of a written request from the Distributor to do so, the Distributor may, at its option, terminate this Agreement. The Fund shall not file any amendment to any Registration Statement or supplement to any Prospectus without giving the Distributor reasonable notice thereof in advance; provided, however, that nothing contained in this Agreement shall in any way limit the Fund's right to file at any time such amendments to any Registration Statement and/or supplements to any Prospectus, of whatever character, as the Fund may deem -3- 4 advisable, such right being in all respects absolute and unconditional. The Fund authorizes the Distributor to use any Prospectus or Statement of Additional Information in the form furnished by the Fund from time to time in connection with the sale of the Shares. 1.12 No Shares shall be offered by either the Distributor or the Fund under any of the provisions of this Agreement and no orders for the purchase or sale of Shares hereunder shall be accepted by the Fund if and so long as effectiveness of the Registration Statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1933 Act, or if and so long as a current Prospectus as required by Section 5(b)(2) of the 1933 Act is not on file with the SEC; provided, however, that nothing contained in this Section 1.12 shall in any way restrict or have any application to or bearing upon the Fund's obligation to redeem Shares tendered for redemption by any shareholder in accordance with the provisions of the Fund's Registration Statement or Agreement and Declaration of Trust. 1.13 The Fund agrees to advise the Distributor as soon as reasonably practical by a notice in writing delivered to the Distributor: (a) of any request by the SEC for amendments to the Registration Statement, Prospectus or Statement of Additional Information then in effect or for additional information; (b) in the event of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement, Prospectus or Statement of Additional Information then in effect or the initiation by service of process on the Fund of any proceeding for that purpose; (c) of the happening of any event that makes untrue any statement of a material fact made in the Registration Statement, Prospectus or Statement of Additional Information then in effect or that requires the making of a change in such Registration Statement, Prospectus or Statement of Additional Information in order to make the statements therein not misleading; and (d) of all actions of the SEC with respect to any amendments to any Registration Statement, Prospectus or Statement of Additional Information which may from time to time be filed with the SEC. For purposes of this Section 1.13, informal requests by or acts of the staff of the SEC shall not be deemed actions of or requests by the SEC. 1.14 The Fund represents and warrants to the Distributor that the Fund is an investment company registered under the 1940 Act and the Shares sold by each Portfolio are, and will be, registered under the 1933 Act. -4- 5 1.15 The Distributor agrees to maintain, and preserve for the periods prescribed by Rule 31a-2 under the 1940 Act, such records as are required to be maintained by Rule 31a-1(d) under the 1940 Act. 2. COMPENSATION AND EXPENSES The Fund will bear the following expenses: (a) preparation, printing and distribution of sufficient copies of the Prospectus and Statement of Additional Information to existing shareholders; (b) preparation, printing and distribution of reports and other communications (not prepared by the Distributor) to existing shareholders; (c) registration of the Shares under the federal and state securities laws; (d) maintaining facilities for the issue and transfer of Shares; (e) supplying information, prices and other data to be furnished by the Fund under this Agreement; (f) any original issue taxes or other transfer taxes applicable to the sale or delivery of the Shares or certificates therefor; and (g) any payments made in accordance with any plan adopted pursuant to Rule 12b-1 under the 1940 Act. 3. INDEMNIFICATION 3.1 The Fund agrees to indemnify and hold the Distributor, its officers, directors, and employees, and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, costs, expenses (including reasonable attorneys' fees), losses, damages, charges, payments and liabilities of any sort or kind which the Distributor, its officers, directors, employees or any such controlling person may incur under the 1933 Act, under any other statute, or under common law or otherwise, arising out of or based upon (i) any untrue statement, or alleged untrue statement, of a material fact contained in the Fund's Registration Statement, Prospectus or Statement of Additional Information (including amendments and supplements thereto), or (ii) any omission, or alleged omission, to state a material fact required to be stated in the Fund's Registration Statement, Prospectus or Statement of Additional Information (including amendments or supplements thereto) or necessary to make the statements therein not misleading; provided, however, that insofar as any losses, claims, damages, costs, charges, payments, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished to the Fund by the Distributor or its affiliated persons for use in the Fund's Registration Statement, -5- 6 Prospectus or Statement of Additional Information (including amendments or supplements thereto), such indemnification is not applicable; and further provided that the Fund's agreement to indemnify the Distributor and the Fund's representations and warranties hereinbefore set forth in Section 1.11 shall not be deemed to cover any liability to the Fund, its officers, trustees or shareholders to which the Distributor would otherwise be subject by reason of: (a) the Distributor's willful misfeasance, bad faith or negligence in the performance of its duties and obligations, or by reason of the Distributor's reckless disregard of its duties and obligations under this Agreement; or (b) the Distributor's breach of Section 12 of this Agreement. The Fund agrees and acknowledges that the Distributor has not prior to the date hereof assumed, and will not assume, any obligations or liabilities arising out of the conduct of the Fund or its distributor prior to the date hereof of those duties which the Distributor has agreed to perform pursuant to this Agreement. The Fund further agrees to indemnify the Distributor against any losses, claims, damages or liabilities to which the Distributor may become subject in connection with the conduct by the Fund or its distributor of such duties prior to the date hereof; provided that the Fund's agreement to indemnify the Distributor shall not be deemed to cover any liability to the Fund, its officers, trustees or shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its duties and obligations, or by reason of the Distributor's reckless disregard of its duties and obligations under this Agreement. 3.2 The Distributor agrees to indemnify and hold harmless the Fund, its several officers and trustees and each person, if any, who controls a Portfolio within the meaning of Section 15 of the 1933 Act, from and against any and all claims, costs, expenses (including reasonable attorneys' fees), losses, damages, charges, payments and liabilities of any sort or kind which the Fund, its officers or trustees, or any such controlling person, may incur under the 1933 Act, under any other statute, or under common law or otherwise, but only to the extent that such liability or expense incurred by the Fund, its officers or trustees, or any controlling person, resulting from such claims or demands, shall arise out of or be based upon any untrue statement, or alleged untrue statement, of a material fact contained in the Fund's Registration Statement, Prospectus or Statement of Additional Information (including amendments and supplements thereto), or any omission, or alleged omission, to state a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon information furnished or confirmed to the Fund by the Distributor or its affiliated persons (as defined in the 1940 Act). The Distributor also agrees to indemnify and hold harmless the Fund, its officers or trustees, or any controlling person in connection with any claim or in connection with any action, suit or proceeding which arises out of or is alleged to arise out of: (a) the Distributor's willful misfeasance, bad faith or negligence in the performance of its duties and obligations, or by reason of the Distributor's reckless disregard of its duties and obligations under this Agreement; or (b) the Distributor's breach of Section 12 of this Agreement. The foregoing rights of indemnification shall be in addition to any other rights to which the Fund, its officers or trustees, or any controlling person shall be entitled to as a matter of law. -6- 7 3.3 In any case in which one party hereto (the "Indemnifying Party") may be asked to indemnify or hold the other party hereto (the "Indemnified Party") harmless, the Indemnified Party will notify the Indemnifying Party in writing promptly after identifying any situation which it believes presents or appears likely to present a claim for indemnification (an "Indemnification Claim") against the Indemnifying Party, although the failure to do so shall not relieve the Indemnifying Party from any liability which it may otherwise have to the Indemnified Party, and the Indemnified Party shall keep the Indemnifying Party advised with respect to all developments concerning such situation. The Indemnifying Party shall be entitled to participate at its own expense in the defense, or if it so elects, to assume the defense of, any Indemnification Claim which may be the subject of this indemnification, and, in the event that the Indemnifying Party so elects, such defense shall be conducted by counsel of good standing chosen by the Indemnifying Party and approved by the Indemnified Party, which approval shall not be unreasonably withheld. In the event the Indemnifying Party elects to assume the defense of any such Indemnification Claim and retain such counsel, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by the Indemnified Party. In the event that the Indemnifying Party does not elect to assume the defense of any such Indemnification Claim, or in case the Indemnified Party reasonably does not approve of counsel chosen by the Indemnifying Party, or in case there is a conflict of interest between the Indemnifying Party or the Indemnified Party, the Indemnifying Party will reimburse the Indemnified Party for the fees and expenses of any counsel retained by the Indemnified Party. The Fund agrees promptly to notify the Distributor of the commencement of any litigation or proceedings against the Fund or any of its officers or trustees in connection with the issue and sale of any of the Shares, and the Distributor agrees promptly to notify the Fund of the commencement of any litigation or proceedings against the Distributor or any of its officers, directors, employees or controlling persons in connection with the issuance and sale of any of the Shares. The Indemnified Party will not confess any Indemnification Claim or make any compromise in any case in which the Indemnifying Party will be asked to provide indemnification, except with the Indemnifying Party's prior written consent. 3.4 The obligations of the parties hereto under this Section 3 shall survive the termination of this Agreement. 3.5 The Fund's indemnification agreement contained in this Section 3 and the Fund's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Distributor, its officers, directors and employees, or any controlling person, and shall survive the delivery of any Shares. This agreement of indemnity will inure exclusively to the Distributor's benefit, to the benefit of its several officers, directors and employees, and their respective estates and to the benefit of its controlling persons and their successors. 3.6 The Distributor's indemnification agreement contained in this Section 3 and the Distributor's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Fund -7- 8 or its officers and trustees, or any controlling person, and shall survive the delivery of any Shares. 4. STANDARD OF CARE; LIMITATION OF LIABILITY 4.1 The Distributor shall not be liable to the Fund for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of its obligations and duties under this Agreement, except a loss resulting from: (a) the Distributor's willful misfeasance, bad faith or negligence in the performance of such obligations and duties, or by reason of its reckless disregard thereof; or (b) the Distributor's breach of Section 12 of this Agreement. 4.2 Each party shall have the duty to mitigate damages for which the other party may become responsible. 4.3 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO THE OTHER PARTY FOR CONSEQUENTIAL DAMAGES, PROVIDED, HOWEVER, THAT NOTHING CONTAINED IN THIS SECTION 4.3 SHALL BE CONSTRUED SO AS TO LIMIT THE RIGHTS OF ANY SHAREHOLDER OF THE FUND, WHETHER SUING ON HIS, HER OR ITS OWN BEHALF OR DERIVATIVELY THROUGH THE FUND, TO CONSEQUENTIAL DAMAGES. 5. TERM 5.1 This Agreement shall become effective on the date first written above and, unless sooner terminated as provided herein, shall continue until September 30, 2000 and thereafter shall continue automatically for successive one-year terms, provided such continuance is specifically approved at least annually by (i) the Fund's Board of Trustees or (ii) by a vote of a majority (as defined in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting securities of the Fund, provided that in either event the continuance is also approved by a majority of the trustees who are not parties to this Agreement and who are not interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. This Agreement is terminable without penalty, on at least sixty days' written notice, by the Fund's Board of Trustees, by vote of a majority (as defined in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting securities of the Fund, or by the Distributor. This Agreement will also terminate automatically in the event of its assignment (as defined in the 1940 Act and the rules thereunder). 5.2 In the event a termination notice is given by the Fund and provided that the Distributor is not in default under this Agreement at the time of such termination notice, all expenses associated with movement of records and materials and conversion thereof to a successor distributor will be borne by the Fund. -8- 9 6. MODIFICATIONS AND WAIVERS No change, termination, modification, or waiver of any term or condition of the Agreement shall be valid unless in writing signed by each party. No such writing shall be effective as against the Distributor unless said writing is executed by a Senior Vice President, Executive Vice President or President of the Distributor. No such writing shall be effective as against the Fund unless said writing is executed by the Chairman of the Fund's Board of Trustees. A party's waiver of a breach of any term or condition in the Agreement shall not be deemed a waiver of any subsequent breach of the same or another term or condition. 7. NO PRESUMPTION AGAINST DRAFTER The Distributor and the Fund have jointly participated in the negotiation and drafting of this Agreement. The Agreement shall be construed as if drafted jointly by the Fund and the Distributor, and no presumptions arise favoring any party by virtue of the authorship of any provision of this Agreement. 8. PUBLICITY Neither the Distributor nor the Fund shall release or publish news releases, public announcements, advertising or other publicity relating to this Agreement or to the transactions contemplated by it without prior review and written approval of the other party; provided, however, that either party may make such disclosures as are required by legal, accounting or regulatory requirements after making reasonable efforts in the circumstances to consult in advance with the other party. 9. SEVERABILITY The parties intend every provision of this Agreement to be severable. If a court of competent jurisdiction determines that any term or provision is illegal or invalid for any reason, the illegality or invalidity shall not affect the validity of the remainder of this Agreement. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties. Without limiting the generality of this paragraph, if a court determines that any remedy stated in this Agreement has failed of its essential purpose, then all other provisions of this Agreement shall remain fully effective. 10. FORCE MAJEURE No party shall be liable for any default or delay in the performance of its obligations under this Agreement if and to the extent such default or delay is caused, directly or indirectly, by circumstances beyond such party's reasonable control. In any such event, the non-performing party shall be excused from any further performance and observance of the obligations so affected only for so long as such circumstances prevail and such -9- 10 party continues to use commercially reasonable efforts to recommence performance or observance as soon as practicable. 