Document/Exhibit Description Pages Size
1: 485BPOS Northern Institutional P.E. Amendment #53 480 2.04M
2: EX-99.A.9 Amendment No. 8 to the Agreement and Declaration 1 9K
of Trust
3: EX-99.B.2 Amendment No. 1 to the Amended and Restated 1 8K
By-Laws
4: EX-99.D.16 Addendum No. 1 to the Investment Advisory 2 12K
Agreement
5: EX-99.E.2 Amended and Restated Schedule A to the 2 9K
Distribution Agreement
6: EX-99.G.19 Addendum No. 12 to the Custodian Agreement 2 14K
7: EX-99.G.20 Addendum No. 13 to the Custodian Agreement 2 12K
8: EX-99.G.21 Addendum No. 5 to the Foreign Custody Agreement 2 12K
9: EX-99.H.12 Addendum No. 11 to the Revised and Restated 2 14K
Transfer Agency Agreement
10: EX-99.H.13 Forms of Servicing Agreement for Class C and D 10 38K
Shares
11: EX-99.H.14 Forms of Servicing Agreement for Service and 10 41K
Premier Classes
12: EX-99.H.22 Amended and Restated Schedule A to the Amended and 1 10K
Restated Co-Admin. Agreement
13: EX-99.J.1 Consent of Counsel 1 8K
14: EX-99.J.2 Consent of Independent Auditors 1 8K
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As filed with the Securities and Exchange Commission on March 29, 2004
Securities Act of 1933 Registration No. 2-80543
Investment Company Act of 1940 Registration No. 811-3605
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [_]
Post-Effective Amendment No. 53 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 57 [X]
(Check appropriate box or boxes)
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NORTHERN INSTITUTIONAL FUNDS
(Exact Name of Registrant as Specified in Charter)
50 South LaSalle Street
Chicago, Illinois 60675
(Address of Principal Executive Offices)
800-637-1380
(Registrant's Telephone Number, including Area Code)
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Name and Address of Agent for Service:
Jeffrey A. Dalke with a copy to:
Drinker Biddle & Reath LLP Linda Hoard, Assistant Secretary
One Logan Square PFPC Inc.
18/th/ and Cherry Streets 99 High Street, 27/th/ Floor
Philadelphia, Pennsylvania Boston, Massachusetts 02110
19103-6996
It Is Proposed That This Filing Become Effective (Check Appropriate Box):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] On (date)pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] On (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
================================================================================
NORTHERN INSTITUTIONAL FUNDS
EQUITY PORTFOLIOS
.. INTERNATIONAL GROWTH PORTFOLIO
.. INTERNATIONAL EQUITY INDEX PORTFOLIO
.. SMALL COMPANY GROWTH PORTFOLIO
.. SMALL COMPANY INDEX PORTFOLIO
.. MID CAP GROWTH PORTFOLIO
.. FOCUSED GROWTH PORTFOLIO
.. DIVERSIFIED GROWTH PORTFOLIO
.. EQUITY INDEX PORTFOLIO
.. BALANCED PORTFOLIO
Prospectus dated April 1, 2004
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other
government agency. An investment in a Portfolio involves investment risks,
including possible loss of principal.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
OVERVIEW
RISK/RETURN SUMMARY
Information about the objectives, principal strategies and risk characteristics
of each Portfolio.
[Download Table]
5
Equity Portfolios
5
International Growth Portfolio
6
International Equity Index Portfolio
7
Small Company Growth Portfolio
8
Small Company Index Portfolio
9
Mid Cap Growth Portfolio
10
Focused Growth Portfolio
11
Diversified Growth Portfolio
11
Equity Index Portfolio
12
Balanced Portfolio
14
Principal Investment Risks
17
Portfolio Performance
18
International Growth Portfolio
19
International Equity Index Portfolio
20
Small Company Growth Portfolio
21
Small Company Index Portfolio
22
Mid Cap Growth Portfolio
23
Focused Growth Portfolio
24
Diversified Growth Portfolio
25
Equity Index Portfolio
26
Balanced Portfolio
27
Broad-Based Securities Market Indices
28
Portfolio Fees and Expenses
MANAGEMENT OF THE PORTFOLIOS
Details that apply to the Portfolios as a group.
36
Investment Advisers
37
Advisory Fees
38
Portfolio Management
39
Other Portfolio Services
[Download Table]
ABOUT YOUR ACCOUNT
How to open, maintain and close an account.
40
Purchasing and Selling Shares
40
Purchasing Shares
40
Opening an Account
41
Selling Shares
42
Account Policies and Other Information
42
Purchase and Redemption Minimums
42
Calculating Share Price
42
Timing of Purchase Requests
42
Additional Transaction Fee
43
Miscellaneous Purchase Information
43
Timing of Redemption and Exchange Requests
43
Payment of Redemption Proceeds
43
Redemption Fees
44
Miscellaneous Redemption Information
44
Exchange Privileges
45
Excessive Trading in Portfolio Shares
45
In-Kind Purchases and Redemptions
45
Telephone Transactions
45
Making Changes to Your Account Information
45
Business Day
45
Good Order
45
Customer Identification Program
46
Early Closings
46
Emergency Events
46
Financial Intermediaries
47
Shareholder Communications
48
Dividends and Distributions
49
Tax Considerations
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL
INFORMATION
51
Risks, Securities and Techniques
51
Additional Information on Investment Objectives,
Principal Investment Strategies and Related Risks
TABLE OF CONTENTS
[Download Table]
56
Additional Description of Securities and Common
Investment Techniques
65
Disclaimers
67
Financial Information
68
Financial Highlights
FOR MORE INFORMATION
88
Annual/Semiannual Reports
88
Statement of Additional Information
OVERVIEW
NORTHERN INSTITUTIONAL FUNDS (THE "TRUST") OFFERS A SELECTION OF INVESTMENT
PORTFOLIOS TO INSTITUTIONAL INVESTORS, EACH WITH A DISTINCT INVESTMENT
OBJECTIVE AND RISK/REWARD PROFILE.
--------------------------------------------------------------------------------
The descriptions on the following pages may help you choose the portfolio or
portfolios that best fit your investment needs. Keep in mind, however, that no
portfolio can guarantee it will meet its investment objective, and no portfolio
should be relied upon as a complete investment program.
This Prospectus describes one balanced and eight equity portfolios (the
"Portfolios") currently offered by the Trust. Each Portfolio is authorized to
offer three classes of shares: Class A, Class C and Class D Shares. The Trust
also offers fixed income and money market portfolios, which are described in
separate prospectuses.
In addition to the instruments described on the following pages, each Portfolio
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 51 of this Prospectus and
in the Statement of Additional Information ("Additional Statement"). As used in
this Prospectus, the term "equity securities" includes common stocks, preferred
stocks, interests in real estate investment trusts, convertible securities,
equity interest in trusts, partnerships, joint ventures, limited liability
companies and similar enterprises, warrants, stock purchase rights and
synthetic and derivative instruments that have economic characteristics similar
to equity securities.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
4
EQUITY PORTFOLIOS
INTERNATIONAL GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio
will invest, under normal circumstances, at least 65% of its net assets in
equity securities. The Portfolio intends to invest in the securities of
companies located in a number of countries throughout the world. These
companies generally have market capitalizations in excess of $1 billion.
Using fundamental research and quantitative analysis, the investment management
team buys securities of a broad mix of companies that it believes have
favorable growth characteristics relative to their peers. Similarly, the
investment management team sells securities it believes no longer have these or
other favorable characteristics. The team also may sell securities in order to
maintain the desired portfolio securities composition of the Portfolio. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
.. Sales and earnings growth;
.. Return on equity;
.. Debt to equity ratio; and
.. Market share and competitive leadership of the company's products.
Although the Portfolio primarily invests in mature markets (such as Germany and
Japan), it may to a lesser extent also make investments in emerging markets
(such as Argentina and China). The Portfolio, from time to time, may emphasize
particular companies or market segments, such as technology, in attempting to
achieve its investment objective. Many of the companies in which the Portfolio
invests retain their earnings to finance current and future growth. These
companies generally pay little or no dividends.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, currency, country, foreign
regulatory, emerging markets and portfolio turnover risks. See page 14 for a
discussion of these risks.
EQUITY PORTFOLIOS
5
INTERNATIONAL EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities included in the Morgan Stanley
Capital International Europe, Australia and Far East Index ("EAFE(R) Index").
The EAFE(R) Index is a broad-based market capitalization weighted index that
includes over 1,000 securities in twenty-one foreign countries as of November
30, 2003. It is widely considered representative of foreign stock market
performance overall.
Morgan Stanley Capital International ("MSCI") does not endorse any of the
securities in the EAFE(R) Index. It is not a sponsor of the International
Equity Index Portfolio and is not affiliated with the Portfolio in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. Under normal circumstances, the Portfolio will invest
substantially all (and at least 80%) of its net assets in the equity securities
included in the EAFE(R) Index, in weightings that approximate the relative
composition of the securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the EAFE(R) Index by using computer
programs and statistical procedures. As a result, the investment management
team does not use traditional methods of investment management for the
Portfolio, such as selecting securities on the basis of economic, financial and
market analysis. Rather, the investment management team will buy and sell
securities in response to changes in the EAFE(R) Index. Because the Portfolio
will have fees and transaction expenses (while the Index has none), returns are
likely to be below those of the EAFE(R) Index.
Because the proportion of assets allocated to each country will approximate the
relative country weights in the EAFE(R) Index, more than 25% of the Portfolio's
assets may be invested in a single country (such as the United Kingdom and
Japan). This may make the Portfolio's performance more dependent upon the
performance of a single country than if the Portfolio allocated its assets
among issuers in a larger number of countries.
The Investment Adviser expects that, under normal circumstances, the quarterly
performance of the Portfolio, before expenses, will track the performance of
the EAFE(R) Index within a 0.95 correlation coefficient.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, tracking, currency, country and
foreign regulatory risks. See page 14 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
6
SMALL COMPANY GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio
will invest, under normal circumstances, at least 80% of its net assets in the
equity securities of small capitalization companies. Small capitalization
companies generally are considered to be those whose market capitalization is,
at the time the Portfolio makes an investment, similar to the market
capitalization of companies in the Russell 2000(R)/ /Index. Companies whose
capitalization no longer meets this definition after purchase may continue to
be considered small capitalization companies. As of November 30, 2003, the
market capitalization of the companies in the Russell 2000 Index was between
$47.9 million and $2.2 billion. The size of companies in such Index changes
with market conditions. In addition, changes to the composition of the Index
can change the market capitalization range of companies in the Index. The
Portfolio is not limited to the stocks in the Russell 2000 Index and may invest
in other stocks that meet the Investment Adviser's criteria discussed below.
Using fundamental research and quantitative analysis, the investment management
team buys securities of small companies that it believes have favorable
characteristics such as above average sales, earnings growth and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these or other favorable
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In doing so, the
investment management team considers factors such as a company's:
.. Debt to equity ratio;
.. Market share and competitive leadership of the company's products;
.. Earnings growth relative to relevant competitors; and
.. Market valuation in comparison to securities of other small cap companies and
the stock's own historical norms.
Although the Portfolio primarily invests in the securities of U.S. issuers, it
may make limited investments in the securities of foreign issuers.
The Portfolio, from time to time, may emphasize particular companies or market
segments, such as technology, in attempting to achieve its investment
objective. Many of the companies in which the Portfolio invests retain their
earnings to finance current and future growth. These companies generally pay
little or no dividends.