11. MISCELLANEOUS 11.1 Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or the Distributor shall be sufficiently given if addressed to the party and received by it at its office set forth below or at such other place as it may from time to time designate in writing. To the Fund: James D. Grassi, Esq. The Northern Trust Company 50 South LaSalle Street - M-9 Chicago, IL 60675 with a copy to: Jeffrey A. Dalke, Esq. One Logan Square 18th and Cherry Streets Philadelphia, PA 19103-6996 To the Distributor: c/o Provident Distributors, Inc. Four Falls Corporate Center 6th Floor West Conshohocken, PA 19428-2961 with a copy to the Distributor's Chief Legal Officer 11.2 The laws of the Commonwealth of Massachusetts, excluding the applicable provisions of the 1940 Act, shall govern the interpretation, validity, and enforcement of this Agreement. To the extent the provisions of Massachusetts law or the provisions hereof conflict with the 1940 Act, the 1940 Act shall control. All actions arising from or related to this Agreement shall be brought in the state and federal courts sitting in the City of Boston, and the Distributor and the Fund hereby submit themselves to the exclusive jurisdiction of those courts. 11.3 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and which collectively shall be deemed to constitute only one instrument. -10- 11 11.4 The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. 11.5 This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and is not intended to confer upon any other person any rights or remedies hereunder. 12. CONFIDENTIALITY 12.1 The parties agree that the Proprietary Information (defined below) is confidential information of the parties and their respective licensers. The Fund and the Distributor shall exercise at least the same degree of care, but not less than reasonable care, to safeguard the confidentiality of the Proprietary Information of the other as it would protect its own Proprietary Information. The Fund and the Distributor may use the Proprietary Information only to exercise their respective rights or perform their respective duties under this Agreement. Except as otherwise required by law, the Fund and the Distributor shall not duplicate, sell or disclose to others the Proprietary Information of the other, in whole or in part, without the prior written permission of the other party. The Fund and the Distributor may, however, disclose Proprietary Information to their respective employees who have a need to know the Proprietary Information to perform work for the other, provided that the Fund and the Distributor shall use reasonable efforts to ensure that the Proprietary Information is not duplicated or disclosed by their respective employees in breach of this Agreement. The Fund and the Distributor may also disclose the Proprietary Information to independent contractors, auditors and professional advisors, provided they first agree in writing to be bound by confidentiality obligations substantially similar to this Section 12. Notwithstanding the previous sentence, in no event shall either the Fund or the Distributor disclose the Proprietary Information to any competitor of the other without specific, prior written consent. 12.2 Proprietary Information means: (a) any data or information that is completely sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finance, operations, customer relationships, customer profiles, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or the Distributor, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or the Distributor a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, -11- 12 inventions, know-how, show-how and trade secrets, whether or not patentable or copyrightable; (d) all documents, inventions, substances, engineering and laboratory notebooks, drawings, diagrams, specifications, bills of material, equipment, prototypes and models, and any other tangible manifestation of the foregoing of either party which now exist or come into the control or possession of the other; and (e) with respect to the Fund, all records and other information relative to the Fund and its prior, present or potential shareholders (and clients of such shareholders). 12.3 Notwithstanding the foregoing, it is hereby understood and agreed by the parties hereto that any marketing strategies, financing plans, customer profiles, sales estimates, business plans or similar items prepared or developed by the Distributor for the benefit of the Fund shall be considered the Proprietary Information of the Fund and nothing in this Agreement shall be construed to prevent or prohibit the Fund from disclosing such Proprietary Information to a successor distributor. 12.4 The obligations of the parties hereto under this Section 12 shall survive the termination of this Agreement. 13. TRUSTEE AND SHAREHOLDER LIABILITY This Agreement is executed by or on behalf of the Fund with respect to each of the Portfolios and the obligations hereunder are not binding upon any of the trustees, officers or shareholders of the Fund individually but are binding only upon the Portfolio to which such obligations pertain and the assets and property of such Portfolio. All obligations of the Fund under this Agreement shall apply only on a Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be liable for the obligations of another Portfolio. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. 14. ENTIRE AGREEMENT This Agreement, including all Schedules hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous proposals, agreements, contracts, representations, and understandings, whether written or oral, between the parties with respect to the subject matter hereof. -12- 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the day and year first above written. NORTHERN FUNDS By: /s/ Jylanne Dunne ----------------------------- Name: Jylanne Dunne -------------------------- Title: Sr. Vice President ------------------------- NORTHERN FUNDS DISTRIBUTORS, LLC By: /s/ Jason A. Greim ----------------------------- Name: Jason A. Greim -------------------------- Title: Vice President ------------------------- -13- 14 SCHEDULE A NAME OF PORTFOLIOS Money Market Fund U.S. Government Money Market Fund U.S. Government Select Money Market Fund Tax-Exempt Money Market Fund Municipal Money Market Fund California Municipal Money Market Fund U.S. Government Fund Short-Intermediate U.S. Government Fund Intermediate Tax-Exempt Fund California Intermediate Tax-Exempt Fund Florida Intermediate Tax-Exempt Fund Fixed Income Fund Tax-Exempt Fund Arizona Tax-Exempt Fund California Tax-Exempt Fund International Fixed Income Fund High Yield Municipal Fund High Yield Fixed Income Fund Income Equity Fund Stock Index Fund Growth Equity Fund Select Equity Fund Mid Cap Growth Fund Small Cap Index Fund Small Cap Fund Small Cap Growth Fund International Growth Equity Fund International Select Equity Fund Technology Fund 15 SCHEDULE B DISTRIBUTION SERVICES The Distributor shall, at its own expense, finance appropriate activities which are primarily intended to result in the sale of the Shares. Such services shall include, but are not limited to: 1. Preparation and execution of selling agreements monitoring accruals monitoring expenses making disbursements for expenses and fees 2. Advertising and sales literature submission to the NASD 3. Investor qualification calls, as necessary 4. Printing and mailing of Prospectuses to other than existing shareholders 5. Formation and maintenance of a private label distributor for the Shares -2- EX-99.B.(E)(2) 8 FORM OF AMNDED AND RESTATED SCHED. A TO DIST. AGMT 1 EXHIBIT (e)(2) AMENDED AND RESTATED SCHEDULE A TO THE DISTRIBUTION AGREEMENT BY AND BETWEEN NORTHERN FUNDS AND NORTHERN FUNDS DISTRIBUTORS, LLC DATED ____________, 1999 Intending to be legally bound, the undersigned hereby amend and restate Schedule A to the aforesaid Agreement to include the following investment portfolios: Money Market Fund International Fixed Income Fund U.S. Government Money Market Fund High Yield Municipal Fund U.S. Government Select Money Market Fund High Yield Fixed Income Fund Tax-Exempt Money Market Fund Income Equity Fund Municipal Money Market Fund Stock Index Fund California Municipal Money Market Fund Growth Equity Fund U.S. Government Fund Select Equity Fund Short-Intermediate U.S. Government Fund Mid Cap Growth Fund Intermediate Tax-Exempt Fund Small Cap Index Fund California Intermediate Tax-Exempt Fund Small Cap Fund Florida Intermediate Tax-Exempt Fund Small Cap Growth Fund Fixed Income Fund International Growth Equity Fund Tax-Exempt Fund International Select Equity Fund Arizona Tax-Exempt Fund Technology Fund California Tax-Exempt Fund MarketPower Fund All signatures need not appear on the same copy of this Amended and Restated Schedule A. NORTHERN FUNDS By: _________________________ Title: ______________________ Date: _______________________ NORTHERN FUNDS DISTRIBUTORS, LLC By: _________________________ Title: ______________________ Date: _______________________ EX-99.B.(G)(13) 9 ADDENDUM NO. 9 TO CUSTODIAN AGREEMENT 1 EXHIBIT (g)(13) NORTHERN FUNDS ADDENDUM NO. 9 TO THE CUSTODIAN AGREEMENT This Addendum, dated as of the 15th day of September, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern"). WHEREAS, the Trust and Northern have entered into a Custodian Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated August 6, 1996, by Addendum No. 5 dated March 24, 1997, by Addendum No. 6 dated February 12, 1997, by Addendum No. 7 dated November 18, 1997 and by Addendum No. 8 dated December 21, 1998 (the "Custodian Agreement") pursuant to which the Trust has appointed Northern to act as custodian to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund and the High Yield Fixed Income Fund; WHEREAS, the Trust is establishing the Tax-Exempt Money Market and the Small Cap Growth Funds (the "Funds"), and the Trust desires to retain Northern under the terms of the Custodian Agreement to act as the custodian for the Funds, and Northern is willing to so act; and WHEREAS, the Trust and Northern desire to enter into this Addendum No. 9 to provide compensation for each Fund for uninvested cash balances maintained with Northern under the Custodian Agreement; NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints Northern custodian to the Trust for the Funds in accordance with the terms set forth in the Custodian Agreement. Northern hereby accepts such appointment and agrees to render the services set forth in the Custodian Agreement for the compensation therein provided. 2 2. Capitalized Terms. From and after the date hereof, the term "Funds" as used in the Custodian Agreement shall be deemed to include the Funds. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Custodian Agreement. 3. Cash Balance Compensation. Northern shall compensate each Fund for uninvested cash balances maintained with Northern at the end of each day ("Cash Balance Compensation") in accordance with this paragraph. Cash Balance Compensation with respect to each Fund's uninvested cash balance shall be determined at the end of each day based on an annual rate equal to 96% of the previous calendar month's average 90-day Treasury bill interest rate. The amount of each Fund's accumulated Cash Balance Compensation shall be paid monthly in the form of reductions to the custody fees otherwise allocable to the Fund under the Custodian Agreement for such month. In the event that a Fund's Cash Balance Compensation for any month exceeds the custody fees payable by the Fund under the Custodian Agreement for such month, the Fund's excess Cash Balance Compensation may be carried forward and credited against future custody fees, provided that no excess Cash Balance Compensation may be carried forward beyond the end of any fiscal year. 4. Miscellaneous. The initial term of the Custodian Agreement with respect to the Funds shall continue, unless sooner terminated in accordance with the Custodian Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Custodian Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. 3 IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. All signatures need not appear on the same copy of this Addendum. NORTHERN FUNDS Attest: /s/ Diane Anderson By: /s/ Silas S. Cathcart ------------------------ ------------------------------- Title: President ----------------------------- THE NORTHERN TRUST COMPANY Attest: /s/ Diane Anderson By: /s/ Archibald E. King ------------------------ ------------------------------- Title: Vice President ----------------------------- EX-99.B.(G)(14) 10 FORM OF ADDENDUM NO. 9 TO THE CUST. AGMT 1 EXHIBIT (g)(14) NORTHERN FUNDS ADDENDUM NO. 10 TO THE CUSTODIAN AGREEMENT This Addendum, dated as of the ____ day of _________, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern"). WHEREAS, the Trust and Northern have entered into a Custodian Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated August 6, 1996, by Addendum No. 5 dated March 24, 1997, by Addendum No. 6 dated February 12, 1997, by Addendum No. 7 dated November 18, 1997, by Addendum No. 8 dated December 21, 1998 and by Addendum No. 9 dated September 15, 1999 (the "Custodian Agreement") pursuant to which the Trust has appointed Northern to act as custodian to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, Tax-Exempt Money Market and the Small Cap Growth Fund; WHEREAS, the Trust is establishing the MarketPower Fund (the "Fund"), and the Trust desires to retain Northern under the terms of the Custodian Agreement to act as the custodian for the Fund, and Northern is willing to so act; and WHEREAS, the Trust and Northern desire to enter into this Addendum No. 10 to provide compensation for the Fund for uninvested cash balances maintained with Northern under the Custodian Agreement; NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints Northern custodian to the Trust for the Fund in accordance with the terms set forth in the Custodian Agreement. Northern hereby accepts such appointment and agrees to render the services set forth in the Custodian Agreement for the compensation therein provided. 2. Capitalized Terms. From and after the date hereof, the term "Funds" as used in the Custodian Agreement shall be deemed to include the Fund. 2 Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Custodian Agreement. 3. Cash Balance Compensation. Northern shall compensate the Fund for uninvested cash balances maintained with Northern at the end of each day ("Cash Balance Compensation") in accordance with this paragraph. Cash Balance Compensation with respect to the Fund's uninvested cash balance shall be determined at the end of each day based on an annual rate equal to 96% of the previous calendar month's average 90-day Treasury bill interest rate. The amount of the Fund's accumulated Cash Balance Compensation shall be paid monthly in the form of reductions to the custody fees otherwise allocable to the Fund under the Custodian Agreement for such month. In the event that the Fund's Cash Balance Compensation for any month exceeds the custody fees payable by the Fund under the Custodian Agreement for such month, the Fund's excess Cash Balance Compensation may be carried forward and credited against future custody fees, provided that no excess Cash Balance Compensation may be carried forward beyond the end of any fiscal year. 4. Miscellaneous. The initial term of the Custodian Agreement with respect to the Fund shall continue, unless sooner terminated in accordance with the Custodian Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Custodian Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. -2- 3 IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. All signatures need not appear on the same copy of this Addendum. NORTHERN FUNDS Attest: ___________________ By: ________________________________ Title: __________________________ THE NORTHERN TRUST COMPANY Attest: ____________________ By: ________________________________ Title: ___________________________ -3- EX-99.B.(H)(9) 11 ADDENDUM NO. 8 TO TRANS. AGENCY AGMT 1 EXHIBIT (h)(9) NORTHERN FUNDS ADDENDUM NO. 8 TO THE TRANSFER AGENCY AGREEMENT This Addendum, dated as of the 15th day of September, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent"). WHEREAS, the Trust and the Transfer Agent have entered into a Transfer Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated March 24, 1997, by Addendum No. 5 dated February 12, 1997, by Addendum No. 6 dated November 18, 1997 and by Addendum No. 7 dated December 21, 1998 (the "Transfer Agency Agreement") pursuant to which the Trust has appointed the Transfer Agent to act as transfer agent to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund and the High Yield Fixed Income Fund; and WHEREAS, the Trust is establishing the Tax-Exempt Money Market and the Small Cap Growth Funds (the "Funds"), and the Trust desires to retain the Transfer Agent under the terms of the Transfer Agency Agreement to render transfer agency and other services with respect to the Funds and the record and/or beneficial owners of the Funds, and the Transfer Agent is willing to render such services. NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints the Transfer Agent as transfer agent with respect to the Funds in accordance with the terms set forth in the Transfer Agency Agreement. The Transfer Agent hereby accepts such appointment and agrees to render the services and perform the duties set forth in the Transfer Agency Agreement for the compensation therein provided. 2 2. Capitalized Terms. From and after the date hereof, the term "Current Funds" as used in the Transfer Agency Agreement shall be deemed to include the Funds. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Transfer Agency Agreement. 3. Miscellaneous. The initial term of the Transfer Agency Agreement with respect to the Funds shall continue, unless sooner terminated in accordance with the Transfer Agency Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Transfer Agency Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. All signatures need not appear on the same copy of this Addendum. NORTHERN FUNDS Attest: /s/ Diane Anderson By: /s/ Silas S. Cathcart ------------------------ ------------------------------------ Title: President --------------------------------- THE NORTHERN TRUST COMPANY Attest: /s/ Diane Anderson By: /s/ Archibald E. King ------------------------ ------------------------------------ Title: Vice President -------------------------------- EX-99.B.(H)(10) 12 FORM OF ADDENDUM NO. 9 TO THE TRANS. AGNCY. AGMT. 1 EXHIBIT (h)(10) NORTHERN FUNDS ADDENDUM NO. 9 TO THE TRANSFER AGENCY AGREEMENT This Addendum, dated as of the ____ day of _______________, 1999, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent"). WHEREAS, the Trust and the Transfer Agent have entered into a Transfer Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated March 24, 1997, by Addendum No. 5 dated February 12, 1997, by Addendum No. 6 dated November 18, 1997, Addendum No. 7 dated December 21, 1998 and by Addendum No. 8 dated September 15, 1999 (the "Transfer Agency Agreement") pursuant to which the Trust has appointed the Transfer Agent to act as transfer agent to the Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, Tax-Exempt Money Market Fund and the Small Cap Growth Fund; and WHEREAS, the Trust is establishing the MarketPower Fund (the "Fund"), and the Trust desires to retain the Transfer Agent under the terms of the Transfer Agency Agreement to render transfer agency and other services with respect to the Fund and the record and/or beneficial owners of the Fund, and the Transfer Agent is willing to render such services. NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment. The Trust hereby appoints the Transfer Agent as transfer agent with respect to the Fund in accordance with the terms set forth in the Transfer Agency Agreement. The Transfer Agent hereby accepts such appointment and agrees to render the services and perform the duties set forth in the Transfer Agency Agreement for the compensation therein provided. 2 2. Capitalized Terms. From and after the date hereof, the term "Current Funds" as used in the Transfer Agency Agreement shall be deemed to include the Fund. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Transfer Agency Agreement. 3. Miscellaneous. The initial term of the Transfer Agency Agreement with respect to the Fund shall continue, unless sooner terminated in accordance with the Transfer Agency Agreement, until March 31, 2000. Except to the extent supplemented hereby, the Transfer Agency Agreement shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as supplemented hereby. IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the date and year first above written. All signatures need not appear on the same copy of this Addendum. NORTHERN FUNDS Attest: ___________________ By: _______________________________ Title: ________________________ THE NORTHERN TRUST COMPANY Attest: ___________________ By: _______________________________ Title: ________________________ EX-99.B.(H)(11) 13 AMENDED AND RESTATED SERVICE PLAN AND RELATED AGMT 1 EXHIBIT (h)(11) NORTHERN FUNDS AMENDED AND RESTATED SERVICE PLAN Section 1. Upon the recommendation of the co-administrators of Northern Funds, any officer of Northern Funds is authorized to execute and deliver, in the name and on behalf of Northern Funds, written agreements based on the form attached hereto as Appendix A or any other form duly approved by the Board of Trustees ("Agreements") with securities dealers, financial institutions and other industry professionals that are shareholders or dealers of record or which have a servicing relationship with the beneficial owners of Shares of Northern Funds ("Service Organizations"). Pursuant to such Agreements, Service Organizations shall provide support services as set forth therein to their clients who beneficially own Shares of any Fund offered by Northern Funds in consideration of a fee, computed monthly in the manner set forth in the Agreements, at an annual rate of up to .25% of the average daily net asset value of the Shares beneficially owned by such clients. The Northern Trust Company and its affiliates are eligible to become Service Organizations and to receive fees under this Plan. Section 2. The co-administrators shall monitor the arrangements pertaining to Northern Funds' Agreements with Service Organizations in accordance with the terms of their co-administration agreement with Northern Funds. The co-administrators shall not, however, be obliged by this Plan to recommend, and Northern Funds shall not be obliged to execute, any Agreement with any qualifying Service Organization. Section 3. So long as this Plan is in effect, the co-administrators shall provide to Northern Funds' Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan and the purposes for which such expenditures were made. Section 4. This Plan shall become effective immediately with respect to each particular Fund upon the approval of the Plan (and the form of Agreement attached hereto) by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Act, of Northern Funds and have no direct or indirect financial interest in the operation of this Plan or in any Agreement related to this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan (and form of Agreement). Section 5. Unless sooner terminated, this Plan shall continue until March 31, 2000 and thereafter shall continue automatically for successive annual periods provided such continuance is approved at least annually in the manner set forth in Section 4. 2 Section 6. This Plan may be amended at any time with respect to any Fund by the Board of Trustees, provided that any material amendment of the terms of this Plan shall become effective only upon the approvals set forth in Section 4. Section 7. This Plan is terminable at any time with respect to any Fund by vote of a majority of the Disinterested Trustees. Section 8. All expenses incurred by Northern Funds with respect to the Shares of a particular Fund in connection with Agreements and the implementation of this Plan shall be borne entirely by such Fund. Section 9. This Plan was originally adopted by Northern Funds as of April 1, 1994 and most recently revised as of September 15, 1999. -2- 3 Appendix A SERVICING AGREEMENT Gentlemen: We wish to enter into this Servicing Agreement with you concerning the provision of support services to your clients ("Clients") who may from time to time beneficially own shares of any Fund ("Shares") offered by Northern Funds. The terms and conditions of this Servicing Agreement are as follows: Section 1. You agree to provide one or more of the following support services to Clients who may from time to time beneficially own Shares: (i) processing dividend and distribution payments from us on behalf of Clients; (ii) providing information periodically to Clients showing their positions in Shares; (iii) arranging for bank wires; (iv) responding to Client inquiries relating to the services performed by you; (v) providing subaccounting with respect to Shares beneficially owned by Clients or the information to us necessary for subaccounting; (vi) if required by law, forwarding shareholder communications from us (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to Clients; (vii) processing exchange and redemption requests from Clients and placing net exchange and redemption orders with our service contractors; (viii) assisting Clients in changing dividend options, account designations and addresses; and (ix) providing such other similar services as we may reasonably request to the extent you are permitted to do so under applicable statutes, rules and regulations. Section 2. You will provide such office space and equipment, telephone facilities and personnel (which may be any part of the space, equipment and facilities currently used in your business, or any personnel employed by you) as may be reasonably necessary or beneficial in order to provide the aforementioned services and assistance to Clients. Section 3. Neither you nor any of your officers, employees or agents are authorized to make any representations concerning us or the Shares except those contained in our then current prospectuses and statements of additional information for Shares, copies of which will be supplied by us to you, or in such supplemental literature or advertising as may be authorized by us in writing. Section 4. For all purposes of this Agreement you will be deemed to be an independent contractor, and will have no authority to act as agent for us in any matter or in any respect. By your written acceptance of this Agreement, you agree to and do release, indemnify and hold us harmless from and against any and all direct or indirect liabilities or losses resulting from requests, directions, actions or inactions of or by you or your officers, employees or agents regarding your responsibilities hereunder or the purchase, redemption, transfer or registration of A-1 4 Shares by or on behalf of Clients. You and your employees will, upon request, be available during normal business hours to consult with us or our designees concerning the performance of your responsibilities under this Agreement. Section 5. In consideration of the services and facilities provided by you hereunder, we will pay to you, and you will accept as full payment therefor, a fee at the annual rate of .____ of 1% of the average daily net asset value of the Shares beneficially owned by your Clients for whom you are the dealer of record or holder of record or with whom you have a servicing relationship (the "Clients' Shares"), which fee will be computed daily and payable monthly. For purposes of determining the fees payable under this Section 5, the average daily net asset value of the Clients' Shares will be computed in the manner specified in our Registration Statement (as the same is in effect from time to time) in connection with the computation of the net asset value of Shares for purposes of purchases and redemptions. The fee rate stated above may be prospectively increased or decreased by us, in our sole discretion, at any time upon notice to you. Further, we may, in our discretion and without notice, suspend or withdraw the sale of Shares, including the sale of Shares to you for the account of any Client or Clients. All fees payable by Northern Funds under this Agreement with respect to the Shares of a particular Fund shall be borne by, and be payable entirely out of the assets allocable to, said Shares; and no other class of Shares of any other Fund offered by Northern Funds shall be responsible for such fees. Section 6. Any person authorized to direct the disposition of monies paid or payable by us pursuant to this Agreement will provide to our Board of Trustees, and our Trustees will review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. In addition, you will furnish us or our designees with such information as we or they may reasonably request (including, without limitation, periodic certifications confirming the provision to Clients of the services described herein), and will otherwise cooperate with us and our designees (including, without limitation, any auditors designated by us), in connection with the preparation of reports to our Board of Trustees concerning this Agreement and the monies paid or payable by us pursuant hereto, as well as any other reports or filings that may be required by law. Section 7. We may enter into other similar Servicing Agreements with any other person or persons without your consent. Section 8. By your written acceptance of this Agreement, you represent, warrant and agree that: (i) the compensation payable to you hereunder, together with any other compensation you receive from Clients for services contemplated by this Agreement, will not be excessive or unreasonable under the laws and instruments governing your relationships with Clients; (ii) you will provide to Clients a schedule of any fees that you may charge to them relating to the investment of their assets in Shares; and (iii) the services provided by you under this Agreement will in no event be primarily intended to result in the sale of Shares. Section 9. This Agreement will become effective on the date a fully executed copy of this Agreement is received by us or our designee. Unless sooner terminated, this Agreement will continue until the next March 31, and thereafter will continue automatically for A-2 5 successive annual periods provided such continuance is specifically approved at least annually by us in the manner described in Section 12. This Agreement is terminable with respect to the Shares of any Fund, without penalty, at any time by us (which termination may be by a vote of a majority of the Disinterested Trustees as defined in Section 12) or by you upon notice to the other party hereto. Section 10. All notices and other communications to either you or us will be duly given if mailed, telegraphed, telexed or transmitted by similar telecommunications device to the appropriate address stated herein. Section 11. This Agreement will be construed in accordance with the laws of the State of Illinois. Section 12. This Agreement has been approved by vote of a majority of (i) our Board of Trustees and (ii) those Trustees who are not "interested persons" (as defined in the Investment Company Act of 1940) of us and have no direct or indirect financial interest in the operation of the Service Plan adopted by us or in any agreement related thereto cast in person at a meeting called for the purpose of voting on such approval ("Disinterested Trustees"). This Agreement is executed by or on behalf of the Trust and the obligations hereunder are not binding upon any of the Trustees, Officers or Shareholders of the Trust individually but are binding only upon the Trust and its assets and property. All obligations of the Trust under this Agreement shall apply only on a Fund by Fund basis, and the assets of one Fund shall not be liable for the obligations of another Fund. The Trust's Agreement and Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. If you agree to be legally bound by the provisions of this Agreement, please sign a copy of this letter where indicated below and promptly return it to us, c/o The Northern Trust Company, 50 South LaSalle Street, Chicago, Illinois, 60675. Very truly yours, NORTHERN FUNDS By:_______________________________ Date:_______________________ (Authorized Officer) Accepted and Agreed to: By:_______________________________ Date:_______________________ (Authorized Officer) A-3 EX-99.B.