The Portfolio may make significant investments in initial public offerings
("IPOs"). An IPO is a company's first offering of stock to the public.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Russell does not endorse any stock in the Russell 2000 Index. It is not a
sponsor of Small Company Growth Portfolio and is not affiliated with the
Portfolio in any way.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, small cap stock, technology
securities, IPO and portfolio turnover risks. See page 14 for a discussion of
these risks.
EQUITY PORTFOLIOS
7
SMALL COMPANY INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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(R) Index. The Russell 3000
Index consists of stocks of the 3,000 largest U.S. companies based on total
market capitalization, which represents approximately 98% of the investable
U.S. equity market. 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 Russell 2000 Index because they are expected to have superior
stock price performance relative to the stock market in general or other stocks
in particular. As of November 30, 2003, the approximate market capitalization
range of the companies included in the Russell 2000 Index was between $47.9
million and $2.2 billion.
Russell does not endorse any stock in the Russell 2000 Index. It is not a
sponsor of the Small Company Index Portfolio and is not affiliated with the
Portfolio in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. Under normal circumstances, the Portfolio will invest
substantially all (and at least 80%) of its net assets in the equity securities
included in the Russell 2000 Index, in weightings that approximate the relative
composition of securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the Russell 2000 Index by using
computer programs and statistical procedures. As a result, the investment
management team does not use traditional methods of investment management for
the Portfolio, such as selecting securities on the basis of economic, financial
and market analysis. Rather, the investment management team will buy and sell
securities in response to changes in the Russell 2000 Index. Because the
Portfolio will have fees and transaction expenses (while the Index has none),
returns are likely to be below those of the Russell 2000 Index.
The Investment Adviser expects that, under normal circumstances, the quarterly
performance of the Portfolio, before expenses, will track the performance of
the Russell 2000 Index within a 0.95 correlation coefficient.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, tracking, small cap stock and
technology securities risks. See page 14 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
8
MID CAP GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio
will invest, under normal circumstances, at least 80% of its net assets in
equity securities of medium capitalization companies. Medium capitalization
companies generally are considered to be those whose market capitalization is,
at the time the Portfolio makes an investment, similar to the market
capitalization of companies in the Russell Midcap(R) Index. Companies whose
capitalization no longer meets this definition after purchase may continue to
be considered medium capitalization companies. As of November 30, 2003, the
market capitalization of the companies in the Russell Midcap Index was between
$414.9 million and $15.3 billion. The size of companies in such Index changes
with market conditions. In addition, changes to the composition of the Index
can change the market capitalization range of companies in the Index. The
Portfolio is not limited to the stocks included in the Russell Midcap Index and
may invest in other stocks that meet the Investment Adviser's criteria
discussed below.
Using fundamental research and quantitative analysis, the investment management
team buys securities of mid-sized companies that it believes have favorable
characteristics such as above average sales, earnings growth and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these or other favorable
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In doing so, the
investment management team considers factors such as a company's:
.. Debt to equity ratio;
.. Market share and competitive leadership of the company's products;
.. Earnings growth relative to relevant competitors; and
.. Market valuation in comparison to securities of other mid cap companies and
the stock's own historical norms.
Although the Portfolio primarily invests in the securities of U.S. issuers, it
may make limited investments in the securities of foreign issuers.
The Portfolio, from time to time, may emphasize particular companies or market
segments, such as technology, in attempting to achieve its investment
objective. Many of the companies in which the Portfolio invests retain their
earnings to finance current and future growth. These companies generally pay
little or no dividends.
The Portfolio may make significant investments in IPOs. The investment
management team may engage in active trading, and will not consider portfolio
turnover a limiting factor in making decisions for the Portfolio.
Russell does not endorse any stock in the Russell Midcap Index. It is not a
sponsor of the Mid Cap Growth Portfolio and is not affiliated with the
Portfolio in any way.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, mid cap stock, technology
securities, IPO, and portfolio turnover risks. See page 14 for a discussion of
these risks.
EQUITY PORTFOLIOS
9
FOCUSED GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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
Portfolio, under normal circumstances, will invest at least 65% of its net
assets in equity securities. Companies in which the Portfolio invests are
selected by the investment management team for their growth potential and
generally have market capitalizations in excess of $1 billion.
Using fundamental research and quantitative analysis, the investment management
team buys securities of a somewhat limited number of companies (generally less
than 100) that it believes have favorable growth characteristics relative to
their peers. Similarly, the investment management team sells securities it
believes no longer have these or other favorable characteristics. The team also
may sell securities in order to maintain the desired portfolio securities
composition of the Portfolio. In determining whether a company has favorable
growth characteristics, the investment management team analyzes factors such as:
.. Sales and earnings growth;
.. Return on equity;
.. Debt to equity ratio; and
.. Market share and competitive leadership of the company's products.
Although the Portfolio primarily invests in the securities of U.S. issuers, it
may invest to a limited extent in the securities of foreign issuers.
The Portfolio, from time to time, may emphasize particular companies or market
segments, such as technology, in attempting to achieve its investment
objective. Many of the companies in which the Portfolio invests retain their
earnings to finance current and future growth. These companies generally pay
little or no dividends.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, technology securities and portfolio
turnover risks. See page 14 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
10
DIVERSIFIED GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation with income a
secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation, the
Portfolio, under normal circumstances, will invest at least 65% of its net
assets in equity securities. The companies in which the Portfolio invests
generally have market capitalizations in excess of $1 billion.
Using fundamental research and quantitative analysis, the investment management
team buys securities of a broad mix of companies that it believes have
favorable growth characteristics relative to their peers. Similarly, the
investment management team sells securities it believes no longer have these or
other favorable characteristics. The team also may sell securities in order to
maintain the desired portfolio securities composition of the Portfolio, which
may change in response to market conditions. In determining whether a company
has favorable growth characteristics, the investment management team analyzes
factors such as:
.. Sales and earnings growth;
.. Return on equity;
.. Debt to equity ratio; and
.. Market share and competitive leadership of the company's products.
Although the Portfolio primarily invests in the securities of U.S. issuers, it
may invest to a limited extent in the securities of foreign issuers.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, technology securities and portfolio
turnover risks. See page 14 for a discussion of these risks.
EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities included in the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500(R) Index").
The S&P 500 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 S&P 500 Index tend to be industry leaders within
the U.S. economy as determined by Standard and Poor's Rating Services ("S&P").
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. As of November 30, 2003, the approximate
market capitalization range of companies included in the S&P 500 Index was
between $665.8 million and $287.2 billion.
S&P does not endorse any stock in the S&P 500 Index. It is not a sponsor of the
Equity Index Portfolio and is not affiliated with the Portfolio in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. Under normal circumstances, the Portfolio will invest
substantially all (and at least 80%) of its net assets in the equity securities
of the companies that make up the S&P 500 Index, in weightings that approximate
the relative composition of the securities contained in the S&P 500 Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the S&P 500 Index using computer
programs and statistical procedures. As a result, the investment management
team does not use traditional methods of investment management for this
Portfolio, such as selecting securities on the basis of economic, financial and
market analysis. Rather, the investment management team will buy and sell
securities in response to changes in the S&P 500 Index. Because
EQUITY PORTFOLIOS
11
the Portfolio will have fees and transaction expenses (while the Index has
none), returns are likely to be below those of the S&P 500 Index.
The Investment Adviser expects that, under normal circumstances, the quarterly
performance of the Portfolio, before expenses, will track the performance of
the S&P 500 Index within a 0.95 correlation coefficient.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, tracking and technology securities
risks. See page 14 for a discussion of these risks.
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation and current
income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation and current
income, the Portfolio, under normal circumstances, will invest up to 75% of its
net assets in equity securities and at least 25% in fixed income securities.
Within these limitations, the actual mix of assets will vary depending on the
investment management team's analysis of market and economic conditions,
including expected earnings, growth in earnings, long-term interest rates and
risk premiums. When, for example, this analysis indicates that the equity
market is overvalued relative to the fixed income market, the investment
management team would allocate a greater percentage of the Portfolio's assets
to fixed income securities.
When investing in equity securities, the Portfolio generally invests in a broad
mix of companies. Such companies generally have market capitalizations in
excess of $1 billion. Using fundamental research and quantitative analysis, the
investment management team buys equity securities it believes have favorable
growth characteristics relative to their peers. Similarly, the investment
management team sells securities it believes no longer have these
characteristics. The investment team also may sell securities in response to
market conditions in order to maintain the desired equity securities
composition in light of the Portfolio's investment objective and strategies. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
.. Sales and earnings growth;
.. Return on equity;
.. Debt to equity ratio; and
.. Market share and competitive leadership of the company's products.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
12
Although the Portfolio primarily invests in the equity securities of U.S.
issuers, it may make limited investments in the equity securities of foreign
issuers.
In buying and selling securities for the fixed income portion of the Portfolio,
the investment management team uses a relative value approach. This approach
involves an analysis of general economic and market conditions. It also
involves the use of models that analyze and compare expected returns and
assumed risks. Under the relative value approach, the investment management
team will emphasize particular securities and types of securities (such as
treasury, agency, mortgage-related and corporate securities) that the team
believes will provide a favorable return in light of these risks. In this
regard, the investment management team will consider not only the income the
Portfolio will receive from its investments, but also the likelihood that
particular securities or types of securities will have a more favorable or
improving credit outlook.
The Portfolio invests in a broad range of fixed income securities, including:
.. Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations;
.. Obligations of state, local and foreign governments;
.. Obligations of domestic and foreign banks and corporations;
.. Zero coupon bonds, debentures, preferred stock and convertible securities;
.. Mortgage and other asset-backed securities; and
.. Stripped securities evidencing ownership of future interest or principal
payments on debt obligations.
Although the Portfolio primarily invests in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
nationally recognized statistical rating organization ("NRSRO") or of
comparable quality), it may invest to a limited extent in obligations of
foreign issues and in securities that are rated below investment grade ("junk
bonds").
The dollar-weighted average maturity of the fixed income portion of the
Portfolio, under normal circumstances, will range between two and ten years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, all of which are
considered to be derivative instruments, for both hedging and non-hedging
purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, stock, derivatives, high-yield, interest rate/maturity,
credit (or default), prepayment (or call), debt extension, structured
securities, and portfolio turnover risks. See page 14 for a discussion of these
risks.
EQUITY PORTFOLIOS
13
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Portfolio's investments, its investment performance and the price of its
shares. As a result, loss of money is a risk of investing in each Portfolio.
AN INVESTMENT IN A PORTFOLIO IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED
OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
The following summarizes the principal risks that apply to the Portfolios.
--------------------------------------------------------------------------------
RISKS THAT APPLY TO ALL PORTFOLIOS
Market risk is the risk that the value of the securities in which a Portfolio
invests may go up or down in response to the prospects of individual issuers
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 Portfolio will not be able to pay redemption
proceeds within the time periods described in this Prospectus because of
unusual market conditions, an unusually high volume of redemption requests or
other reasons.
Stock risk is the risk that stock prices have historically risen and fallen in
periodic cycles. In general, the values of equity investments fluctuate in
response to the activities of individual companies and in response to general
market and economic conditions. Accordingly, the values of the equity
investments that a Portfolio holds may decline over short or extended periods.
This volatility means that the value of your investment in the Portfolios may
increase or decrease. Over the past several years, stock markets have
experienced substantial price volatility.
Derivatives risk is the risk that loss may result from a Portfolio's
investments in options, futures, swaps, structured securities and other
derivative instruments, which may be leveraged. Investments in derivative
instruments may result in losses exceeding the amounts invested.
RISKS THAT APPLY PRIMARILY TO THE BALANCED PORTFOLIO
High-yield risk may impact the value of non-investment grade securities held by
a Portfolio. Generally, these securities, sometimes 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 Portfolio may not achieve the expected return from
non-investment grade securities and that its share price may be adversely
affected by declines in the value of these securities.