(H)(12) 14 CO-ADMINISTRATION AGREEMENT 1 EXHIBIT (h)(12) CO-ADMINISTRATION AGREEMENT THIS ADMINISTRATION AGREEMENT (the "Agreement"), dated as of this 1st day of October, 1999 (the "Effective Date"), by and among FIRST DATA INVESTOR SERVICES GROUP, INC. ("Investor Services Group"), a Massachusetts corporation, THE NORTHERN TRUST COMPANY ("Northern"), an Illinois state bank (each a "Co-Administrator" and collectively, the "Co-Administrators"), and NORTHERN FUNDS (the "Fund"), a Massachusetts business trust. WHEREAS, the Fund is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Fund desires to retain the Co-Administrators to render certain administrative services with respect to each investment portfolio listed in Schedule A hereto, as the same may be amended from time to time by the parties hereto (collectively, the "Portfolios"), and the Co-Administrators are willing to render such services. WITNESSETH: NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein and intending to be legally bound hereby, the parties hereto agree as follows: Article 1 Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: (a) "Advisory Agreement" shall mean the Investment Advisory and Ancillary Services Agreement between the Fund and Northern made as of April 1, 1994, as currently in effect and as amended and/or superseded from time to time. (b) "Articles of Incorporation" shall mean the Articles of Incorporation, Declaration of Trust, or other similar organizational document as the case may be, of a party as the same may be amended from time to time. (c) "Assign" and "Assignment" shall have the same meaning herein as the term "assignment" has in the 1940 Act. (d) "Authorized Person" shall be deemed to include (i) any Board Member or officer of the Fund; or (ii) any person, whether or not such person is an officer or employee of the Fund, duly authorized to give Oral Instructions or Written Instructions on behalf of the Fund as indicated in writing to a Co-Administrator from time to time. 2 (e) "Board Members" shall mean the Directors or Trustees of the governing body of the Fund, as the case may be. (f) "Board of Directors" shall mean the Board of Directors or Board of Trustees of the Fund, as the case may be. (g) "By-Laws" shall mean the By-Laws of a party as the same may be amended from time to time. (h) "Commission" shall mean the Securities and Exchange Commission. (i) "Custodian" refers to any custodian or subcustodian of securities and other property, which the Fund may from time to time deposit, or cause to be deposited or held under the name or account of such a custodian pursuant to a custody agreement. (j) "1933 Act" shall mean the Securities Act of 1933 and the rules and regulations promulgated thereunder, all as amended from time to time. (k) "1940 Act" shall mean the Investment Company Act of 1940 and the rules and regulations promulgated thereunder, all as amended from time to time. (l) "Oral Instructions" shall mean instructions, other than Written Instructions, actually received by a Co-Administrator from a person reasonably believed by a Co-Administrator to be an Authorized Person. (m) "Prospectus" shall mean the most recently dated Fund Prospectuses and Statements of Additional Information, including any supplements thereto if any, which has become effective under the 1933 Act and the 1940 Act. (n) "Shares" refers collectively to such shares of capital stock or beneficial interest, as the case may be, or class thereof, of each respective Portfolio of the Fund as may be issued from time to time. (o) "Written Instructions" shall mean a written communication signed by a person reasonably believed by a Co-Administrator to be an Authorized Person and actually received by a Co-Administrator. Written Instructions shall include manually executed originals and authorized electronic transmissions, including telefacsimile of a manually executed original or other process. Article 2 Appointment of the Co-Administrators. The Fund hereby appoints Northern and Investor Services Group to act as Co-Administrators of the Fund for the period and on the terms set forth in this Agreement. Northern and Investor Services Group accept such appointment and agree to render the services herein set - 2 - 3 forth for the compensation herein provided. This Agreement shall be effective and binding on the parties hereto as of the Effective Date. Article 3 Duties of the Co-Administrators. 3.1 Subject to the general supervision of the Board of Directors, the Co-Administrators shall provide supervision of all aspects of the Fund's operations (other than those referred to in paragraph 3(a) of the Advisory Agreement) and perform the customary services of an administrator, including but not limited to the corporate secretarial, treasury and blue sky services set forth in Schedule B to this Agreement. 3.2 In performing their duties under this Agreement, the Co-Administrators: (a) will act in accordance with the Articles of Incorporation, By-Laws, Prospectus and with the Oral Instructions and Written Instructions of the Fund and will conform to and comply with the requirements of the 1940 Act and all other applicable federal or state laws and regulations; and (b) will consult with legal counsel to the Fund, as necessary and appropriate. Furthermore, the Co-Administrators shall not have or be required to have any authority to supervise the investment or reinvestment of the securities or other properties which comprise the assets of the Fund or any of its Portfolios and shall not provide any investment advisory services to the Fund or any of its Portfolios under this Agreement. 3.3 In addition to the duties set forth herein, the Co-Administrators shall perform such other duties and functions, and shall be paid such amounts therefor, as may from time to time be agreed upon in writing between the Fund and the Co-Administrators. 3.4 The Co-Administrators agree to provide the services described herein in accordance with the performance standards annexed hereto as Exhibit 1 of Schedule B and incorporated herein (the "Performance Standards"). Such Performance Standards may be amended from time to time upon written agreement by the parties. 3.5 The services of the Co-Administrators hereunder are not deemed exclusive and the Co-Administrators shall be free to render similar services to others so long as their services under this Agreement are not impaired thereby. Article 4 Recordkeeping and Other Information. 4.1 The Co-Administrators shall create and maintain all records required of them pursuant to their duties hereunder and as set forth in Schedule B in accordance with all applicable laws, rules and regulations, including records required by Section 31(a) of the 1940 Act. Where applicable, such records shall be maintained by the Co-Administrators for the periods and in the places required by Rule 31a-2 under the 1940 Act. 4.2 To the extent required by Section 31 of the 1940 Act, the Co-Administrators agree that all such records prepared or maintained by the Co-Administrators relating to the services to be performed by the Co-Administrators hereunder are the property of the Fund and will be - 3 - 4 preserved, maintained and made available in accordance with such section, and will be surrendered promptly to the Fund on and in accordance with the Fund's request. Article 5 Fund Instructions. 5.1 A Co-Administrator will have no liability when acting upon Written or Oral Instructions reasonably believed to have been executed or orally communicated by an Authorized Person and will not be held to have any notice of any change of authority of any person until receipt of a Written Instruction thereof from the Fund. 5.2 At any time, a Co-Administrator may request Written Instructions from the Fund and may seek advice from legal counsel for the Fund, or its own legal counsel, with respect to any matter arising in connection with this Agreement, and it shall not be liable for any action taken or not taken in good faith in accordance with such Written Instructions or in accordance with the opinion of counsel for the Fund or for the Co-Administrator. Written Instructions requested by a Co-Administrator will be provided by the Fund within a reasonable period of time. 5.3 Each Co-Administrator, its officers, agents or employees, shall accept Oral Instructions or Written Instructions given to them by any person representing or acting on behalf of the Fund only if said representative is an Authorized Person. The Fund agrees that all Oral Instructions shall be followed within one business day by confirming Written Instructions, and that the Fund's failure to so confirm shall not impair in any respect a Co-Administrator's right to rely on Oral Instructions. Article 6 Compensation. 6.1 Each Co-Administrator will from time to time employ or associate with itself such person or persons as the Co-Administrator may believe to be particularly suited to assist it in performing services under this Agreement. Such person or persons include officers and employees who are employed by both the Co-Administrator and the Fund. The Co-Administrator shall pay the compensation of such person or persons and no obligation shall be incurred on behalf of the Fund in such respect. 6.2 The Co-Administrators shall not be required to pay any of the following expenses incurred by the Fund: membership dues in the Investment Company Institute or any similar organization; investment advisory fees; custody and transfer agency fees; fees paid under any service or distribution plan adopted by the Fund; costs of printing and mailing stock certificates; costs of typesetting and printing of the Prospectus for regulatory purposes and for distribution to existing shareholders of the Portfolios; costs of shareholders' reports and notices; interest on borrowed money; brokerage commissions; stock exchange listing fees; taxes and fees payable to federal, state and other governmental agencies; fees of Board Members of the Fund who are not affiliated with the Co-Administrators; outside auditing expenses; outside legal expenses; blue sky registration or filing fees; or other expenses not specified in this Section 6.2 which may be properly payable by the Fund. The Co-Administrators shall not be required to pay any blue sky - 4 - 5 registration or filing fees unless and until they have received the amount of such fees from the Fund. 6.3 The Fund on behalf of each of the Portfolios will compensate the Co-Administrators for the performance of their obligations hereunder in accordance with the fees and charges set forth in the written Fee Schedule annexed hereto as Schedule C and incorporated herein. 6.4 During the term of this Agreement, the Co-Administrators will pay all expenses incurred by them in connection with the performance of their duties under Article 3 and Article 4 hereof, other than those items listed in Section 6.2 and those out-of-pocket costs of the preparations, submissions, updatings and filings of the Fund's Prospectus. 6.5 Any compensation agreed to hereunder may be adjusted from time to time by the unanimous consent of the parties. Article 7 Documents. In connection with the appointment of the Co-Administrators, the Fund shall, on or before the Effective Date, but in any case within a reasonable period of time for the Co-Administrators to prepare to perform their duties hereunder, deliver or caused to be delivered to the Co-Administrators the documents set forth in the written schedule of fund documents annexed hereto as Schedule D. Article 8 Fund Accounting System. 8.1 Each Co-Administrator shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights owned and/or developed by it in connection with the services provided by such Co-Administrator to the Fund pursuant to this Agreement (the "Co-Administrator System"). 8.2 Each Co-Administrator hereby grants to the Fund a limited license to the Co-Administrator System for the sole and limited purpose of having such Co-Administrator provide the services contemplated hereunder and nothing contained in this Agreement shall be construed or interpreted otherwise and such license shall immediately terminate with the termination of this Agreement. 8.3 In the event that the Fund, including any affiliate or agent of the Fund or any third party acting on behalf of the Fund, is provided with direct access to the Co-Administrator System, such direct access capability shall be limited to direct entry to the Co-Administrator System by means of on-line mainframe terminal entry or PC emulation of such mainframe terminal entry, and any other non-conforming method of transmission of information to the Co-Administrator System is strictly prohibited without the prior written consent of the particular Co-Administrator. - 5 - 6 Article 9 Representations and Warranties. 9.1 Investor Services Group represents and warrants to the Fund that: (a) it is a corporation duly organized, existing and in good standing under the laws of the jurisdiction in which it is organized; (b) it is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform the services contemplated by this Agreement; (c) all requisite corporate proceedings have been taken to authorize it to enter into this Agreement; and (d) it has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 9.2 Northern represents and warrants to the Fund that: (a) it is duly organized, existing and in good standing under the laws of the jurisdiction in which it is organized; (b) it is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform the services contemplated by this Agreement; (c) all requisite corporate proceedings have been taken to authorize it to enter into this Agreement; and (d) it has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 9.3 The Fund represents and warrants to each Co-Administrator that: (a) it is duly organized, existing and in good standing under the laws of the jurisdiction in which it is organized; (b) it is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into this Agreement; (c) all corporate proceedings required by said Articles of Incorporation, By-Laws and applicable laws have been taken to authorize it to enter into this Agreement; (d) a registration statement under the 1933 Act and the 1940 Act on behalf of each of the Portfolios is currently effective; and - 6 - 7 (e) as of the date hereof, each Portfolio is duly registered and lawfully eligible for sale in each jurisdiction indicated for such Portfolio on the list furnished to the Co-Administrators pursuant to Article 7 of this Agreement and that it will notify the Co-Administrators immediately of any changes to the aforementioned list. Article 10 Indemnification. 10.1 The Fund shall indemnify and hold each Co-Administrator harmless from and against any and all claims, costs, expenses (including reasonable attorneys' fees), losses, damages, charges, payments and liabilities of any sort or kind which may be asserted against a Co-Administrator or for which a Co-Administrator may be held to be liable in connection with this Agreement or a Co-Administrator's performance hereunder (a "Claim"), unless such Claim resulted from: (a) the willful misfeasance, bad faith or negligence of such Co-Administrator in the performance of its duties hereunder, or by reason of its reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14 of this Agreement. 10.2 The Fund agrees and acknowledges that the Co-Administrators have not prior to the Effective Date assumed, and will not assume, any obligations or liabilities arising out of the conduct by the Fund or its administrator prior to the Effective Date of those duties which the Co-Administrators have agreed to perform pursuant to this Agreement. The Fund further agrees to indemnify each Co-Administrator against any losses, claims, damages or liabilities to which a Co-Administrator may become subject in connection with the conduct by the Fund or its administrator of such duties prior to the Effective Date. 10.3 Each Co-Administrator jointly and severally shall indemnify and hold the Fund harmless from and against any and all claims, costs, expenses (including reasonable attorneys' fees), losses, damages, charges, payments and liabilities of any sort or kind which may be asserted against the Fund or for which the Fund may be held to be liable in connection with this Agreement or the Fund's performance hereunder (a "Claim"), provided that such Claim resulted from: (a) the willful misfeasance, bad faith or negligence of such Co-Administrator in the performance of its duties hereunder, or by reason of its reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14 of this Agreement. 10.4 In any case in which one party (the "Indemnifying Party") may be asked to indemnify or hold another party (the "Indemnified Party") harmless, the Indemnified Party will notify the Indemnifying Party in writing promptly after identifying any situation which it believes presents or appears likely to present a claim for indemnification (an "Indemnification Claim") against the Indemnifying Party, although the failure to do so shall not relieve the Indemnifying Party from any liability which it may otherwise have to the Indemnified Party, and the Indemnified Party shall keep the Indemnifying Party advised with respect to all developments concerning such situation. The Indemnifying Party shall be entitled to participate at its own expense in the defense, or if it so elects, to assume the defense of, any Indemnification Claim which may be the subject of this indemnification, and, in the event that the Indemnifying Party so elects, such defense shall be conducted by counsel of good standing chosen by the Indemnifying Party and approved by the Indemnified Party, which approval shall not be unreasonably withheld. In the event the Indemnifying Party elects to assume the defense of any - 7 - 8 such Indemnification Claim and retain such counsel, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by the Indemnified Party. In the event that the Indemnifying Party does not elect to assume the defense of any such Indemnification Claim, or in case the Indemnified Party reasonably does not approve of counsel chosen by the Indemnifying Party, or in case there is a conflict of interest between the Indemnifying Party or the Indemnified Party, the Indemnifying Party will reimburse the Indemnified Party for the fees and expenses of any counsel retained by the Indemnified Party. The Indemnified Party will not confess any Indemnification Claim or make any compromise in any case in which the Indemnifying Party will be asked to provide indemnification, except with the Indemnifying Party's prior written consent. The obligations of the parties hereto under this Article 10 shall survive the termination of this Agreement. Article 11 Standard of Care. 11.1 The Co-Administrators shall at all times act in good faith and agree to use their best efforts within commercially reasonable limits to ensure the accuracy of all services performed under this Agreement, but assume no responsibility for loss or damage to the Fund unless said errors are caused by the Co-Administrators' willful misfeasance, bad faith or negligence in the performance of their duties hereunder, or by reason of their reckless disregard thereof. 