Interest rate/maturity risk is the risk that increases in prevailing interest
rates will cause fixed income securities held by a Portfolio to decline in
value. The magnitude of this decline will often be greater for longer-term
fixed income securities than shorter-term fixed-income securities.
Credit (or default) risk is the risk that an issuer or guarantor of a security
or a counterparty to a transaction may default on its payment obligations or
experience a decline in credit quality. Generally, the lower the credit rating
of a security, issuer, guarantor or counterparty, the greater the risk of
default. Also, a downgrade in the credit quality of a security or its issuer or
guarantor may cause the security to decline in value. Investment grade fixed
income securities generally are believed to have relatively low degrees of
credit risk.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
14
Prepayment (or call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as a mortgage-backed
security) earlier than expected. This may happen during a period of declining
interest rates. Under these circumstances, a Portfolio 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 Portfolio'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 Portfolio (such as a mortgage-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
Structured securities risk is the risk that loss may result from a Portfolio's
investments in structured securities, which are considered to be derivative
instruments because their value is based on changes in specific currencies,
commodities, securities, indices or other financial indicators. For these
reasons structured securities present additional risk that the interest paid to
the Portfolio on a structured security will be less than expected, and that the
principal amount invested will not be returned to the Portfolio. As a result,
investments in structured securities may adversely affect the Portfolio's net
asset value. In some cases it is possible that a Portfolio may suffer a total
loss on its investment in a structured security.
RISK THAT APPLIES TO THE INTERNATIONAL EQUITY INDEX, SMALL COMPANY INDEX AND
EQUITY INDEX PORTFOLIOS
Tracking risk is the risk that a Portfolio's performance may vary substantially
from the performance of the benchmark index it tracks as a result of share
purchases and redemptions, transaction costs, expenses and other factors.
RISK THAT APPLIES PRIMARILY TO THE SMALL COMPANY GROWTH AND SMALL COMPANY INDEX
PORTFOLIOS
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 addition, small cap stocks typically are traded in lower
volume, and their issuers typically are subject to a greater degree of change
in their earnings and prospects.
RISK THAT APPLIES PRIMARILY TO THE MID CAP GROWTH PORTFOLIO
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 SMALL COMPANY GROWTH, SMALL COMPANY INDEX,
MID CAP GROWTH, FOCUSED GROWTH, DIVERSIFIED GROWTH AND EQUITY INDEX PORTFOLIOS
Technology securities risk is the risk that securities of technology companies
may be subject to greater price volatility than securities of companies in
other sectors. Technology companies may produce or use products or services
that prove commercially unsuccessful, or become obsolete, or may be adversely
impacted by government regulation. Technology securities may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
RISK THAT APPLIES PRIMARILY TO THE SMALL COMPANY GROWTH AND MID CAP GROWTH
PORTFOLIOS
IPO risk is the risk that the market value of IPO shares will fluctuate
considerably due to factors such as the absence of
EQUITY PORTFOLIOS
15
a prior public market, unseasoned trading, the small number of shares available
for trading and limited information about the issuer. The purchase of IPO
shares may involve high transaction costs. IPO shares are subject to market
risk and liquidity risk. When a Portfolio's asset base is small, a significant
portion of the Portfolio's performance could be attributable to investments in
IPOs, because such investments would have a magnified impact on the Portfolio.
As a Portfolio's assets grow, the effect of the Portfolio's investments in IPOs
on the Portfolio's performance probably will decline, which could reduce the
Portfolio's performance.
RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL GROWTH AND INTERNATIONAL EQUITY
INDEX PORTFOLIOS
Currency risk is the potential for price fluctuations in the dollar value of
foreign securities because of changing currency exchange rates.
Country risk is the potential for price fluctuations in foreign securities
because of political, financial and economic events in foreign countries.
Investment of more than 25% of a Portfolio's total assets in securities of
issuers located in one country will subject the Portfolio to increased country
risk with respect to the particular country.
Foreign regulatory risk is the risk that a foreign security could lose value
because of less stringent foreign securities regulations and accounting and
disclosure standards.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL GROWTH PORTFOLIO
Emerging markets risk is the risk that the securities markets of emerging
countries are less liquid, especially are subject to greater price volatility,
have smaller market capitalizations, have less government regulation and are
not subject to as extensive and frequent accounting, financial and other
reporting requirements as the securities markets of more developed countries.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL GROWTH, SMALL COMPANY GROWTH,
MID CAP GROWTH, FOCUSED GROWTH, DIVERSIFIED GROWTH AND BALANCED PORTFOLIOS
Portfolio turnover risk is the risk that high portfolio turnover is likely to
result in increased Portfolio expenses which may result in lower investment
returns. High portfolio turnover also is likely to result in higher short-term
capital gains taxable to shareholders. For the last fiscal year, the annual
portfolio turnover rates of the Small Company Growth, Mid Cap Growth, Focused
Growth, Diversified Growth and Balanced Portfolios exceeded 100%.
More information about the Portfolios is provided in "Risks, Securities and
Techniques" beginning on page 51. You should carefully consider the risks
discussed in this section and in "Risks, Securities and Techniques" before
investing in a Portfolio.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
16
PORTFOLIO PERFORMANCE
EACH PORTFOLIO IS AUTHORIZED TO OFFER THREE CLASSES OF SHARES--CLASS A, CLASS
C AND CLASS D. THE BAR CHARTS AND TABLES THAT FOLLOW PROVIDE AN INDICATION OF
THE RISKS OF INVESTING IN A PORTFOLIO BY SHOWING: (A) CHANGES IN THE
PERFORMANCE OF A PORTFOLIO'S CLASS A SHARES FROM YEAR TO YEAR, AND (B) HOW
THE AVERAGE ANNUAL RETURNS OF A PORTFOLIO'S OUTSTANDING CLASSES OF SHARES
COMPARE TO THOSE OF A BROAD-BASED SECURITIES MARKET INDEX. FOR A DESCRIPTION
OF EACH BROAD-BASED SECURITIES MARKET INDEX, PLEASE SEE PAGE 27.
The bar charts and tables assume reinvestment of dividends and distributions.
A Portfolio's past performance, before and after taxes, is not necessarily an
indication of how the Portfolio 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 Portfolio's
performance would have been reduced.
Class C Shares and Class D Shares of a Portfolio will have similar annual
returns when compared with Class A Shares because Class A, Class C, and Class
D Shares of a Portfolio are invested in the same portfolio of securities. The
annual returns of Class A Shares will differ from those of Class C and Class
D Shares only to the extent that the classes do not have the same expenses.
Annual returns reflected since inception also will differ according to the
inception date for each class. As of the date of this Prospectus, no Class C
Shares of the International Growth, International Equity Index, Small Company
Growth, Small Company Index and Diversified Growth Portfolios were
outstanding.
In calculating the federal income taxes due on redemptions, capital gains
taxes resulting from a redemption are subtracted from the redemption proceeds
and the tax benefits from capital losses resulting from the redemption are
added to the redemption proceeds. Under certain circumstances, the addition
of the tax benefits from capital losses resulting from redemptions may cause
the Returns After Taxes on Distributions and Sale of Fund shares to be
greater than the Returns After Taxes on Distributions or even the Returns
Before Taxes.
--------------------------------------------------------------------------------
EQUITY PORTFOLIOS
17
INTERNATIONAL GROWTH PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- -----
2.52% 5.12% 6.48% 24.54% 35.35% (8.95)% (26.32)% (16.95)% 42.97
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 19.00%
Worst Quarter Return Q3 2002 (18.72)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 3/28/94 42.97% 1.52% 4.61%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 43.14% (0.80)% 2.53%
Return after taxes on distributions 28.41% 0.16% 2.86%
and sale of portfolio shares
MSCI EAFE(R) Index* 38.59% (0.05)% 4.22%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 11/16/94** 42.44% 1.52% 4.20%
------------------------------------------------------------------------------------------------------------------------------------
MSCI EAFE(R) Index* 38.59% (0.05)% 4.14%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
**For Class D Shares, performance from August 23, 1999 through June 14, 2001 is that of Class A, as no Class D Shares were
outstanding during such period. Because the fees and expenses of Class D Shares are higher than those of Class A Shares, actual
performance would have been lower if these higher fees and expenses had been taken into account.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
18
INTERNATIONAL EQUITY INDEX PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)*
[CHART]
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
18.92% 26.06% (14.36)% (21.22)% (16.25)% 38.90%
*The returns in the bar chart do not reflect the special transaction fee
which is charged on the purchase of shares and is explained on page 42.
If they did reflect such fee, returns would be less than those shown.
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 19.84%
Worst Quarter Return Q3 2002 (19.77)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 4/1/97 38.90% (0.21)% 3.38%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 38.45% (0.92)% 2.48%
Return after taxes on distributions 26.57% (0.41)% 2.55%
and sale of portfolio shares
MSCI EAFE(R) Index** 38.59% (0.05)% 3.21%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 10/5/98 37.53% (0.93)% 3.54%
------------------------------------------------------------------------------------------------------------------------------------
MSCI EAFE(R) Index** 38.59% (0.05)% 3.59%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
**The Index figures do not reflect any fees, expenses or taxes.
EQUITY PORTFOLIOS
19
SMALL COMPANY GROWTH PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
2000 2001 2002 2003
---- ---- ---- ----
(11.76)% (21.52)% (25.91)% 36.50%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q2 2003 20.98%
Worst Quarter Return Q1 2001 (23.69)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 12/1/99 36.50% (5.20)%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 36.50% (5.20)%
Return after taxes on distributions and sale of 23.73% (4.37)%
portfolio shares
Russell 2000(R) Growth Index* 48.54% (3.68)%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 6/13/02 35.95% 6.57%
------------------------------------------------------------------------------------------------------------------------------------
Russell 2000 Growth Index* 48.54% 9.03%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
20
SMALL COMPANY INDEX PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)*
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
(2.25)% 27.62% 15.88% 22.13% (2.80)% 20.18% (3.24)% 2.19% (20.55)% 47.07%
*The returns in the bar chart do not reflect the special transaction fee which
is charged on the purchase of shares and is explained on page 42. If they did
reflect such fee, returns would be less than those shown.