11.2 Each party shall have the duty to mitigate damages for which another party may become responsible. 11.3 Without in any way limiting the foregoing, in the event the Co-Administrators shall provide blue sky services to the Fund, the Co-Administrators shall have no liability for failing to file on a timely basis any material to be provided by the Fund or its designee that the Co-Administrators have not received on a timely basis from the Fund or its designee, nor shall the Co-Administrators have any responsibility to review the accuracy or adequacy of materials they receive from the Fund or its designee for filing; nor shall the Co-Administrators have any liability for monetary damages for the sale of securities in jurisdictions where Shares are not properly registered, or in jurisdictions where Shares are sold in excess of the lawfully registered amount, unless such failure of proper registration or excess sales is due to the willful misfeasance, bad faith or negligence of the Co-Administrators, or the reckless disregard of their duties hereunder. The Co-Administrators shall not be liable for any errors which result from inaccurate or inadequate information reported to the Co-Administrators directly or indirectly from the Fund's transfer agent. The Co-Administrators shall be under no obligation to investigate or confirm the accuracy or adequacy of any information provided to the Co-Administrators by the Fund's transfer agent. 11.4 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL ANY PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO ANY OTHER PARTY FOR CONSEQUENTIAL DAMAGES. - 8 - 9 Article 12 Term and Termination. 12.1 This Agreement shall be effective on the Effective Date and, unless sooner terminated as provided herein, shall continue until September 30, 2001 (the "Initial Term"). 12.2 Upon the expiration of the Initial Term, this Agreement shall continue automatically for successive one-year terms ("Renewal Terms") with respect to each Portfolio, provided such continuance is specifically approved at least annually by (i) the Board of Directors or (ii) by a vote of a majority (as defined in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting securities of the particular Portfolio, provided that in either event the continuance is also approved by a majority of the Board Members who are not parties to this Agreement and who are not interested persons (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. 12.3 The Fund may terminate this Agreement at any time after the Initial Term, with or without cause, and without penalty, on at least sixty (60) days written notice to the Co-Administrators. 12.4 Each Co-Administrator may terminate this Agreement with respect to itself at any time after the Initial Term, with or without cause, and without penalty, on at least sixty (60) days written notice to the Fund and the other Co-Administrator. 12.5 The Fund may terminate this Agreement at any time during the Initial Term in the event that the Fund or its shareholders incur damages in excess of one hundred thousand dollars ($100,000) as a result of the willful misfeasance, bad faith or negligence of the Co-Administrators, or the reckless disregard of their duties hereunder. For this purpose, "damages" is defined as damages caused by a single event, or cumulative series of events related to the same matter, which generates a monetary loss to the Fund or its shareholders. The Fund's right to terminate this Agreement pursuant to this Section 12.5 shall remain effective even if the Co-Administrators have made the Fund or its shareholders whole with respect to the damages caused. 12.6 The Fund may also terminate this Agreement at any time during the Initial Term, regardless of the amount of damages to the Fund or its shareholders, in the event that the Co-Administrators have failed to meet one of the performance standards set forth in Exhibit 1 to Schedule B (a "Triggering Event"). The Fund will provide the Co-Administrators with sixty (60) days written notice if the Fund intends to exercise its option to terminate this Agreement under this Section 12.6; provided, however, that such notice must be given within sixty (60) days following the end of the month in which the Triggering Event occurs. Notwithstanding the foregoing, the Fund's rights under this Section 12.6 shall not become effective until ninety (90) days following the Effective Date. 12.7 In the event this Agreement: (a) is terminated by the Fund pursuant to Section 12.5, Section 12.6 or Section 12.9 hereof; or (b) is not continued after the expiration of the Initial Term or any Renewal Term, all reasonable expenses associated with the movement of records and materials and conversion thereof to a successor administrator shall be borne by the Co- - 9 - 10 Administrators, and the Fund shall not be responsible for the Co-Administrators' costs associated with such termination; provided, however, that such expenses shall not exceed $25,000 in the event this Agreement is not continued after the expiration of the Initial Term or any Renewal Term. In the event this Agreement is terminated by the Fund pursuant to any other provision of this Agreement, all reasonable expenses associated with conversion to a successor administrator shall be borne by the Fund. 12.8 Notwithstanding anything contained in this Agreement to the contrary, unless this Agreement is terminated pursuant to Section 12.5, Section 12.6 or Section 12.9 hereof, should the Fund move any of the services provided by the Co-Administrators hereunder to a successor service provider during the Initial Term, or should, during the Initial Term, all or substantially all of the Fund's assets be merged with or purchased by another entity which does not utilize the services of the Co-Administrators, the Co-Administrators shall be entitled to receive fees from the Fund for the period from the date of such movement, merger or purchase until the end of the Initial Term (the "Unexpired Term"). The fees payable for the Unexpired Term shall be accelerated to the date of such movement, merger or purchase and shall be calculated in accordance with Section 6.3 herein at the asset levels on such date. 12.9 The Fund may terminate this Agreement upon its Assignment by a Co-Administrator unless the conditions to an Assignment as set forth in Article 16 hereof have been satisfied. Article 13 Additional Portfolios. In the event that the Fund establishes one or more Portfolios in addition to those identified in Schedule A with respect to which the Fund desires to have the Co-Administrators render services as administrator under the terms hereof, the Fund shall so notify the Co-Administrators in writing, and if the Co-Administrators agree in writing to provide such services, Schedule A shall be deemed amended to include such additional Portfolios. Article 14 Confidentiality. 14.1 The parties agree that the Proprietary Information (defined below) is confidential information of the parties and their respective licensers. The Fund and the Co-Administrators shall exercise at least the same degree of care, but not less than reasonable care, to safeguard the confidentiality of the Proprietary Information of each other as they would exercise to protect their own Proprietary Information. The Fund and the Co-Administrators may use the Proprietary Information only to exercise their respective rights or perform their respective duties under this Agreement. Except as otherwise required by law, the Fund and the Co-Administrators shall not duplicate, sell or disclose to others the Proprietary Information of the other, in whole or in part, without the prior written permission of the affected party. The Fund and the Co-Administrators may, however, disclose Proprietary Information to their respective employees who have a need to know the Proprietary Information to perform work for the other, provided that the Fund and the Co-Administrators shall use reasonable efforts to ensure that the Proprietary Information is not duplicated or disclosed by their respective employees in breach of this Agreement. The Fund and the Co-Administrators may also disclose the Proprietary Information to independent - 10 - 11 contractors, auditors and professional advisors, provided they first agree in writing to be bound by confidentiality obligations substantially similar to this Section 14.1. Notwithstanding the previous sentence, in no event shall either the Fund or the Co-Administrators disclose the Proprietary Information to any competitor of the other without specific, prior written consent. 14.2 Proprietary Information means: (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finance, operations, customer relationships, customer profiles, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Fund or the Co-Administrators, their respective subsidiaries and affiliated companies and the customers, clients and suppliers of any of them; (b) any scientific or technical information, design, process, procedure, formula or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or the Co-Administrators a competitive advantage over their competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, show-how and trade secrets, whether or not patentable or copyrightable; (d) all documents, inventions, substances, engineering and laboratory notebooks, drawings, diagrams, specifications, bills of material, equipment, prototypes and models, and any other tangible manifestation of the foregoing of any party hereto which now exist or come into the control or possession of the other; and (e) with respect to the Fund, all records and other information relative to the Fund and its prior, present or potential shareholders (and clients of such shareholders). 14.3 The obligations of confidentiality and restriction on use herein shall not apply to any Proprietary Information that a party proves: (a) Was in the public domain prior to the date of this Agreement or subsequently came into the public domain through no fault of such party; or (b) Was lawfully received by the party from a third party free of any obligation of confidence to such third party; or (c) Was already in the possession of the party prior to receipt thereof, directly or indirectly, from the other party; or - 11 - 12 (d) Is required to be disclosed in a judicial or administrative proceeding after all reasonable legal remedies for maintaining such information in confidence have been exhausted including, but not limited to, giving the other party as much advance notice of the possibility of such disclosure as practical so the other party may attempt to stop such disclosure or obtain a protective order concerning such disclosure; or (e) Is subsequently and independently developed by employees, consultants or agents of the party without reference to the Proprietary Information disclosed under this Agreement. 14.4 Notwithstanding the foregoing, it is hereby understood and agreed by the parties hereto that any marketing strategies, customer profiles or administrative, business or shareholder servicing plans or similar items prepared or developed by the Co-Administrators for the benefit of the Fund shall be considered the Proprietary Information of the Fund and nothing in this Agreement shall be construed to prevent or prohibit the Fund from disclosing such Proprietary Information to a successor administrator. 14.5 The obligations of the parties hereto under this Article 14 shall survive the termination of this Agreement. Article 15 Force Majeure. No party shall be liable for any default or delay in the performance of its obligations under this Agreement if and to the extent such default or delay is caused, directly or indirectly, by circumstances beyond such party's reasonable control. In any such event, the non-performing party shall be excused from any further performance and observance of the obligations so affected only for as long as such circumstances prevail and such party continues to use commercially reasonable efforts to recommence performance or observance as soon as practicable. Article 16 Assignment and Subcontracting. This Agreement, its benefits and obligations shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except for the pending acquisition of Investor Services Group by PNC Bank Corp., this Agreement may not be Assigned or otherwise transferred by any party hereto without the prior written consent of the other parties; provided, however, that each party may, in its sole discretion, Assign all its right, title and interest in this Agreement to an entity controlling, controlled by, or under common control with, such party, provided that the Board of Directors in its sole discretion reasonably determines within ninety (90) days of receiving written notice of such Assignment that: (i) the financial capacity of a Co-Administrator's assignee is not materially less than that of the Co-Administrator; (ii) the nature and quality of the services to be provided hereunder are not materially adversely affected by such Assignment; and (iii) the quality and capability of the personnel and facilities of a Co-Administrator's assignee are not materially less than those of the Co-Administrator. The Co-Administrators may, in their sole discretion, engage subcontractors to perform any non-material or non-substantive obligations contained in this Agreement that they - 12 - 13 are otherwise required to perform hereunder, provided that the Co-Administrators shall be responsible for all compensation payable to such subcontractors and shall remain responsible for the acts and omissions of such subcontractors to the same extent that the Co-Administrators are hereunder. Article 17 Notice. Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or a Co-Administrator shall be sufficiently given if addressed to a party and received by it at its office set forth below or at such other place as it may from time to time designate in writing. To the Fund: James D. Grassi, Esq. The Northern Trust Company 50 South LaSalle Street - M-9 Chicago, IL 60675 with a copy to: Jeffrey A. Dalke, Esq. One Logan Square 18th and Cherry Streets Philadelphia, PA 19103-6996 To Northern: James D. Grassi, Esq. The Northern Trust Company 50 South LaSalle Street - M-9 Chicago, IL 60675 To Investor Services Group: First Data Investor Services Group, Inc. 4400 Computer Drive Westboro, Massachusetts 01581 Attention: President with a copy to Investor Services Group's General Counsel Article 18 Governing Law/Venue. The laws of the Commonwealth of Massachusetts shall govern the interpretation, validity, and enforcement of this Agreement. All actions arising from or related to this Agreement shall - 13 - 14 be brought in the state and federal courts sitting in the City of Boston, and the parties hereby submit themselves to the exclusive jurisdiction of those courts. Article 19 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts shall, together, constitute only one instrument. Article 20 Captions. The captions of this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. Article 21 Publicity. No party shall release or publish news releases, public announcements, advertising or other publicity relating to this Agreement or to the transactions contemplated by it without the prior review and written approval of the other parties; provided, however, that a party may make such disclosures as are required by legal, accounting or regulatory requirements after making reasonable efforts in the circumstances to consult in advance with the other parties. Article 22 Relationship of Parties. The Co-Administrators agree that they are independent contractors and not partners or co-venturers and nothing contained herein shall be interpreted or construed otherwise. Article 23 Entire Agreement; Severability. 23.1 This Agreement, including all Schedules and Exhibits hereto, constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous proposals, agreements, contracts, representations and understandings, whether written or oral, between the parties with respect to the subject matter hereof. No change, termination, modification or waiver of any term or condition of the Agreement shall be valid unless in writing signed by each party. No such writing shall be effective as against Investor Services Group unless said writing is executed by a Senior Vice President, Executive Vice President or President of Investor Services Group. No such writing shall be effective as against the Fund unless said writing is executed by the Chairman of the Board of Directors or another person specifically designated by the Board of Directors. No such writing shall be effective as against Northern unless said writing is executed by the Vice President, Senior Vice President, Executive Vice President or President of Northern. A party's waiver of a breach of any term or condition in the Agreement shall not be deemed a waiver of any subsequent breach of the same or another term or condition. 