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q2 2003 23.45%
Worst Quarter Return Q3 2002 (21.31)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 1/11/93 47.07% 6.79% 9.07% 9.88%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on 46.77% 4.76% 6.61% 7.49%
distributions
Return after taxes on
distributions and sale of 30.96% 4.66% 6.50% 7.29%
portfolio shares
Russell 2000(R) Index** 47.25% 7.13% 9.47% 10.30%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 12/8/94 46.44% 6.29% N/A 10.61%
------------------------------------------------------------------------------------------------------------------------------------
Russell 2000 Index** 47.25% 7.13% N/A 11.02%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
**The Index figures do not reflect any fees, expenses or taxes.
EQUITY PORTFOLIOS
21
MID CAP GROWTH PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
2000 2001 2002 2003
---- ---- ---- ----
12.90% (17.36)% (20.04)% 31.77%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q1 2000 23.90%
Worst Quarter Return Q3 2001 (19.24)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 12/31/99 31.77% (0.43)%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 31.77% (0.43)%
Return after taxes on distributions and sale of 20.65% (0.36)%
portfolio shares
Russell Midcap(R) Growth Index* 42.71% (7.56)%
------------------------------------------------------------------------------------------------------------------------------------
Class C Return before taxes 4/4/01 31.49% 4.81%
------------------------------------------------------------------------------------------------------------------------------------
Russell Midcap Growth Index* 42.71% 3.67%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 1/29/01 31.17% (4.33)%
------------------------------------------------------------------------------------------------------------------------------------
Russell Midcap Growth Index* 42.71% (8.06)%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
22
FOCUSED GROWTH PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
(6.65)% 23.74% 14.22% 33.66% 36.50% 34.78% (3.46)% (24.72)% (26.16)% 20.40%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 27.60%
Worst Quarter Return Q1 2001 (19.00)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 7/1/93 20.40% (2.73)% 7.68% 8.06%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on 20.40% (3.78)% 5.87% 6.32%
distributions
Return after taxes on
distributions and sale of 13.26% (2.42)% 6.02% 6.41%
portfolio shares
Russell 1000(R) Growth Index* 29.75% (5.11)% 9.21% 9.30%
------------------------------------------------------------------------------------------------------------------------------------
Class C Return before taxes 6/14/96 20.15% (2.95)% N/A 6.53%
------------------------------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Index* 29.75% (5.11)% N/A 5.78%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 12/8/94 19.87% (3.10)% N/A 9.53%
------------------------------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Index* 29.75% (5.11)% N/A 10.07%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
EQUITY PORTFOLIOS
23
DIVERSIFIED GROWTH PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ------ ------ ----- ----- ----- ----- ------
(9.33)% 24.48% 17.50% 31.30% 34.96% 22.82% (6.05)% (16.42)% (22.98)% 25.39%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 24.46%
Worst Quarter Return Q3 2002 (17.57)%
[Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended
December 31, 2003)
----------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
----------------------------------------------------------------------------
Class A Return before taxes 1/11/93 25.39% (1.41)% 8.15% 8.42%
----------------------------------------------------------------------------
Return after taxes on 25.26% (4.42)% 5.39% 5.85%
distributions
Return after taxes on
distributions and sale 16.60% (1.84)% 6.24% 6.56%
of portfolio shares
S&P 500(R) Index* 28.68% (0.57)% 11.08% 10.98%
----------------------------------------------------------------------------
Class D Return before taxes 9/14/94 25.09% (1.80)% N/A 9.00%
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% N/A 11.44%
----------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and localtaxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant toinvestors who hold their shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
After-tax returns areshown only for Class A Shares. After-tax returns for
other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
24
EQUITY INDEX PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
1.12% 37.23% 22.65% 32.72% 28.28% 20.61% (9.18)% (12.05)% (22.32)% 28.50%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 21.22%
Worst Quarter Return Q3 2002 (17.30)%
[Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended
December 31, 2003)
----------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
----------------------------------------------------------------------------
Class A Return before taxes 1/11/93 28.50% (0.78)% 10.79% 10.88%
----------------------------------------------------------------------------
Return after taxes on 28.09% (2.51)% 8.76% 8.93%
distributions
Return after taxes on
distributions and sale 18.86% (1.13)% 8.71% 8.83%
of portfolio shares
S&P 500 Index* 28.68% (0.57)% 11.08% 10.98%
----------------------------------------------------------------------------
Class C Return before taxes 9/28/95 28.11% (1.04)% N/A 9.28%
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% N/A 9.85%
----------------------------------------------------------------------------
Class D Return before taxes 9/14/94 27.91% (1.14)% N/A 11.00%
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% N/A 11.44%
----------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
andlocal taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. After-tax returns shown are
notrelevant to investors who hold their shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
After-taxreturns are shown only for Class A Shares. After-tax returns for
other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
EQUITY PORTFOLIOS
25
BALANCED PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
(6.02)% 20.55% 11.26% 20.21% 22.37% 12.76% 0.98% (4.75)% (9.59)% 16.38%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 1998 13.43%
Worst Quarter Return Q3 2002 (7.74)%
[Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended
December 31, 2003)
----------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
----------------------------------------------------------------------------
Class A Return before taxes 7/1/93 16.38% 2.68% 7.78% 7.91%
----------------------------------------------------------------------------
Return after taxes on 15.96% 0.94% 5.91% 6.08%
distributions
Return after taxes on
distributions and sale 10.78% 1.48% 5.82% 5.96%
of portfolio shares
Lehman Brothers Intermediate 4.31% 6.65% 6.62% 6.54%
Government/Corporate Bond Index*
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% 11.08% 11.02%
----------------------------------------------------------------------------
Class C Return before taxes 12/29/95 16.14% 2.47% N/A 7.88%
----------------------------------------------------------------------------
Lehman Brothers Intermediate 4.31% 6.65% N/A 6.69%
Government/Corporate Bond Index*
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% N/A 9.38%
----------------------------------------------------------------------------
Class D Return before taxes 2/20/96 15.99% 2.29% N/A 7.59%
----------------------------------------------------------------------------
Lehman Brothers Intermediate 4.31% 6.65% N/A 6.89%
Government/Corporate Bond Index*
----------------------------------------------------------------------------
S&P 500 Index* 28.68% (0.57)% N/A 8.99%
----------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and localtaxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. After-tax returns shown are not
relevant toinvestors who hold their shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
After-tax returns areshown only for Class A Shares. After-tax returns for
other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
26
BROAD-BASED SECURITIES MARKET INDICES
The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index of prices of U.S. government and corporate bonds with remaining
maturities of one to ten years.
The MSCI EAFE(R) Index is the Morgan Stanley Capital International Europe,
Australia and Far East Index, an unmanaged index which tracks the performance
of selected equity securities in Europe, Australia and the Far East.
The Russell Midcap Index is an unmanaged index measuring the performance of the
800 smallest companies in the Russell 1000(R) Index, which represent
approximately 27% of the total market capitalization of the Russell 1000 Index
as of November 30, 2003.
The Russell Midcap(R) Growth Index is an unmanaged index which measures the
performance of those Russell Midcap Index companies with higher price-to-book
ratios and higher forecasted growth values. The stocks are also members of the
Russell 1000(R) Growth Index.
The Russell 1000 Index is an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, based on market
capitalization, which represents approximately 91% of the total market
capitalization of the Russell 3000 Index as of November 30, 2003.
The Russell 2000 Index is an unmanaged index which measures the performance of
the 2,000 smallest of the 3,000 largest U.S. companies, based on market
capitalization, which represents approximately 9% of the total market
capitalization of the Russell 3000 Index as of November 30, 2003.
The Russell 3000 Index is an unmanaged index measuring the performance of the
3,000 largest U.S. companies based on total market capitalization, which
represents approximately 98% of the investable U.S. equity market as of
November 30, 2003.
The Russell 1000 Growth Index is an unmanaged index measuring the performance
of those Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values.
The Russell 2000(R) Growth Index is an unmanaged index measuring the
performance of those companies included in the Russell 2000 Index having higher
price-to-book ratios and higher forecasted growth values.
The S&P 500 Index is an unmanaged index consisting of 500 stocks and is a
widely recognized common measure of the performance of the overall U.S. stock
market.
EQUITY PORTFOLIOS
27
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Class A, C or D Shares of the Portfolios. Each class of shares represents pro
rata interests in a Portfolio except that different shareholder servicing and
transfer agency fees are payable due to the varying levels of administrative
support and transfer agency services provided to each class. Please note that
the following information does not reflect any charges that 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 42.)
As indicated below, the Small Company Index and International Equity Index
Portfolios charge an additional transaction fee on the purchase of shares. (For
more information, please see "Additional Transaction Fee" on page 42.)
[Enlarge/Download Table]
-----------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
-----------------------------------------------------------------------------------
Maximum Sales
Maximum Additional Charge (Load)
Sales Charge Transactional Fees Maximum Imposed on
(Load) Imposed (as a percentage of Deferred Sales Reinvested Redemption Exchange
Portfolio on Purchases amount invested) Charge (Load) Distributions Fees** Fees
--------------------------------------------------------------------------------------------------------------
International Growth
Class A None None None None 2.00% None
Class C* None None None None 2.00% None
Class D None None None None 2.00% None
--------------------------------------------------------------------------------------------------------------
International Equity Index
Class A None 1.00% None None 1.00% None
Class C* None 1.00% None None 1.00% None
Class D None 1.00% None None 1.00% None
--------------------------------------------------------------------------------------------------------------
Small Company Growth
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
Small Company Index
Class A None 0.50% None None None None
Class C* None 0.50% None None None None
Class D None 0.50% None None None None
--------------------------------------------------------------------------------------------------------------
Mid Cap Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
Focused Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
* As of the date of the Prospectus, no shares of this class are issued and
outstanding.
**Beginning on or about June 1, 2004, the International Growth and
International Equity Index Portfolios have a redemption fee on shares sold or
exchanged (as a percentage of amount redeemed) within 30 days of purchase.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
28
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
------------------------------------------------------------------------------------------------
Total Annual
Management Distribution Other Servicing Transfer Agency Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees Expenses/(1)/ Expenses/(2)/
------------------------------------------------------------------------------------------------
0.90% None 0.31% None 0.01% 0.30% 1.21%
0.90% None 0.55% 0.15% 0.10% 0.30% 1.45%
0.90% None 0.70% 0.25% 0.15% 0.30% 1.60%
------------------------------------------------------------------------------------------------
0.35% None 0.35% None 0.01% 0.34% 0.70%
0.35% None 0.59% 0.15% 0.10% 0.34% 0.94%
0.35% None 0.74% 0.25% 0.15% 0.34% 1.09%
------------------------------------------------------------------------------------------------
0.95% None 0.40% None 0.01% 0.39% 1.35%
0.95% None 0.64% 0.15% 0.10% 0.39% 1.59%
0.95% None 0.79% 0.25% 0.15% 0.39% 1.74%
------------------------------------------------------------------------------------------------
0.30% None 0.34% None 0.01% 0.33% 0.64%
0.30% None 0.58% 0.15% 0.10% 0.33% 0.88%
0.30% None 0.73% 0.25% 0.15% 0.33% 1.03%
------------------------------------------------------------------------------------------------
0.90% None 0.40% None 0.01% 0.39% 1.30%
0.90% None 0.64% 0.15% 0.10% 0.39% 1.54%
0.90% None 0.79% 0.25% 0.15% 0.39% 1.69%
------------------------------------------------------------------------------------------------
0.85% None 0.15% None 0.01% 0.14% 1.00%
0.85% None 0.39% 0.15% 0.10% 0.14% 1.24%
0.85% None 0.54% 0.25% 0.15% 0.14% 1.39%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
29
[Enlarge/Download Table]
-----------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
-----------------------------------------------------------------------------------
Maximum Sales
Maximum Additional Charge (Load)
Sales Charge Transactional Fees Maximum Imposed on
(Load) Imposed (as a percentage of Deferred Sales Reinvested Redemption Exchange
Portfolio on Purchases amount invested) Charge (Load) Distributions Fees Fees
------------------------------------------------------------------------------------------------------
Diversified Growth
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
------------------------------------------------------------------------------------------------------
Equity Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
------------------------------------------------------------------------------------------------------
Balanced
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
30
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
------------------------------------------------------------------------------------------------
Total Annual
Management Distribution Other Servicing Transfer Agency Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees Expenses/(1)/ Expenses/(2)/
------------------------------------------------------------------------------------------------
0.75% None 0.22% None 0.01% 0.21% 0.97%
0.75% None 0.46% 0.15% 0.10% 0.21% 1.21%
0.75% None 0.61% 0.25% 0.15% 0.21% 1.36%
------------------------------------------------------------------------------------------------
0.20% None 0.15% None 0.01% 0.14% 0.35%
0.20% None 0.39% 0.15% 0.10% 0.14% 0.59%
0.20% None 0.54% 0.25% 0.15% 0.14% 0.74%
------------------------------------------------------------------------------------------------
0.60% None 0.19% None 0.01% 0.18% 0.79%
0.60% None 0.43% 0.15% 0.10% 0.18% 1.03%
0.60% None 0.58% 0.25% 0.15% 0.18% 1.18%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
31
FOOTNOTES
/1/"Other Operating Expenses," along with "Servicing Fees" and "Transfer Agency
Fees," is a subcategory of "Other Expenses" and includes co-administration
fees and all other ordinary operating expenses of the Portfolios not listed
above. The Co-Administrators are entitled to a co-administration fee from
the Portfolios at an annual rate of 0.15% of the average daily net assets of
each of the International Growth and International Equity Index Portfolios,
and 0.10% of the average daily net assets of each other Portfolio. Under the
Co-Administration Agreement with the Trust, which may be amended without
shareholder approval, the Co-Administrators have agreed to reimburse
expenses (including fees payable to the Co-Administrators, but excluding
management fees, transfer agency fees, servicing fees, taxes, interest and
other extraordinary expenses) which exceed on an annualized basis 0.25% of
the International Growth and International Equity Index Portfolios' average
daily net assets, and 0.10% of each other Portfolio's average daily net
assets.
/2/The Investment Advisers have voluntarily agreed to waive a portion of their
management fees, as shown below. Also set forth below are the distribution
(12b-1) fees, other expenses and total annual portfolio operating expenses
that are actually incurred by the Portfolios as a result of these voluntary
fee reductions and the expense reimbursements discussed in footnote 1.
Voluntary fee reductions may be modified, terminated or implemented at any
time at the option of the Investment Advisers or other service providers to
the Portfolios. If this occurs, "Total Annual Operating Expenses" may
increase (or decrease) without shareholder approval.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
32
[Download Table]
--------------------------------------------------------------------------------
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
--------------------------------------------------------------------------------
International Growth
Class A 0.80% None 0.26% 1.06%
Class C* 0.80% None 0.50% 1.30%
Class D 0.80% None 0.65% 1.45%
--------------------------------------------------------------------------------
International Equity Index
Class A 0.25% None 0.26% 0.51%
Class C* 0.25% None 0.50% 0.75%
Class D 0.25% None 0.65% 0.90%
--------------------------------------------------------------------------------
Small Company Growth
Class A 0.80% None 0.11% 0.91%
Class C* 0.80% None 0.35% 1.15%
Class D 0.80% None 0.50% 1.30%
--------------------------------------------------------------------------------
Small Company Index
Class A 0.20% None 0.11% 0.31%
Class C* 0.20% None 0.35% 0.55%
Class D 0.20% None 0.50% 0.70%
--------------------------------------------------------------------------------
Mid Cap Growth
Class A 0.80% None 0.11% 0.91%
Class C 0.80% None 0.35% 1.15%
Class D 0.80% None 0.50% 1.30%
--------------------------------------------------------------------------------
Focused Growth
Class A 0.75% None 0.11% 0.86%
Class C 0.75% None 0.35% 1.10%
Class D 0.75% None 0.50% 1.25%
--------------------------------------------------------------------------------
Diversified Growth
Class A 0.65% None 0.11% 0.76%
Class C* 0.65% None 0.35% 1.00%
Class D 0.65% None 0.50% 1.15%
--------------------------------------------------------------------------------
Equity Index
Class A 0.10% None 0.11% 0.21%
Class C 0.10% None 0.35% 0.45%
Class D 0.10% None 0.50% 0.60%
--------------------------------------------------------------------------------
Balanced
Class A 0.50% None 0.11% 0.61%
Class C 0.50% None 0.35% 0.85%
Class D 0.50% None 0.50% 1.00%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
EQUITY PORTFOLIOS
33
EXAMPLE
The following Example is intended to help you compare the cost of investing in
a Portfolio (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 Portfolio 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 Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
[Download Table]
----------------------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
International Growth
Class A $123 $384 $665 $1,466
Class C $148 $459 $792 $1,735
Class D $163 $505 $871 $1,900
----------------------------------------------------------
International Equity Index
Class A $72 $224 $390 $871
Class C $96 $300 $520 $1,155
Class D $111 $347 $601 $1,329
----------------------------------------------------------
Small Company Growth
Class A $137 $428 $739 $1,624
Class C $162 $502 $866 $1,889
Class D $177 $548 $944 $2,052
----------------------------------------------------------
Small Company Index
Class A $65 $205 $357 $798
Class C $90 $281 $488 $1,084
Class D $105 $328 $569 $1,259
----------------------------------------------------------
Mid Cap Growth
Class A $132 $412 $713 $1,568
Class C $157 $486 $839 $1,834
Class D $172 $533 $918 $1,998
----------------------------------------------------------
Focused Growth
Class A $102 $318 $552 $1,225
Class C $126 $393 $681 $1,500
Class D $142 $440 $761 $1,669
----------------------------------------------------------
Diversified Growth
Class A $99 $309 $536 $1,190
Class C $123 $384 $665 $1,466
Class D $138 $431 $745 $1,635
----------------------------------------------------------
----------------------------------------------------------
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
34
[Download Table]
--------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
--------------------------------------------
Equity Index
Class A $36 $113 $197 $443
Class C $60 $189 $329 $738
Class D $76 $237 $411 $918
--------------------------------------------
Balanced
Class A $81 $252 $439 $978
Class C $105 $328 $569 $1,259
Class D $120 $375 $649 $1,432
--------------------------------------------
--------------------------------------------
EQUITY PORTFOLIOS
35
INVESTMENT ADVISERS
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser," formerly
known and conducting business as Northern Trust Investments, Inc.) and Northern
Trust Global Investments (Europe) Limited ("NTGIE"), each a direct or indirect
subsidiary of The Northern Trust Company ("TNTC"), serve jointly as the
Investment Advisers of the International Growth and Balanced Portfolios. NTI
serves as the Investment Adviser of each of the other Portfolios. NTI is
located at 50 South LaSalle Street, Chicago, IL 60675 and NTGIE is located at 6
Devonshire Square, London, EC2A 4YE, United Kingdom. Unless otherwise
indicated, NTI, NTGIE and TNTC are referred to collectively in this Prospectus
as "Northern Trust."
NTI is an investment adviser registered under the Investment Advisers Act of
1940. It primarily manages assets for defined contribution and benefit plans,
investment companies and other institutional investors.
NTGIE was formed in 2000 as a private company with limited liability under the
laws of the United Kingdom and is authorized and regulated by the U.K.
Financial Services Authority and registered with the Investment Management
Regulatory Organization. It also is registered as an investment adviser under
the Investment Advisers Act of 1940 with respect to its U.S. clients. NTGIE
primarily manages the assets of foreign and U.S. institutional clients,
including U.S. mutual funds.
TNTC is an Illinois state chartered banking organization and a member of the
Federal Reserve System. Formed in 1889, it administers and manages assets for
individuals, personal trusts, defined contribution and benefit plans and other
institutional and corporate clients. It is the principal subsidiary of Northern
Trust Corporation, a bank holding company.
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors, and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
Under the Advisory Agreement with Northern Institutional Funds, each Investment
Adviser, subject to the general supervision of Northern Institutional Funds'
Board of Trustees, is responsible for making investment decisions for the
Portfolios and for placing purchase and sale orders for portfolio securities.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
36
ADVISORY FEES
As compensation for advisory services and the assumption of related expenses,
the Investment Advisers are 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 Portfolio's respective average daily net assets). The table
also reflects the advisory fees (after voluntary fee waivers) paid by the
Portfolios for the fiscal year ended November 30, 2003.
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Portfolios reflects the fact 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.
[Download Table]
-----------------------------------------------------------
Advisory Fee
Contractual Paid for Fiscal Year
Portfolio Rate Ended 11/30/03
-----------------------------------------------------------
International Growth 0.90% 0.80%
-----------------------------------------------------------
International Equity Index 0.35% 0.25%
-----------------------------------------------------------
Small Company Growth 0.95% 0.80%
-----------------------------------------------------------
Small Company Index 0.30% 0.20%
-----------------------------------------------------------
Mid Cap Growth 0.90% 0.80%
-----------------------------------------------------------
Focused Growth 0.85% 0.75%
-----------------------------------------------------------
Diversified Growth 0.75% 0.65%
-----------------------------------------------------------
Equity Index 0.20% 0.10%
-----------------------------------------------------------
Balanced 0.60% 0.50%
-----------------------------------------------------------
-----------------------------------------------------------
EQUITY PORTFOLIOS
37
PORTFOLIO MANAGEMENT
THE INVESTMENT ADVISERS EMPLOY A TEAM APPROACH TO THE INVESTMENT MANAGEMENT
OF THE PORTFOLIOS.
BELOW IS INFORMATION REGARDING THE MANAGEMENT OF THE ACTIVELY MANAGED
PORTFOLIOS.
--------------------------------------------------------------------------------
The management team leaders for the Balanced Portfolio are Colin A. Robertson,
Senior Vice President of Northern Trust, and Robert Mitchell, Vice President of
Northern Trust. Mr. Robertson has had such responsibility since September 2002
and Mr. Mitchell has had such responsibility since December 2002. Mr. Robertson
joined Northern Trust in 1999 and manages various fixed income portfolios. From
1996 to 1999, Mr. Robertson was with Mellon Financial Corporation where he was
responsible for the management of securities lending cash collateral
portfolios. Mr. Mitchell joined Northern Trust in 1988 and during the past five
years has managed various equity and balanced portfolios.
The management team leaders for the Diversified Growth Portfolio are John B.
Leo, Senior Vice President of Northern Trust, and Robert Mitchell. They have
had such responsibility since December 2002. Mr. Leo joined Northern Trust in
1984 and manages various equity portfolios.
The management team leader for the Focused Growth Portfolio is Robert N.
Streed, Senior Vice President of Northern Trust. Mr. Streed has had such
responsibility since December 2002. He joined Northern Trust in 1990 and during
the past five years has managed various equity portfolios.
The management team leaders for the International Growth Portfolio are Richard
Rothwell and Diane Jones, both Vice Presidents of Northern Trust. They have had
such responsibility since November 2002. Mr. Rothwell joined Northern Trust in
July 2002. From 1997 to 2002, Mr. Rothwell was an emerging markets portfolio
manager with Deutsche Asset Management. He has been a member of the Portfolio's
management team since July 2002. Ms. Jones joined Northern Trust in August 2000
and manages various equity portfolios. From 1996 to 1998, she was a European
equity portfolio manager for Courtaulds Pension Fund, and from 1998 to 2000,
was a European equity portfolio manager with Julius Baer. She has been a member
of the Portfolio's management team since August 2000.
The management team leaders for the Mid Cap Growth Portfolio are Andrew Flynn
and Deborah L. Koch, both Vice Presidents of Northern Trust. Mr. Flynn has had
such responsibility since December 2002. Mr. Flynn joined Northern Trust in
1998 as an equity analyst. From 1996 to 1998, he was an equity analyst with
Scudder Kemper Investments. Ms. Koch has had such responsibility since she
joined Northern Trust in May 2003. From 2000 to 2003, Ms. Koch was a portfolio
manager and senior analyst for technology portfolios at Strong Capital
Management and from 1992 to 2000 she was a portfolio manager at Scudder Kemper
Investments.
The management team leader for the Small Company Growth Portfolio is Theodore
Breckel, Senior Vice President of Northern Trust. Mr. Breckel has had such
responsibility since December 2002. He joined Northern Trust in 1971 and during
the past five years has managed various equity portfolios.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
38
OTHER PORTFOLIO SERVICES
TNTC serves as Transfer Agent and Custodian for each Portfolio. The Transfer
Agent performs various shareholder servicing functions, and any shareholder
inquiries should be directed to it. In addition, NTI and PFPC Inc. ("PFPC")
serve as Co-Administrators for the Portfolios. The fees that TNTC, NTI and PFPC
receive for their services in these capacities are described under "Portfolio
Fees and Expenses" and in the Additional Statement.