23.2 The parties intend every provision of this Agreement to be severable. If a court of competent jurisdiction determines that any term or provision is illegal or invalid for any reason, the illegality or invalidity shall not affect the validity of the remainder of this Agreement. In - 14 - 15 such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties. Without limiting the generality of this paragraph, if a court determines that any remedy stated in this Agreement has failed of its essential purpose, then all other provisions of this Agreement shall remain fully effective. Article 24 Board Member and Shareholder Liability. This Agreement is executed by or on behalf of the Fund with respect to each of the Portfolios and the obligations hereunder are not binding upon any of the Board Members, officers or shareholders of the Fund individually but are binding only upon the Portfolio to which such obligations pertain and the assets and property of such Portfolio. All obligations of the Fund under this Agreement shall apply only on a Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be liable for the obligations of another Portfolio. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. - 15 - 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed all as of the Effective Date. NORTHERN FUNDS By:/s/ James W. Cozad ----------------------------------------- Name: James W. Cozad ------------------------------------- Title: Chairman of the Board of Trustees ------------------------------------- THE NORTHERN TRUST COMPANY By:/s/ Lloyd Wennlund ----------------------------------------- Name: Lloyd Wennlund ------------------------------------- Title: Senior Vice President ------------------------------------- FIRST DATA INVESTOR SERVICES GROUP, INC. By:/s/ Jylanne Dunne ----------------------------------------- Name: Jylanne Dunne ------------------------------------- Title: Senior Vice President ------------------------------------- - 16 - 17 SCHEDULE A LIST OF PORTFOLIOS Money Market Fund U.S. Government Money Market Fund U.S. Government Select Money Market Fund Tax-Exempt Money Market Fund Municipal Money Market Fund California Municipal Money Market Fund U.S. Government Fund Short-Intermediate U.S. Government Fund Intermediate Tax-Exempt Fund California Intermediate Tax-Exempt Fund Florida Intermediate Tax-Exempt Fund Fixed Income Fund Tax-Exempt Fund Arizona Tax-Exempt Fund California Tax-Exempt Fund International Fixed Income Fund High Yield Municipal Fund High Yield Fixed Income Fund Income Equity Fund Stock Index Fund Growth Equity Fund Select Equity Fund Mid Cap Growth Fund Small Cap Index Fund Small Cap Fund Small Cap Growth Fund International Growth Equity Fund International Select Equity Fund Technology Fund - 17 - 18 SCHEDULE B DUTIES OF THE CO-ADMINISTRATORS (a) Maintaining office facilities (which may be in the offices of a Co-Administrator or a corporate affiliate) and furnishing corporate officers for the Fund; (b) Furnishing data processing services, clerical services, and executive and administrative services and standard stationery and office supplies; (c) Performing all functions ordinarily performed by the office of a corporate treasurer, and furnishing the services and facilities ordinarily incident thereto, as follows: - Expense accrual monitoring and payment of the Fund's bills, preparing monthly reconciliation of the Fund's expense records and updating projections of annual expenses - Determining dividends - Calculating yields and total returns - Preparing materials for review by the Board of Directors, e.g., written reports pursuant to Rules 2a-7, 10f-3, 17a-7, 17e-1 and 144A and the Fund's applicable procedures - Tax and financial counsel - Creating expense pro formas for new Portfolios/classes - Reporting Fund statistical information to investment company reporting agencies and associations (e.g., Lipper Analytical Services, Inc. and the Investment Company Institute) - Compliance testing (e.g., to test compliance with applicable provisions of the Prospectus, 1940 Act and Internal Revenue Code) (d) Preparing and submitting reports to the Fund's shareholders and the Commission including, but not necessarily limited to, Annual Reports and Semi-Annual Reports on Form N-SAR; (e) Preparing and printing financial statements; (f) Preparing monthly Portfolio profile reports; - 18 - 19 (g) Preparing and filing the Fund's federal and state tax returns (other than those required to be filed by the Fund's custodian and transfer agent) and providing shareholder tax information to the Fund's transfer agent; (h) Assisting the Fund's investment adviser, at the adviser's request, in monitoring and developing compliance procedures for the Fund which will include, among other matters, procedures to assist the adviser in monitoring compliance with each Portfolio's investment objective, policies, restrictions, tax matters and applicable laws and regulations; (i) Assisting in marketing strategy and product development; (j) Performing oversight/management responsibilities, including the following: - Supervision and coordination of transfer agent - Supervision and coordination of IRA custodian - Supervision and coordination of Fund custodian - Vendor management and invoicing - Daily report coordination - Media relations - Sales literature forms and development - Fund operations coordination - Management of auditor relationship - Oversight of Portfolio compliance and tax function (k) Performing "blue sky" compliance functions, as follows: - Effecting and maintaining, as the case may be, the registration of Shares of the Fund for sale under the securities laws of the jurisdictions listed in the Written Instructions of the Fund, which instructions will include the amount of Shares to be registered as well as the warning threshold to be maintained. - Filing with each appropriate jurisdiction the appropriate materials relating to the Fund. - Providing to the Fund quarterly reports of sales activity in each jurisdiction in accordance with the Written Instructions of the Fund. Sales will be reported by shareholder residence. NSCC trades and order clearance will be reported by the - 19 - 20 state provided by the dealer at the point of sale. Trades by omnibus accounts will be reported by trustee state of residence in accordance with the Written Instructions of the Fund outlining the entities which are permitted to maintain omnibus positions with the Fund. - In the event sales of Shares in a particular jurisdiction reach or exceed the warning levels provided in the Written Instructions of the Fund, the Co-Administrators will promptly notify the Fund with a recommendation of the amount of Shares to be registered in such jurisdiction and the fee for such registration. The Co-Administrators will not register additional Shares in such jurisdiction unless and until the Co-Administrators shall have received Written Instructions to do so. - If the Co-Administrators are instructed by the Fund not to register Shares in a particular jurisdiction, the Co-Administrators will use their best efforts to cause any sales in such jurisdictions to be blocked, and such sales will not be reported to the Co-Administrators as sales of Shares of the Fund. (l) Performing corporate secretarial services including the following: - Assist in maintaining corporate records and good standing status of Fund in its state of organization - Develop and maintain calendar of annual and quarterly board approvals and regulatory filings - Prepare notice, agenda, memoranda, resolutions and background materials for legal approvals at quarterly and special board meetings and committee meetings; assemble and distribute board materials for board meetings and committee meetings; attend meetings; make presentations where appropriate; prepare minutes; follow up on issues; prepare such periodic and special reports as the Board Members may reasonably request - Provide support for written consent votes where needed (m) Monitoring the Fund's arrangements with respect to services provided by institutions ("Servicing Agents") to their customers who are the beneficial owners of Shares, pursuant to agreements ("Servicing Agreements") between the Fund and such Servicing Agents including: - Review the qualifications of Servicing Agents wishing to enter into Servicing Agreements - Assist in the execution and delivery of Servicing Agreements - 20 - 21 - Report to the Board of Directors with respect to the amounts paid or payable by the Fund from time to time under the Servicing Agreements and the nature of the services provided by Servicing Agents - Maintain appropriate records in connection with their monitoring duties (n) Performing the following legal services: - Prepare and file annual Post-Effective Amendments to the Fund's Registration Statement - Prepare and file Rule 24f-2 Notices - Prepare and file Forms N-SAR - Prepare and file Annual and Semi-Annual Financial Reports - Communicate significant regulatory or legislative developments to Fund management and Board Members and provide related planning assistance where needed - Consult with Fund management regarding portfolio compliance and Fund corporate and regulatory issues as needed - Maintain effective communication with outside counsel - Arrange D&O/E&O insurance and fidelity bond coverage for Fund - Assist in monitoring Fund Code of Ethics reporting and provide such reports to the person designated under the Fund's Code - Monitor handling of litigation by outside counsel and non-routine regulatory matters - Assist in managing Commission audits of the Fund at the investment adviser's principal place of business - Review sales material and advertising for Fund Prospectus compliance - Assist in developing compliance guidelines and procedures to improve overall compliance by Fund and service providers - Prepare compliance manuals - 21 - 22 (o) Performing, in accordance with the Written Instructions of the Fund, Special Legal Services in accordance with the pricing structure listed on the Fee Schedule attached to this Agreement as Schedule C. Examples of such Special Legal Services are: - Assist in new Portfolio start-up (to the extent requested): - Coordinate time and responsibility schedules - Prepare Fund corporate documents - Draft/file registration statement (including investment objectives/policies and prospectuses) - Respond to and negotiate Commission comments - Draft notice, agenda and resolutions for organizational meeting; attend board meeting; make presentations where appropriate; prepare minutes and follow up on issues - Prepare proxy materials for special meetings of shareholders (including fund merger documents) - Prepare Post-Effective Amendments for special purposes (e.g., new funds or classes, changes in advisory relationships, mergers, restructurings) - Assist in extraordinary non-recurring projects, including providing consultative legal services, such as: - Arrange CDSC financial programs - Prospectus simplification - Profile prospectuses - Exemptive order applications - Requests for no-action letters - 22 - 23 EXHIBIT 1 TO SCHEDULE B PERFORMANCE STANDARDS The Co-Administrators' obligation to meet the following Performance Standards shall be measured in the aggregate with respect to all Portfolios of the Fund. The Co-Administrators will report to the Fund on a monthly basis the percent of items completed within standard as well as a quality rating. Reporting will be detailed to the transaction type level. A pass/fail determination for contractual penalties will be based on the categories listed below. Note that completion standards are measured in business days. Fund Administration (Treasury and Reporting)/Tax/Compliance The following standards will be met 100% of the time: - All Commission and Internal Revenue Service ("IRS") regulatory requirements will be met according to the deadlines set forth by the Commission and the IRS - Notification to the Fund's investment adviser within two (2) business days with compliance violations based on procedures established by and among the Co-Administrators and the Fund - Directors & Officers Errors & Omissions Insurance Coverage will be reviewed annually - Rule 17g-1 Fidelity Bond filings will be made as required by the regulations of the Commission The following standard will be met 98% of the time: - Code of Ethics reporting forms will be circulated at least seven (7) business days before each quarter end BLUE SKY The following standards will be met 98% of the time: - Annual renewal filings will be submitted at least thirty (30) business days prior to expiration - Filings of Prospectus and Annual Reports will be submitted within fifteen (15) business days of printing/release - 23 - 24 Legal Administration The following standards will be met 98% of the time as measured on a quarterly basis: - Board materials will be sent to the Fund for review at least fourteen (14) business days prior to the Board meeting, provided that all requested information has been received by the Co-Administrators within agreed-upon time frames - Board materials will be sent to the Board Members at least seven (7) business days prior to the Board meeting, provided that all requested information has been received by the Co-Administrators within agreed-upon time frames - Timely submission of sales literature to NASD, provided that copies of such materials are provided to the Co-Administrators or their affiliates on a timely basis - 24 - 25 SCHEDULE C FEE SCHEDULE For the services rendered, expenses assumed, facilities furnished and payments made by the Co-Administrators, as provided for in this Agreement, the Fund, on behalf of each Portfolio, on the first business day of each month, will pay to Northern, as agent for itself and Investor Services Group, a fee for the previous month at the annualized rates listed below. 1. Standard Annual Fees: .15% of each Portfolio's average daily net assets The foregoing fee will be computed based on net assets on each day. 2. Fees for Special Legal Services: The Co-Administrators shall be entitled to the following fee for the performance of any Special Legal Services as described in Schedule B in accordance with the Written Instructions of the Fund: $185 per hour subject to certain project caps as may be agreed to by the Co-Administrators and the Fund. Services and charges may vary based on volume. - 25 - 26 SCHEDULE D FUND DOCUMENTS - - Certified copy of the Articles of Incorporation of the Fund - - Certified copy of the By-Laws of the Fund - - Copy of the resolution of the Board of Directors authorizing the execution and delivery of this Agreement - - Copies of all agreements between the Fund and its service providers - - A listing of all jurisdictions in which each Portfolio is registered and lawfully available for sale as of the date of this Agreement and all information relative to the monitoring of sales and registrations of the Shares in such jurisdictions - - The Fund's most recent post-effective amendment to its registration statement - - The Fund's Prospectus - 26 - EX-99.B.(H)(13) 15 FRM. OF AMDED & RESTATD SCHED. A TO CO ADMN AGT 1 EXHIBIT (h)(13) AMENDED AND RESTATED SCHEDULE A TO THE CO-ADMINISTRATION AGREEMENT BY AND BETWEEN NORTHERN FUNDS, THE NORTHERN TRUST COMPANY AND FIRST DATA INVESTOR SERVICES GROUP, INC. DATED _______________ __, 1999 Intending to be legally bound, the undersigned hereby amend and restate Schedule A to the aforesaid Agreement to include the following investment portfolios: Money Market Fund International Fixed Income Fund U.S. Government Money Market Fund High Yield Municipal Fund U.S. Government Select Money Market Fund High Yield Fixed Income Fund Tax-Exempt Money Market Fund Income Equity Fund Municipal Money Market Fund Stock Index Fund California Municipal Money Market Fund Growth Equity Fund U.S. Government Fund Select Equity Fund Short-Intermediate U.S. Government Fund Mid Cap Growth Fund Intermediate Tax-Exempt Fund Small Cap Index Fund California Intermediate Tax-Exempt Fund Small Cap Fund Florida Intermediate Tax-Exempt Fund Small Cap Growth Fund Fixed Income Fund International Growth Equity Fund Tax-Exempt Fund International Select Equity Fund Arizona Tax-Exempt Fund Technology Fund California Tax-Exempt Fund MarketPower Fund All signatures need not appear on the same copy of this Amended and Restated Schedule A. NORTHERN FUNDS NORTHERN TRUST COMPANY By: _________________________ By: _________________________ Title: ______________________ Title: ______________________ Date: _______________________ Date: _______________________ FIRST DATA INVESTOR SERVICES GROUP, INC. By: _________________________ Title: ______________________ Date: _______________________ EX-99.B.(J)(1) 16 CONSENT OF DRINKER AND BIDDLE & REATH LLP 1 EXHIBIT (j)(1) CONSENT OF COUNSEL We hereby consent to the use of our name and to the reference to our Firm under the caption "Counsel" in the Statement of Additional Information that is included in Post-Effective Amendment No. 27 to the Registration Statement (No. 33-73404/811-8236) on Form N-1A of Northern Funds, under the Securities Act of 1933 and the Investment Company Act of 1940, respectively. This consent does not constitute a consent under section 7 of the Securities Act of 1933, and in consenting to the use of our name and the references to our Firm under such caption we have not certified any part of the Registration Statement and do not otherwise come within the categories of persons whose consent is required under said section 7 or the rules and regulations of the Securities and Exchange Commission thereunder. /s/ DRINKER BIDDLE & REATH LLP -------------------------------------------- DRINKER BIDDLE & REATH LLP Philadelphia, Pennsylvania October 15, 1999 EX-99.B.(J)(2) 17 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT (j)(2) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated May 14, 1999, and to all references to our Firm included in or made a part of this amendment to the registration statement on Form N-1A of Northern Funds (a Massachusetts business trust consisting of the Money Market Fund, U.S. Government Money Market Fund, U.S. Government Select Money Market Fund, Municipal Money Market Fund, California Municipal Money Market Fund, U.S. Government Fund, Intermediate Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund, Fixed Income Fund, Tax-Exempt Fund, California Tax-Exempt Fund, International Fixed Income Fund, High Yield Municipal Fund, High Yield Fixed Income Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund, Mid Cap Growth Fund, Small Cap Fund, International Growth Equity Fund, International Select Equity Fund and Technology Fund). ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP - ---------------------------------- Chicago, Illinois October 15, 1999 EX-99.B.(L)(6) 18 PURCHS. AGMT. BTWN REGISTRANT AND M.M. ALLISON 1 EXHIBIT (l)(6) PURCHASE AGREEMENT Northern Funds (the "Trust"), a Massachusetts business trust, and Miriam M. Allison hereby agree as follows: 1. The Trust hereby offers Miriam M. Allison, and Miriam M. Allison hereby purchases, five shares of the Trust's Small Cap Index Fund (the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from Miriam M. Allison of funds in full payment for the foregoing Shares. 2. Miriam M. Allison represents and warrants to the Trust that the foregoing Shares are being acquired for investment purposes and not with a view to the distribution thereof. IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of September 3, 1999. NORTHERN FUNDS By:/s/ Mary M. Tenwinkel ----------------------------------------- MIRIAM M. ALLISON /s/ Miriam M. Allison -------------------------------------------- EX-99.B.(L)(7) 19 PCHS. AGMT. W/ NORTHERN TRUST SEPT. 3 1999 1 EXHIBIT (l)(7) PURCHASE AGREEMENT (Equity Funds) Agreement dated as of September 3, 1999 between Northern Funds, a Massachusetts business trust (the "Trust"), and The Northern Trust Company ("Northern"), acting on behalf of certain common trust funds named below that are maintained by Northern (the "Common Funds") in a fiduciary capacity. BACKGROUND 1. The Trust is an open-end management investment company registered under the Investment Company Act of 1940, consisting of twenty-seven separate investment portfolios advised by Northern (the "Portfolios"). 2. Northern also maintains, in a fiduciary capacity, the Common Funds in accordance with Section 584 of the Internal Revenue Code of 1996, as amended (the "Code"). 3. Northern believes that it is in the interests of the accounts that are invested in the Common Funds (the "Accounts") to transfer their investments from the Common Funds to the Portfolios. As fiduciary of the Common Funds and the Accounts, Northern has, therefore, determined that each Common Fund should transfer its assets to a Portfolio of the Trust with corresponding investment objectives and policies in exchange solely for shares of the Portfolio, and then distribute the shares to its participants solely in exchange for and in cancellation of their interests in the Common Fund pursuant to Section 584(h) of the Code. Northern believes that the foregoing procedure for transferring the investments of the Accounts in the Common Funds to the Portfolios will be beneficial to both the Accounts and the Portfolios, and will minimize brokerage and other costs associated with the transfer of the Assets. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto, intending to be legally bound, agree as follows: AGREEMENT 1. Purchase of Portfolio Shares. Effective as of 3:00 p.m. (Central Time) on September 3, 1999 (the "Transfer Time"), the Common Funds named below shall purchase, and the Trust shall issue to the Common Funds, for subsequent distribution to the participants in the Common Funds, shares of the corresponding Portfolios, as listed below, with an aggregate net asset value equal to the aggregate market value of the Assets transferred to the Portfolios determined in accordance with Sections 3 and 4 hereof. 2
Corresponding Portfolios Common Funds of the Trust ------------ ------------ Income Equity Income Equity Market Equity Stock Index Growth Equity Growth Equity Focused Growth Technology Technology Global Growth International Growth Equity Small Capitalization Equity Small Cap Index
2. Purchase Price. In consideration of the issuance of shares of the Portfolios pursuant to this Agreement, Northern shall transfer those Assets held by the Common Funds that are set forth in Exhibit A, attached hereto and made a part hereof; provided that the Assets so transferred shall constitute permissible investments under the Portfolios' respective investment policies and limitations as set forth in the Trust's registration statement. No brokerage commissions, fees (except for customary transfer fees) or other remuneration will be paid by the Portfolios, the Common Funds or the Accounts in connection with the transactions contemplated hereby. The number of shares of each Portfolio to be issued to the Common Funds shall be determined by dividing the aggregate market value (computed as set forth below) of the Assets being transferred to the Portfolio, determined as of the Transfer Time, by the Portfolio's per share value, determined as of the Transfer Time. 3. Determination of Market Value. The aggregate market value of the Assets of a Common Fund shall be any cash plus the sum of the independent current market price of each security being purchased hereunder. For purposes of this Agreement, the "current market price" shall be determined pursuant to paragraph (b) of Rule 17a-7 under the Investment Company Act of 1940 as interpreted and applied by the staff of the Securities and Exchange Commission. Securities may be valued on the basis of prices provided by independent pricing services when such prices are believed by Northern to reflect the fair market value of such securities. 4. Representation of Northern. Northern hereby represents and warrants as follows: (a) Northern is entering into this Agreement as fiduciary of the Common Funds. The execution and delivery of this Agreement by Northern has been duly authorized by all requisite corporate action and (assuming the due authorization, execution and delivery hereof by the Trust) constitutes the valid and binding obligation of Northern, as fiduciary, enforceable in accordance with its terms. (b) At the time of the transfer of the Assets to the Trust, the Common Funds will have good title to the Assets, free and clear of all mortgages, security interests, liens, charges, pledges and encumbrances whatsoever. Upon transfer of the Assets to the Trust, the Trust will acquire good title thereto, free and clear of all such mortgages, security interests, liens, charges, pledges and encumbrances whatsoever. - 2 - 3 5. Representations of the Trust. The Trust hereby represents and warrants as follows: (a) The Trust is entering into this Agreement on behalf of the Portfolios. The execution and delivery of this Agreement by the Trust has been duly authorized by all requisite action and (assuming the due authorization, execution and delivery hereof by Northern) constitutes the valid and binding obligation of the Trust, enforceable in accordance with its terms. (b) The issuance, sale and delivery of shares of the Portfolios in accordance with the terms of this Agreement have been duly authorized by all requisite action and such shares, when so issued, sold and delivered against payment therefor in accordance with the provisions hereof, will be duly and validly issued, fully paid and nonassessable by the Trust. 6. Names. The Trust's Agreement and Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed by or on behalf of the Trust and the obligations hereunder are not binding upon any of the Trustees, Officers or Shareholders of the Trust individually but are binding only upon the Trust and its assets and property. All obligations of the Trust under this Agreement shall apply only on a Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be liable for the obligations of another Portfolio. 7. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers designated below as of the day, month and year first above written. Attest: NORTHERN FUNDS /s/ Mary M. Tenwinkel By: /s/ Miriam M. Allison - ---------------------------------- ------------------------------------- Attest: THE NORTHERN TRUST COMPANY, acting as Fiduciary for the Common Trust Funds Named Above /s/ Lloyd Wennlund By: /s/ Archibald E. King - ---------------------------------- ------------------------------------- - 3 - 4 Exhibit A to Agreement between Northern Funds and The Northern Trust Company Dated as of September 3, 1999 The following is a List of Assets for transfer to the investment portfolios of Northern Funds from Common Trust Funds maintained by The Northern Trust Company: - 4 - EX-99.B.(L)(8) 20 PCHS. AGMT. W/ M.C. GAWNE FOR SHRS. OF SML CAP GTH 1 EXHIBIT (l)(8) PURCHASE AGREEMENT Northern Funds (the "Trust"), a Massachusetts business trust, and Martin C. Gawne hereby agree as follows: 1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby purchases, five shares of the Trust's Small Cap Growth Fund (the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of funds in full payment for the foregoing Shares. 2. Martin C. Gawne represents and warrants to the Trust that the foregoing Shares are being acquired for investment purposes and not with a view to the distribution thereof. IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of September 30, 1999. NORTHERN FUNDS By:/s/ Mary M. Tenwinkel ----------------------------------- MARTIN C. GAWNE /s/ Martin C. Gawne -------------------------------------- EX-99.B.(L)(9) 21 PCHS. AGMT. W/M.C. GAWNE - SHORT INTERMEDIATE U.S. 1 EXHIBIT (l)(9) PURCHASE AGREEMENT Northern Funds (the "Trust"), a Massachusetts business trust, and Martin C. Gawne hereby agree as follows: 1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby purchases, five shares of the Trust's Short-Intermediate U.S. Government Fund (the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of funds in full payment for the foregoing Shares. 2. Martin C. Gawne represents and warrants to the Trust that the foregoing Shares are being acquired for investment purposes and not with a view to the distribution thereof. IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of September 30, 1999. NORTHERN FUNDS By:/s/ Mary M. Tenwinkel ----------------------------------- MARTIN C. GAWNE /s/ Martin C. Gawne -------------------------------------- EX-99.B.(L)(10) 22 PCHS. AGMT. W/M.C.GAWNE - CALIF. INTM. TAX-EXEMPT 1 EXHIBIT (l)(10) PURCHASE AGREEMENT Northern Funds (the "Trust"), a Massachusetts business trust, and Martin C. Gawne hereby agree as follows: 1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby purchases, five shares of the Trust's California Intermediate Tax-Exempt Fund (the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of funds in full payment for the foregoing Shares. 2. Martin C. Gawne represents and warrants to the Trust that the foregoing Shares are being acquired for investment purposes and not with a view to the distribution thereof. IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of September 30, 1999. NORTHERN FUNDS By:/s/ Mary M. Tenwinkel ----------------------------------- MARTIN C. GAWNE /s/ Martin C. Gawne -------------------------------------- EX-99.B.(L)(11) 23 PCHS. AGMT. W/ M.C.GAWNE FOR ARIZ. TX. EXEMPT SHRS 1 EXHIBIT (l)(11) PURCHASE AGREEMENT Northern Funds (the "Trust"), a Massachusetts business trust, and Martin C. Gawne hereby agree as follows: 1. The Trust hereby offers Martin C. Gawne, and Martin C. Gawne hereby purchases, five shares of the Trust's Arizona Tax-Exempt Fund (the "Shares") at $10 per Share. The Trust hereby acknowledges receipt from Martin C. Gawne of funds in full payment for the foregoing Shares. 2. Martin C. Gawne represents and warrants to the Trust that the foregoing Shares are being acquired for investment purposes and not with a view to the distribution thereof. IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties hereto have executed this Agreement as of September 30, 1999. NORTHERN FUNDS By:/s/ Mary M. Tenwinkel ----------------------------------- MARTIN C. GAWNE /s/ Martin C. Gawne -------------------------------------- EX-99.B.(L)(12) 24 PCHS. AGMTS. DATED OCT 1, 1999 W/NRTHN TRUST CO. 1 EXHIBIT (l)(12) PURCHASE AGREEMENT (Fixed Income Funds) Agreement dated as of October 1, 1999 between Northern Funds, a Massachusetts business trust (the "Trust"), and The Northern Trust Company ("Northern"), acting on behalf of certain common trust funds named below that are maintained by Northern (the "Common Funds") in a fiduciary capacity. BACKGROUND 1. The Trust is an open-end management investment company registered under the Investment Company Act of 1940, consisting of twenty-nine separate investment portfolios advised by Northern (the "Portfolios"). 2. Northern also maintains, in a fiduciary capacity, the Common Funds in accordance with Section 584 of the Internal Revenue Code of 1996, as amended (the "Code"). 3. Northern believes that it is in the interests of the accounts that are invested in the Common Funds (the "Accounts") to transfer their investments from the Common Funds to the Portfolios. As fiduciary of the Common Funds and the Accounts, Northern has, therefore, determined that each Common Fund should transfer its assets to a Portfolio of the Trust with corresponding investment objectives and policies in exchange solely for shares of the Portfolio, and then distribute the shares to its participants solely in exchange for and in cancellation of their interests in the Common Fund pursuant to Section 584(h) of the Code. Northern believes that the foregoing procedure for transferring the investments of the Accounts in the Common Funds to the Portfolios will be beneficial to both the Accounts and the Portfolios, and will minimize brokerage and other costs associated with the transfer of the Assets. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto, intending to be legally bound, agree as follows: AGREEMENT 1. Purchase of Portfolio Shares. Effective as of 3:00 p.m. (Central Time) on October 1, 1999 (the "Transfer Time"), the Common Funds named below shall purchase, and the Trust shall issue to the Common Funds, for subsequent distribution to the participants in the Common Funds, shares of the corresponding Portfolios, as listed below, with an aggregate net asset value equal to the aggregate market value of the Assets transferred to the Portfolios determined in accordance with Sections 3 and 4 hereof. - 1 - 2
Corresponding Portfolios Common Funds of the Trust ------------ ------------ 1986 Government Bond U.S. Government Government Bond U.S. Government Intermediate Tax-Exempt Bond Intermediate Tax-Exempt Taxable Bond Fixed Income Tax-Exempt Bond Tax-Exempt California Tax-Exempt Bond California Tax-Exempt International Government Bond International Fixed Income Arizona Tax-Exempt Bond Arizona Tax-Exempt Intermediate California Tax-Exempt Bond California Intermediate Tax-Exempt Intermediate Government Bond Short-Intermediate U.S. Government