Pursuant to an exemptive order issued by the SEC concerning such arrangements,
TNTC also may render securities lending services to the Portfolios. For such
services, TNTC may receive a fee of up to 35% of the net revenue earned by a
Portfolio on each securities loan. In addition, cash collateral received by a
Portfolio in connection with a securities loan may be invested in shares of
other registered or unregistered portfolios that pay investment advisory or
other fees to NTI, TNTC or an affiliate.
TNTC, NTI and other Northern Trust affiliates may provide other services to the
Portfolios and receive compensation for such services, if consistent with the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules,
exemptive orders and no-action letters issued by the SEC thereunder. Unless
required, investors in a Portfolio may or may not receive specific notice of
such additional services and fees.
EQUITY PORTFOLIOS
39
PURCHASING AND SELLING SHARES
PURCHASING SHARES
Institutional investors, acting on their own behalf or on behalf of customers
and other beneficial owners ("Customers"), may purchase shares of the
Portfolios through their institutional accounts at Northern Trust or an
affiliate. They also may purchase shares directly from the Trust. There is no
sales charge imposed on purchases of shares. Institutional investors include:
.. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
.. Corporations, partnerships, business trusts, and other institutions and
organizations.
The Portfolios currently offer a choice of three classes of shares to meet the
special needs of institutional investors ("Institutions").
Class A Shares are designed for Institutions that can obtain information about
their shareholder accounts and do not require the additional services available
to other classes.
Class C Shares are designed for Institutions that require the Transfer Agent
and a Service Organization to provide certain account-related services incident
to Customers being the beneficial owners of shares.
Class D Shares are designed for Institutions that require the Transfer Agent
and a Service Organization to provide them and their Customers with certain
account-related services and other information.
Different shareholder servicing and transfer agency fees are payable by each
class of shares (see "Portfolio Fees and Expenses" on page 28). In addition,
any person entitled to receive compensation for selling or servicing shares of
a Portfolio may receive different compensation with respect to one particular
class of shares over another in the same Portfolio.
OPENING AN ACCOUNT
You may purchase shares of the Portfolios through your institutional account at
Northern Trust (or an affiliate) or you may open an account directly with the
Trust with a minimum initial investment of $5 million in one or more
Portfolios. There is no minimum for subsequent investments.
Through an Institutional Account. If you are opening an institutional account
at Northern Trust, a Northern Trust representative can assist you with all
phases of your investment. To purchase shares through your account, contact
your Northern Trust representative for further information.
Directly from the Trust. An Institution may open a shareholder account and
purchase shares directly from the Trust as described in this Prospectus.
For your convenience, there are a number of ways to invest directly in the
Portfolios:
BY MAIL
.. Read this Prospectus carefully.
.. Complete and sign the New Account Application.
.. Include a certified corporate resolution (or other acceptable evidence of
authority).
.. Enclose a check or Federal Reserve draft payable to Northern Institutional
Funds.
.. Mail your check, corporate resolution (if needed) and completed New Account
Application to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
40
BY TELEPHONE
.. Read this prospectus carefully.
.. Call the Northern Institutional Funds Center at 800/637-1380.
To open a new account please provide:
.. The name of the Portfolio in which you would like to invest
.. The number of shares or dollar amount to be invested
.. The method of payment
To add to an existing account, please provide:
.. The Institution's name
.. Your Account Number
BY WIRE OR AUTOMATED CLEARING HOUSE TRANSFER ("ACH TRANSFER")
To open a new account:
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. For more information about the purchase of shares, call the Northern
Institutional Funds Center at 800/637-1380.
To add to an existing account:
.. Have your bank wire federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10-Digit Portfolio Account Number)
(Reference Shareholder's Name)
SELLING SHARES
Through an Institutional Account. Institutions may sell (redeem) shares through
their institutional account by contacting their Northern Trust account
representative.
Directly through the Trust. Institutions that purchase shares directly from the
Trust may redeem their shares through the Transfer Agent in one of the
following ways:
BY MAIL
Send a written request to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
The letter of instruction must include:
.. The signature of a duly authorized person
.. Your Account Number
.. The name of the Portfolio
.. The number of shares or the dollar amount to be redeemed
BY TELEPHONE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. 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 WIRE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. You must have given prior authorization for expedited wire redemption.
.. The minimum amount that may be redeemed by this method is $10,000.
EQUITY PORTFOLIOS
41
ACCOUNT POLICIES AND OTHER INFORMATION
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in one or more Portfolios. There is no minimum for subsequent
investments. A $10,000 minimum applies for redemptions by wire. The Trust
reserves the right to waive purchase and redemption minimums and to determine
the manner in which a minimum is satisfied.
Calculating Share Price. The Trust issues shares and redeems shares at net
asset value ("NAV"). The NAV for each share class of a Portfolio is calculated
by dividing the value of the Portfolio's net assets attributed to that class by
the number of outstanding shares of that class. The NAV is calculated on each
Business Day as of 3:00 p.m., Central time, for each class. The NAV used in
determining the price of your shares is the one calculated after your purchase
order is received and accepted and after your exchange or redemption order is
received in good order as described below.
Investments of the Portfolios for which market quotations are readily available
are priced at their market value. If market quotations are not readily
available, or if it is believed that such quotations do not accurately reflect
fair value, the fair value of the Portfolios' investments may be otherwise
determined in good faith under procedures established by the Trustees. For
example, the Trust, in its discretion, may make adjustments to the prices of
securities held by a Portfolio if an event occurs after the publication of
market values normally used by a Portfolio but before the time as of which the
Portfolio calculates its NAV, depending on the nature and significance of the
event, consistent with applicable regulatory guidance. This may occur
particularly with respect to certain foreign securities held by a Portfolio, in
which case the Trust may use adjustment factors obtained from an independent
evaluation service that are intended to reflect more accurately the value of
those securities as of the time the Portfolio's NAV is calculated. The use of
fair valuation involves the risk that the values used by the Portfolios to
price their investments may be higher or lower than the values used by other
unaffiliated investment companies and investors to price the same investments.
Short-term obligations held by a Portfolio are valued at their amortized cost
which, according to the Investment Adviser, approximates market value.
A Portfolio may hold foreign securities that trade on weekends or other days
when the Portfolio 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 Purchase Requests. Purchase requests received in good order and
accepted by the Transfer Agent or other authorized intermediary by 3:00 p.m.,
Central time, on any Business Day will be executed the day they are received by
the Transfer Agent or other authorized intermediary, at that day's closing
share prices (plus any additional transaction fee) provided that:
.. The Transfer Agent receives payment by 3:00 p.m., Central time, on the same
Business Day;
.. The order is placed by a financial or authorized intermediary and payment in
federal or other immediately available funds is received by the Transfer
Agent by the close of the same Business Day or on the next Business Day,
depending on the terms of the Trust's agreement with the intermediary; or
.. Payment in federal or other immediately available funds is received by the
next Business Day in an institutional account maintained with Northern Trust
or an affiliate.
Purchase requests received in good order 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 (plus any additional transaction fee), provided that payment is made as
noted above. If an Institution pays for shares by check, federal funds
generally will become available within two Business Days after a purchase order
is received.
Additional Transaction Fee. Purchases of, and exchanges for, shares of the
Small Company Index and International
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
42
Equity Index Portfolios require the payment of an additional transaction fee.
This fee equals 0.50% and 1.00%, respectively, of the dollar amount purchased.
It does not apply to reinvested dividends or capital gain distributions. This
transaction fee is not a sales charge. It is paid to the Portfolios and is used
to protect existing shareholders by offsetting the transaction costs associated
with new purchases of securities by the Portfolios. Because these transaction
costs are not paid out of their other assets, the Small Company Index Portfolio
and the International Equity Index Portfolio are expected to track their
respective indices more closely.
Miscellaneous Purchase Information.
.. Institutions are responsible for transmitting purchase orders and delivering
required funds on a timely basis.
.. Institutions are responsible for all losses and expenses of a Portfolio, and
purchase orders may be cancelled, in the event of any failure to make payment
according to the procedures outlined in this Prospectus. In addition, a $20
charge will be imposed if a check does not clear.
.. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
.. In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 46.
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., Central time, will be executed on the same day
at that day's closing share price (less any applicable redemption fee and, in
the case of an exchange, any additional transaction fee).
Redemption and exchange requests received in good order by the Transfer Agent
or other authorized intermediary on a non-Business Day or after 3:00 p.m.,
Central time, on a Business Day will be executed the next Business Day, at that
day's closing share price (less any applicable redemption fee, and, in the case
of an exchange, any additional transaction fee). The proceeds will normally be
sent or credited the following Business Day.
Payment of Redemption Proceeds. Redemption proceeds will normally be sent or
credited on the Business Day following the Business Day on which such
redemption request is received in good order by the deadline noted above.
Redemption Fees. Effective on or about June 1, 2004, the International Growth
Portfolio will charge a 2% redemption fee and the International Equity Index
Portfolio will charge a 1% redemption fee on the redemption of shares
(including by exchange) acquired on or after May 2, 2004 and held for 30 days
or less. For the purpose of applying the fee, the Portfolios will use a
first-in, first-out ("FIFO") method so that shares held longest will be treated
as being redeemed first and shares held shortest will be treated as being
redeemed last. The redemption fee will be paid to the Portfolio from which the
redemption is made, and is intended to offset the trading costs, market impact
and other costs associated with short-term money movements in and out of a
Portfolio. The redemption fee may be collected by deduction from the redemption
proceeds or, if assessed after the redemption transaction, through a separate
billing.
The Portfolios are authorized to waive the redemption fee for the following
transactions:
.. Redemptions from omnibus accounts, fee-based programs and employer-sponsored
defined contribution plans maintained by financial intermediaries that inform
the Portfolios that they are unable to impose a redemption fee on their
underlying Customer accounts;
.. Redemptions effected pursuant to asset allocation programs, wrap fee programs
and other investment programs offered by financial institutions where
investment decisions are made on a discretionary basis by investment
professionals;
.. Redemptions pursuant to systematic withdrawal plans and automatic exchange
plans;
.. Redemptions of shares acquired by reinvestment of dividends, distributions or
other payments;
EQUITY PORTFOLIOS
43
.. Redemptions due to the death or post-purchase disability of the beneficial
owner of the account;
.. Redemptions to satisfy minimum required distributions from retirement
accounts;
.. Redemptions representing the return of excess contributions in retirement
accounts; and
.. Redemptions initiated by the Portfolios.
In addition to the circumstances noted above, each Portfolio reserves the right
to waive the redemption fee in its discretion where it believes such waiver is
consistent with the best interests of the Portfolio, to the extent permitted by
law. In addition, each Portfolio reserves the right to modify or eliminate the
redemption fee or waivers at any time and will give 60 days' prior written
notice of any material changes, unless otherwise provided by law.
Currently, the Portfolios are limited in their ability to assess or collect the
redemption fee on all shares redeemed by financial intermediaries on behalf of
their Customers. For example, where a financial intermediary is not able to
determine if the redemption fee applies and/or is not able to assess or collect
the fee, or does not collect the fee at the time of a redemption, the
Portfolios will not receive the redemption fees. If Portfolio shares are
redeemed by a financial intermediary at the direction of its Customers, the
Portfolios may not know whether a redemption fee is applicable or the identity
of the Customer who should pay the redemption fee. Due to operational
requirements, a financial intermediary's methods for tracking and calculating
the redemption fee may differ in some respects from that of the Portfolios.
Customers purchasing shares from financial intermediaries should contact these
intermediaries or refer to their account agreements or plan documents for more
information on how the redemption fee is applied to their shares.
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 New Account Application,
including a corporate resolution or other acceptable evidence of authority.
.. The Trust may require any information reasonably necessary to ensure that a
redemption has been duly authorized.
.. Redemption requests made to the Transfer Agent by mail must be signed by a
person authorized by acceptable documentation on file with the Transfer Agent.
.. The Trust 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 Portfolio.
.. If you are redeeming recently purchased shares, your redemption request may
not be honored until your check or electronic transaction has cleared. This
may delay your transaction for up to 15 days.
.. Institutions are responsible for transmitting redemption orders and crediting
their Customers' accounts with redemption proceeds on a timely basis.
.. The Trust and the Transfer Agent reserve the right to redeem shares held by
any shareholder in circumstances deemed to be in the best interest of a
Portfolio.
.. The Trust reserves the right to change or discontinue any of its redemption
procedures.
.. In certain circumstances, the Trust may advance the time by which redemption
and exchange orders must be received. See "Early Closings" on page 46.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of a Portfolio for shares of
other investment portfolios of the Trust. The registration of both accounts
involved must be identical. Both accounts must have the same owner's name and
title, if applicable. A $1,000 minimum applies to exchanges. An exchange is a
redemption of shares you own and the purchase of shares you are acquiring. It
is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days' written notice to shareholders and to reject any
exchange request. Exchanges are only available in states where an exchange
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
44
can legally be made. Before making an exchange you should read the Prospectus
for the shares you are acquiring.
Excessive Trading in Portfolio Shares. The Trust discourages excessive
short-term trading that could be disruptive to the management of a Portfolio.
If a shareholder makes more than two "round trips" in a Portfolio during a
calendar quarter, the Trust may, in its discretion, refuse to process
additional purchase or exchange orders by the shareholder. A "round trip" is a
redemption or exchange out of a Portfolio followed by a purchase or exchange
into the same Portfolio. In addition, the Trust may, in its discretion, reject
any additional purchase or exchange order from a shareholder if the Trust
determines that the shareholder's short-term trading activity is excessive,
regardless of whether or not the shareholder has made two round trips in a
calendar quarter. It should be noted that the Trust's ability to monitor and
limit the trading activity of shareholders investing in a Portfolio through the
omnibus account of a financial intermediary may be significantly limited or
absent where the intermediary maintains the underlying shareholder accounts.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See
the Additional Statement for further information about the terms of these
purchases and redemptions.
Telephone Transactions. Telephone requests are recorded. 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, the Trust 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.
The Trust 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 certified corporate resolution,
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
Trust and Transfer Agent may charge a shareholder reasonable costs in locating
a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the New York
Stock Exchange ("the Exchange") is open for business. For the period April 1,
2004 through March 31, 2005, the Portfolios will be closed on the following
holidays: Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day (observed), Labor Day, Thanksgiving Day and Christmas Day
(observed).
Good Order. A purchase, redemption or exchange request is considered to be "in
good order" when all necessary information is provided and all required
documents are properly completed, signed and delivered, including a certified
resolution or other acceptable evidence of authority. Additionally, a purchase
order initiating the opening of an account will not be considered to be "in
good order" unless the investor has provided all information required by the
Trust's "Customer Identification Program" described below.
Customer Identification Program. Federal law requires the Trust to obtain,
verify and record identifying information, which may include the name, business
street address, taxpayer identification number or other identifying
EQUITY PORTFOLIOS
45
information for each investor who opens or reopens an account with the Trust.
Applications without this information, or without an indication that a taxpayer
identification number has been applied for, may not be accepted. After
acceptance, to the extent permitted by applicable law or the Trust's customer
identification program, the Trust reserves the right to: (a) place limits on
account transactions until an Institution's identity is verified; (b) refuse an
investment in the Trust; or (c) involuntarily redeem an investor's shares and
close an account in the event that an investor's identity is not verified. The
Trust and its agents will not be responsible for any loss in an investor's
account resulting from the investor's delay in providing all required
identifying information or from closing an account and redeeming an investor's
shares when an investor's identity cannot be verified.
Early Closings. The Portfolios reserve the right to advance the time for
accepting purchase, redemption or exchange orders for same Business Day credit
when the Exchange closes or closes early, trading on the Exchange is
restricted, an emergency arises or as otherwise permitted by the SEC. In
addition, the Board of Trustees of the Portfolios may, for any Business Day,
decide to change the time as of which a Portfolio's NAV is calculated in
response to new developments such as altered trading hours, or as otherwise
permitted by the SEC.
Emergency Events. In the event the Exchange does not open for business because
of an emergency, the Trust may, but is not required to, open one or more
Portfolios for purchase, redemption and exchange transactions if the Federal
Reserve wire payment system is open. To learn whether a Portfolio is open for
business during an emergency situation, please call 800/637-1380 or visit
northerninstitutionalfunds.com.
Financial Intermediaries. The Trust may authorize certain Institutions acting
as financial intermediaries (including banks, trust companies, brokers and
investment advisers), to accept purchase, redemption and exchange orders from
their Customers on behalf of the Trust. These authorized intermediaries also
may designate other intermediaries to accept such orders, if approved by the
Trust. A Portfolio will be deemed to have received an order when the order is
accepted by the authorized intermediary, and the order will be priced at the
Portfolio's per share NAV next determined, provided that the authorized
intermediary forwards the order (and payment for any purchase order) to the
Transfer Agent on behalf of the Trust within agreed-upon time periods. If the
order (or payment for any purchase order) is not received by the Transfer Agent
within such time periods, the authorized intermediary may be liable for fees
and losses and the transaction may be cancelled.
Certain financial intermediaries, including affiliates of Northern Trust, may
perform (or arrange to have performed) various administrative support services
for Customers who are the beneficial owners of Class C or D Shares through
Servicing Agreements with the Trust ("Service Organizations"). These agreements
are permitted under the Trust's Shareholder Servicing Plan. The level of
support services required by an Institution and its Customers generally will
determine whether they purchase Class A, C or D Shares.
Administrative support services may include:
.. processing purchase, exchange and redemption requests from investors;
.. placing net purchase and redemption orders with the Transfer Agent;
.. providing necessary personnel and facilities to establish and maintain
investor accounts and records; and
.. providing information periodically to investors showing their positions in
Portfolio shares.
Service Organizations will receive fees from the Portfolios for such services
at an annual rate of up to 0.15% and 0.25% of the average daily net asset value
of Class C and Class D Shares, respectively. These fees will be borne
exclusively by the beneficial owners of Class C and D Shares.
Northern Trust also may provide compensation to certain dealers and other
financial intermediaries, including affiliates of Northern Trust, that provide
services to their Customers who invest in the Trust or whose Customers
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
46
purchase significant amounts of a Portfolio'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 the Investment Advisers (after
adjustments). This additional compensation will be paid by Northern Trust or
its affiliates and will not represent an additional expense to the Trust or its
shareholders.
Customers purchasing shares through a financial intermediary should read their
account agreements carefully. A financial intermediary's requirements may
differ from those listed in this Prospectus. A financial intermediary also may
impose account charges, such as asset allocation fees, account maintenance
fees, and other charges that will reduce the net return on an investment in a
Portfolio. If a Customer has agreed with a particular financial intermediary to
maintain a minimum balance and the balance falls below this minimum, the
Customer may be required to redeem all or a portion of the Customer's
investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation by a
Service Organization or other financial intermediary in connection with the
investment of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Reserve Board and
state banking commissions, and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult their legal counsel.
State securities laws regarding the registration of dealers may differ from
federal law. As a result, Service Organizations and other financial
intermediaries investing in the Portfolios on behalf of their Customers may be
required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Trust's fiscal year on November 30, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses, proxy
statements or information statements to all shareholders who share the same
mailing address with your account, you may revoke your consent at any time by
contacting the Northern Institutional Funds Center by phone at 800/637-1380 or
by mail at Northern Institutional Funds, P.O. Box 75986, Chicago, IL 60675-5986.
EQUITY PORTFOLIOS
47
DIVIDENDS AND DISTRIBUTIONS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS OF EACH PORTFOLIO ARE AUTOMATICALLY
REINVESTED IN ADDITIONAL SHARES OF THE SAME PORTFOLIO WITHOUT ANY SALES
CHARGE OR ADDITIONAL PURCHASE PRICE AMOUNT.
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You may, however, elect to have dividends or capital gain distributions (or
both) paid in cash or reinvested in the same class of shares of another
Portfolio at their net asset value per share (plus an additional purchase price
amount equal to 0.50% and 1.00% of the amount invested in the case of the Small
Company Index Portfolio and International Equity Index Portfolio,
respectively). If you would like to receive dividends or distributions in cash
or have them reinvested in another Portfolio, 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
only may be reinvested in a Portfolio in which you maintain an account.
The following table summarizes the general distribution policies for each of
the Portfolios. A Portfolio with an annual dividend or distribution policy may,
in some years, pay additional dividends or make additional distributions to the
extent necessary for the Portfolio to avoid incurring unnecessary tax
liabilities or for other reasons.
A Portfolio may pay additional dividends or make additional distributions to
the extent necessary for the Portfolio to avoid incurring unnecessary tax
liabilities or for other reasons.
[Download Table]
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Dividends, if any, Capital Gains, if any,
Portfolio Declared and Paid Declared and Paid
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International Growth Annually Annually
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International Equity Index Annually Annually
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Small Company Growth Annually Annually
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Small Company Index Annually Annually
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Mid Cap Growth Annually Annually
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Focused Growth Annually Annually
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Diversified Growth Annually Annually
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Equity Index Quarterly Annually
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Balanced Quarterly Annually
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
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TAX CONSIDERATIONS
Each Portfolio intends to qualify as a regulated investment company for federal
tax purposes, and to distribute to shareholders substantially all of its net
investment income and net capital gain each year. In general, the Portfolios'
dividends and distributions will be taxable to you for federal, state and local
income tax purposes, unless you have a tax-advantaged account. Dividends and
distributions are taxable whether they are received in cash or reinvested in
Portfolio shares. For federal tax purposes, Portfolio distributions
attributable to short-term capital gains and net investment income are
generally taxable to you as ordinary income. Distributions attributable to any
excess of net long-term capital gains of a Portfolio over net short-term
capital losses generally are taxable to you as long-term capital gains. This is
true no matter how long you own your shares.
Under recent changes to the Internal Revenue Code, the maximum long-term
capital gain tax rate applicable to individuals, estates, and trusts is reduced
to 15%. Also, Portfolio distributions to noncorporate shareholders attributable
to dividends received by the Portfolio from U.S. and certain foreign
corporations after December 31, 2002 will generally be taxed at the long-term
capital gain rate of 15%, as long as certain other requirements are met. For
these lower rates to apply, the noncorporate shareholders must have owned their
Portfolio shares for at least 61 days during the 121-day period beginning 60
days before the Portfolio's ex-dividend date. The amount of a Portfolio's
distributions that qualify for this favorable treatment will be reduced as a
result of a Portfolio's securities lending activities, by a high portfolio
turnover rate or by investments in debt securities or "non-qualified" foreign
corporations.
Dividends and distributions from each Portfolio will generally be taxable to
you in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of
ordinary income and capital gains distributed to your account for the previous
year.