2. Purchase Price. In consideration of the issuance of shares of the Portfolios pursuant to this Agreement, Northern shall transfer those Assets held by the Common Funds that are set forth in Exhibit A, attached hereto and made a part hereof; provided that the Assets so transferred shall constitute permissible investments under the Portfolios' respective investment policies and limitations as set forth in the Trust's registration statement. No brokerage commissions, fees (except for customary transfer fees) or other remuneration will be paid by the Portfolios, the Common Funds or the Accounts in connection with the transactions contemplated hereby. The number of shares of each Portfolio to be issued to the Common Funds shall be determined by dividing the aggregate market value (computed as set forth below) of the Assets being transferred to the Portfolio, determined as of the Transfer Time, by the Portfolio's per share value, determined as of the Transfer Time. 3. Determination of Market Value. The aggregate market value of the Assets of a Common Fund shall be any cash plus the sum of the independent current market price of each security being purchased hereunder. For purposes of this Agreement, the "current market price" shall be determined pursuant to paragraph (b) of Rule 17a-7 under the Investment Company Act of 1940 as interpreted and applied by the staff of the Securities and Exchange Commission. Securities may be valued on the basis of prices provided by independent pricing services when such prices are believed by Northern to reflect the fair market value of such securities. 4. Representation of Northern. Northern hereby represents and warrants as follows: (a) Northern is entering into this Agreement as fiduciary of the Common Funds. The execution and delivery of this Agreement by Northern has been duly authorized by all requisite corporate action and (assuming the due authorization, execution and delivery hereof by the Trust) constitutes the valid and binding obligation of Northern, as fiduciary, enforceable in accordance with its terms. - 2 - 3 (b) At the time of the transfer of the Assets to the Trust, the Common Funds will have good title to the Assets, free and clear of all mortgages, security interests, liens, charges, pledges and encumbrances whatsoever. Upon transfer of the Assets to the Trust, the Trust will acquire good title thereto, free and clear of all such mortgages, security interests, liens, charges, pledges and encumbrances whatsoever. 5. Representations of the Trust. The Trust hereby represents and warrants as follows: (a) The Trust is entering into this Agreement on behalf of the Portfolios. The execution and delivery of this Agreement by the Trust has been duly authorized by all requisite action and (assuming the due authorization, execution and delivery hereof by Northern) constitutes the valid and binding obligation of the Trust, enforceable in accordance with its terms. (b) The issuance, sale and delivery of shares of the Portfolios in accordance with the terms of this Agreement have been duly authorized by all requisite action and such shares, when so issued, sold and delivered against payment therefor in accordance with the provisions hereof, will be duly and validly issued, fully paid and nonassessable by the Trust. 6. Names. The Trust's Agreement and Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed by or on behalf of the Trust and the obligations hereunder are not binding upon any of the Trustees, Officers or Shareholders of the Trust individually but are binding only upon the Trust and its assets and property. All obligations of the Trust under this Agreement shall apply only on a Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not be liable for the obligations of another Portfolio. 7. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. - 3 - 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers designated below as of the day, month and year first above written. Attest: NORTHERN FUNDS By: /s/ Jylanne Dunne - -------------------------- ----------------------------------- Attest: THE NORTHERN TRUST COMPANY, acting as Fiduciary for the Common Trust Funds Named Above /s/ Diane Anderson By: /s/ Archibald E. King - -------------------------- ----------------------------------- - 4 - 5 Exhibit A to Agreement between Northern Funds and The Northern Trust Company Dated as of October 1, 1999 The following is a List of Assets for transfer to the investment portfolios of Northern Funds from Common Trust Funds maintained by The Northern Trust Company: - 5 - EX-99.B.(M) 25 AMNDED AND RESTATED DIST. AND SERV. PLAN 1 EXHIBIT (m) NORTHERN FUNDS AMENDED AND RESTATED DISTRIBUTION AND SERVICE PLAN This Distribution and Service Plan (the "Plan") has been adopted by the Board of Trustees of Northern Funds in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the "Act"). Section 1. Upon the recommendation of Northern Funds Distributors, LLC, the distributor of Northern Funds, any officer of Northern Funds is authorized to execute and deliver, in the name and on behalf of Northern Funds, written agreements based on the form attached hereto as Appendix A or any other form duly approved by the Board of Trustees ("Agreements") with securities dealers, financial institutions and other industry professionals that are shareholders or dealers of record or which have a servicing relationship with the beneficial owners of Shares of Northern Funds ("Shareholder Organizations"). Pursuant to such Agreements, Shareholder Organizations shall provide distribution and support services as set forth therein to their clients who acquire and beneficially own Shares of any Fund offered by Northern Funds in consideration of a fee, computed monthly in the manner set forth in the Agreements, at an annual rate of up to .25% of the average daily net asset value of the Shares beneficially owned by such clients. The Northern Trust Company and its affiliates are eligible to become Shareholder Organizations and to receive fees under this Plan. Section 2. The co-administrators of Northern Funds shall monitor the arrangements pertaining to Northern Funds' Agreements with Shareholder Organizations in accordance with the terms of their co-administration agreement with Northern Funds. Northern Funds Distributors, LLC shall not, however, be obliged by this Plan to recommend, and Northern Funds shall not be obliged to execute, any Agreement with any qualifying Shareholder Organization. Section 3. So long as this Plan is in effect, the co-administrators shall provide to Northern Funds' Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan and the purposes for which such expenditures were made. Section 4. This Plan shall become effective immediately with respect to each particular Fund upon the approval of the Plan (and the form of Agreement attached hereto) by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Act, of Northern Funds and have no direct or indirect financial interest in the operation of this Plan or in any Agreement related to this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan (and form of Agreement). - 1 - 2 EXHIBIT (m) Section 5. Unless sooner terminated, this Plan shall continue until March 31, 2000 and thereafter shall continue automatically for successive annual periods provided such continuance is approved at least annually in the manner set forth in Section 4(a). Section 6. This Plan may be amended at any time with respect to any Fund by the Board of Trustees, provided that (a) any amendment to increase materially the costs (whether for distribution or any other purpose) which such Fund may bear pursuant to this Plan shall be effective only upon the favorable vote of a majority (as defined in the Act) of the outstanding Shares of such Fund, and (b) any material amendment of the terms of this Plan shall become effective only upon the approvals set forth in Section 4(a). Section 7. This Plan is terminable at any time with respect to any Fund by (a) vote of a majority of the Disinterested Trustees, or (b) vote of a majority (as defined in the Act) of the Shares of such Fund. Section 8. While this Plan is in effect, the selection and nomination of those Trustees who are not "interested persons" (as defined in the Act) of Northern Funds shall be committed to the discretion of such non-interested Trustees. Section 9. All expenses incurred by Northern Funds with respect to the Shares of a particular Fund in connection with Agreements and the implementation of this Plan shall be borne entirely by such Fund. Section 10. This Plan was originally adopted by Northern Funds as of April 1, 1994 and most recently revised as of September 15, 1999. - 2 - 3 Appendix A DISTRIBUTION AND SERVICING AGREEMENT Gentlemen: We wish to enter into this Distribution and Servicing Agreement ("Agreement") with you concerning the provision of distribution services (and, to the extent provided below, support services) to your clients ("Clients") who may from time to time acquire and beneficially own shares of any Fund ("Shares") offered by Northern Funds. The terms and conditions of this Agreement are as follows: Section 1. You will provide reasonable assistance in connection with the distribution of Shares to Clients as requested from time to time by our distributor, which assistance may include forwarding sales literature and advertising provided by our distributor for Clients. In addition, you agree to provide one or more of the following support services to Clients who may from time to time acquire and beneficially own Shares: (i) processing dividend and distribution payments from us on behalf of Clients; (ii) providing information periodically to Clients showing their positions in Shares; (iii) arranging for bank wires; (iv) responding to Client inquiries relating to the services performed by you; (v) providing subaccounting with respect to Shares beneficially owned by Clients or the information to us necessary for subaccounting; (vi) if required by law, forwarding shareholder communications from us (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to Clients; (vii) assisting in processing purchase, exchange and redemption requests from Clients and in placing such orders with our service contractors; (viii) assisting Clients in changing dividend options, account designations and addresses; and (ix) providing such other similar services as we may reasonably request to the extent you are permitted to do so under applicable statutes, rules and regulations. Section 2. You will provide such office space and equipment, telephone facilities and personnel (which may be any part of the space, equipment and facilities currently used in your business, or any personnel employed by you) as may be reasonably necessary or beneficial in order to provide the aforementioned assistance and services to Clients. A-1 4 Section 3. Neither you nor any of your officers, employees or agents are authorized to make any representations concerning us or the Shares except those contained in our then current prospectuses and statements of additional information for Shares, copies of which will be supplied by us to you, or in such supplemental literature or advertising as may be authorized by us in writing. Section 4. For all purposes of this Agreement you will be deemed to be an independent contractor, and will have no authority to act as agent for us in any matter or in any respect. By your written acceptance of this Agreement, you agree to and do release, indemnify and hold us harmless from and against any and all direct or indirect liabilities or losses resulting from requests, directions, actions or inactions of or by you or your officers, employees or agents regarding your responsibilities hereunder or the purchase, redemption, transfer or registration of Shares (or orders relating to the same) by or on behalf of Clients. You and your employees will, upon request, be available during normal business hours to consult with us or our designees concerning the performance of your responsibilities under this Agreement. Section 5. In consideration of the services and facilities provided by you hereunder, we will pay to you, and you will accept as full payment therefor, a fee at the annual rate of _______% of the average daily net asset value of the Shares beneficially owned by your Clients for whom you are the dealer of record or holder of record or with whom you have a servicing relationship (the "Clients' Shares"), which fee will be computed daily and payable monthly. For purposes of determining the fees payable under this Section 5, the average daily net asset value of the Clients' Shares will be computed in the manner specified in our Registration Statement (as the same is in effect from time to time) in connection with the computation of the net asset value of Shares for purposes of purchases and redemptions. The fee rate stated above may be prospectively increased or decreased by us, in our sole discretion, at any time upon notice to you. Further, we may, in our discretion and without notice, suspend or withdraw the sale of Shares, including the sale of Shares to you for the account of any Client or Clients. All fees payable by Northern Funds under this Agreement with respect to the Shares of a particular Fund shall be borne by, and be payable entirely out of the assets allocable to, said Shares; and no other class of Shares of any other Fund offered by Northern Funds shall be responsible for such fees. Section 6. Any person authorized to direct the disposition of monies paid or payable by us pursuant to this Agreement will provide to our Board of Trustees, and our Trustees will review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. In addition, you will furnish us or our designees with such information as we or they may reasonably request (including, without limitation, periodic certifications confirming the provision to Clients of the services described herein), and will otherwise cooperate with us and our designees (including, without limitation, any auditors designated by us), in connection with the preparation of reports to our Board of Trustees concerning this Agreement and the monies paid or payable by us pursuant hereto, as well as any other reports or filings that may be required by law. A-2 5 Section 7. We may enter into other similar Agreements with any other person or persons without your consent. Section 8. By your written acceptance of this Agreement, you represent, warrant and agree that: (i) the compensation payable to you hereunder, together with any other compensation you receive from Clients for services contemplated by this Agreement, will not be excessive or unreasonable under the laws and instruments governing your relationships with Clients; and (ii) you will provide to Clients a schedule of any fees that you may charge to them relating to the investment of their assets in Shares. In addition, you understand that this Agreement has been entered into pursuant to Rule 12b-l under the Investment Company Act of 1940 (the "Act"), and is subject to the provisions of said Rule, as well as any other applicable rules or regulations promulgated by the Securities and Exchange Commission. Section 9. This Agreement will become effective on the date a fully executed copy of this Agreement is received by us or our designee. Unless sooner terminated, this Agreement will continue until the next March 31, and thereafter will continue automatically for successive annual periods provided such continuance is specifically approved at least annually by us in the manner described in Section 12. This Agreement is terminable with respect to the Shares of any Fund, without penalty, at any time by us (which termination may be by a vote of a majority of the Disinterested Trustees as defined in Section 12 or by vote of the holders of a majority of the outstanding Shares of such Fund) or by you upon notice to the other party hereto. This Agreement will also terminate automatically in the event of its assignment (as defined in the Act). Section 10. All notices and other communications to either you or us will be duly given if mailed, telegraphed, telexed or transmitted by similar telecommunications device to the appropriate address stated herein. Section 11. This Agreement will be construed in accordance with the laws of the State of Illinois. Section 12. This Agreement has been approved by vote of a majority of (i) our Board of Trustees and (ii) those Trustees who are not "interested persons" (as defined in the Investment Company Act of 1940) of us and have no direct or indirect financial interest in the operation of the Distribution and Service Plan adopted by us or in any agreement related thereto cast in person at a meeting called for the purpose of voting on such approval ("Disinterested Trustees"). This Agreement is executed by or on behalf of the Trust and the obligations hereunder are not binding upon any of the Trustees, Officers or Shareholders of the Trust individually but are binding only upon the Trust and its assets and property. All obligations of the Trust under this Agreement shall apply only on a Fund by Fund basis, and the assets of one Fund shall not be liable for the obligations of another Fund. The Trust's Agreement and Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. A-3 6 If you agree to be legally bound by the provisions of this Agreement, please sign a copy of this letter where indicated below and promptly return it to us, c/o The Northern Trust Company, 50 South LaSalle Street, Chicago, Illinois, 60675. Very truly yours, NORTHERN FUNDS Date: ___________________ By:_____________________________ (Authorized Officer) Accepted and Agreed to: Date: ___________________ By:_____________________________ (Authorized Officer) A-4 -----END PRIVACY-ENHANCED MESSAGE-----