A portion of dividends paid by the Portfolios may qualify for the
dividends-received deduction for corporations, subject to certain holding
requirements and debt financing limitations. It is not expected that any
dividends paid by the International Equity Index Portfolio or the International
Growth Portfolio will qualify for this deduction. The amount of a Portfolio's
distributions that qualify for the dividends-received deduction ("qualifying
dividends") available to corporate shareholders may be reduced as a result of a
Portfolio's securities lending activities. This is because any dividends paid
on securities while on loan will not be deemed to have been received by a
Portfolio, and the equivalent amount paid to the Portfolio by the borrower of
the securities will not be deemed to be a qualifying dividend. In addition, the
amount of qualifying dividends may be reduced as a result of a high portfolio
turnover rate or by investment in debt securities or foreign corporations.
A Portfolio's share price may, at any time, reflect undistributed capital gains
or income and unrealized appreciation. When these amounts are distributed, they
will be taxable to you. For this reason, you should be especially mindful that
if you buy shares on or just before the record date of a dividend or capital
gain distribution, you will pay the full price for the shares and then receive
back a portion of the money you have just invested in the form of a taxable
dividend or capital gain.
The sale of Portfolio shares is a taxable event on which a gain or loss may be
recognized. For tax purposes, an exchange is considered the same as a sale. The
amount of gain or loss is based on the difference between your tax basis in the
Portfolio shares and the amount you receive for them upon disposition.
Generally, you will recognize long-term capital gain or loss if you have held
your Portfolio shares for over twelve months at the time you sell or exchange
them. Shares held six months or less may also generate long-term capital loss
to the extent of any capital gains distributions received on the shares while
they were held by you.
Additionally, any loss realized on a sale, exchange or redemption of shares of
a Portfolio may be disallowed under "wash sale" rules to the extent the shares
disposed of
EQUITY PORTFOLIOS
49
are replaced with other shares of that Portfolio within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of,
such as pursuant to a dividend reinvestment in shares of that Portfolio. If
disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
So long as more than 50% of the value of the total assets of the International
Growth and International Equity Index Portfolios consists of stock or
securities (including debt securities) of foreign corporations at the close of
a taxable year, these Portfolios may elect, for federal income tax purposes, to
treat certain foreign taxes paid by them, including generally any withholding
and other foreign income taxes, as paid by their shareholders. If the
Portfolios make this election, the amount of such foreign taxes paid by the
Portfolios will be included in their shareholders' income pro rata (in addition
to taxable distributions actually received by them), and such shareholders will
be entitled either (a) to credit their proportionate amounts of such taxes
against their federal income tax liabilities, or (b) to deduct such
proportionate amounts from their federal taxable income under certain
circumstances.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States federal
income tax treatment. Your investment in the Portfolios could have additional
tax consequences. You should consult your tax professional for information
regarding all tax consequences applicable to your investments in the
Portfolios. More tax information is provided in the Additional Statement. This
short summary is not intended as a substitute for careful tax planning.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
50
RISKS, SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE PORTFOLIOS' PRINCIPAL
INVESTMENT STRATEGIES AND RELATED RISKS WHICH ARE SUMMARIZED IN THE
RISK/RETURN SUMMARIES FOR EACH PORTFOLIO. It also explores the various
investment securities and techniques that the investment management team may
use. The Portfolios may invest in other securities and are subject to further
restrictions and risks which are described in the Additional Statement.
Additionally, the Portfolios may purchase other types of securities or
instruments similar to those described in this section if otherwise
consistent with the Portfolios' investment objectives and policies.
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ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
Investment Objectives. The investment objective of each of the following
Portfolios may be changed by the Trust's Board of Trustees without shareholder
approval: Small Company Growth Portfolio and Mid Cap Growth Portfolio.
Shareholders will, however, be notified of any changes. Any such change may
result in a Portfolio having an investment objective different from the
objective that the shareholder considered appropriate at the time of investment
in the Portfolio. The investment objectives of the other Portfolios may not be
changed without shareholder approval.
Derivatives. The Portfolios may purchase certain "derivative" instruments for
hedging or speculative purposes. A derivative is a financial instrument whose
value is derived from--or based upon--the performance of underlying assets,
interest or currency exchange rates, or other indices. Derivative securities
include futures contracts, options, interest rate and currency swaps, equity
swaps, forward currency contracts and structured securities (including
collateralized mortgage obligations and other types of asset-backed securities,
"stripped" securities and various floating rate instruments, including
leveraged "inverse floaters").
Investment Strategy. Under normal market conditions, a Portfolio may to a
moderate extent invest in derivative securities if the potential risks and
rewards are consistent with the Portfolio's objective, strategies and overall
risk profile. In unusual circumstances, including times of increased market
volatility, a Portfolio may make more significant investments in derivatives.
The Portfolios may use derivatives for hedging purposes to offset a potential
loss in one position by establishing an interest in an opposite position. The
Portfolios also may use derivatives for speculative purposes to invest for
potential income or capital gain. Each Portfolio may invest more than 5% of its
assets in derivative instruments for non-hedging purposes.
Special Risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio'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 Portfolio 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
recently have been developed and have not been tested over complete market
cycles. For these reasons, a Portfolio may suffer a loss whether or not the
analysis of the investment management team is accurate.
EQUITY PORTFOLIOS
51
Foreign Investments. Foreign securities include direct investments in non-U.S.
dollar-denominated securities traded primarily outside of the United States and
dollar-denominated securities of foreign issuers. Foreign securities also
include indirect investments such as American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are receipts that are traded in the U.S., and entitle the
holder to all dividends and capital gain distributions that are paid out on the
underlying foreign shares. EDRs and GDRs are receipts that often trade on
foreign exchanges. They represent ownership in an underlying foreign or U.S.
security and generally are denominated in a foreign currency. Foreign
government obligations may include debt obligations of supranational entities,
including international organizations (such as the European Coal and Steel
Community and the International Bank for Reconstruction and Development, also
known as the World Bank) and international banking institutions and related
government agencies.
Investment Strategy. The International Equity Index and International Growth
Portfolios intend to invest a substantial portion of their total assets in
foreign securities. The Small Company Growth, Mid Cap Growth, Focused Growth,
Diversified Growth and Balanced Portfolios may invest up to 25% of their total
assets in foreign securities including ADRs, EDRs and GDRs. These Portfolios
also may invest in foreign time deposits and other short-term instruments.
The International Growth Portfolio may invest more than 25% of its total assets
in the securities of issuers located in a single foreign country having
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. The International Growth
Portfolio may invest up to 25% of total assets in emerging markets. The
International Equity Index Portfolio invests in countries according to their
weightings in the EAFE(R) Index.
Special Risks. Foreign securities involve special risks and costs, which are
considered by the Investment Adviser in evaluating creditworthiness of issuers
and making investment decisions for the Portfolios. 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 obligations. The performance of investments
in securities denominated in a foreign currency also will 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
otherwise could 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 also
may 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 generally are located in the
Asia and Pacific regions, the Middle East, Eastern Europe, Central and South
America and Africa. In general, the securities markets of these countries are
less liquid, are subject to greater price volatility, have smaller market
capitalizations and have
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
52
problems with securities registration and custody. In addition, because the
securities settlement procedures are less developed in these countries, a
Portfolio may be required to deliver securities before receiving payment and
also may 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 Portfolios.
While the Portfolios' investments may, if permitted, be denominated in foreign
currencies, the portfolio securities and other assets held by the Portfolios
are valued in U.S. dollars. Currency exchange rates may fluctuate significantly
over short periods of time causing a Portfolio'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 Portfolio is invested in foreign securities while
also maintaining currency positions, it may be exposed to greater combined
risk. The Portfolios' respective net currency positions may expose them to
risks independent of their securities positions.
On January 1, 1999, the European Economic and Monetary Union ("EMU") introduced
a new single currency called the euro. The euro has replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal
and Spain. In addition, ten new countries, Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, are preparing
for entry into the EMU in 2004.
The new European Central Bank has control over each country's monetary
policies. Therefore, the member countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The change to the euro as a single currency is relatively new and untested. The
elimination of currency risk among EMU countries has affected the economic
environment and behavior of investors, particularly in European markets, but
the long-term impact of those changes on currency values or on the business or
financial condition of European countries and issuers cannot fully be assessed
at this time. In addition, the introduction of the euro presents other unique
uncertainties, including the fluctuation of the euro relative to non-euro
currencies; 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 that now are or may in the
future become members of the European Union ("EU") will have an impact on the
euro. Also, it is possible that the euro could be abandoned in the future by
countries that have already adopted its use. These or other events, including
political and economic developments, could cause market disruptions, and could
affect adversely the value of securities held by the Portfolios. Because of the
number of countries using this single currency, a significant portion of the
assets held by certain Portfolios may be denominated in the euro.
Initial Public Offerings. An IPO is a company's first offering of stock to the
public.
Investment Strategy. At times, the Small Company Growth and Mid Cap Growth
Portfolios may make significant investments in IPOs. The other Portfolios, to a
lesser extent, also may invest in IPOs.
Special Risks. An IPO presents the risk that the market value of IPO shares
will fluctuate considerably due to factors such as the absence of a prior
public market, unseasoned trading, the small number of shares available for
trading and limited information about the issuer. The purchase of IPO shares
may involve high transaction costs. IPO shares are subject to market risk and
liquidity risk. When a Portfolio's asset base is small, a significant portion
of the Portfolio's performance could be attributable to investments in IPOs,
because such investments would have a magnified impact on the Portfolio. As the
Portfolio's assets grow, the effect of the Portfolio's investments in IPOs on
the Portfolio's performance probably will decline, which could reduce the
Portfolio's performance. Because of the price volatility of IPO shares, a
Portfolio may choose to hold IPO shares for a very short period of time. This
may
EQUITY PORTFOLIOS
53
increase the turnover of a portfolio and may lead to increased expenses to the
Portfolio, such as commissions and transaction costs. By selling IPO shares,
the Portfolio may realize taxable gains it subsequently will distribute to
shareholders. In addition, the market for IPO shares can be speculative and/or
inactive for extended periods of time. There is no assurance that the Portfolio
will be able to obtain allocable portions of IPO shares. The limited number of
shares available for trading in some IPOs may make it more difficult for the
Portfolio to buy or sell significant amounts of shares without an unfavorable
impact on prevailing prices. Investors in IPO shares can be affected by
substantial dilution in the value of their shares, by sales of additional
shares and by concentration of control in existing management and principal
shareholders. The Portfolios' investments in IPO shares may include the
securities of "unseasoned" companies (companies with less than three years of
continuous operations), which present risks considerably greater than common
stocks of more established companies. These companies may have limited
operating histories and their prospects for profitability may be uncertain.
These companies may be involved in new and evolving businesses and may be
vulnerable to competition and changes in technology, markets and economic
conditions. They may be more dependent on key managers and third parties and
may have limited product lines.
Investment Grade Securities. A security is considered investment grade if, at
the time of purchase, it is rated:
.. BBB or higher by S&P;
.. Baa or higher by Moody's Investors Service, Inc. ("Moody's");
.. BBB or higher by Fitch Ratings ("Fitch"); or
.. BBB or higher by Dominion Bond Rating Service Limited ("Dominion").
A security will be considered investment grade if it receives one of the above
ratings, or a comparable rating from another organization that is recognized as
an NRSRO, even if it receives a lower rating from other rating organizations.
An unrated security also may be considered investment grade if the Investment
Adviser determines the security is comparable in quality to a security that has
been rated investment grade.
Investment Strategy. The Portfolios may invest in fixed income and convertible
securities to the extent consistent with their respective investment policies.
Except as stated in the next section, fixed income and convertible securities
purchased by the Portfolios generally will be investment grade.
Special Risks. Although securities rated BBB by S&P, Dominion 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
Portfolio, a rated security may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio and may be in
default. The Investment Adviser will consider such an event in determining
whether a Portfolio should continue to hold the security.
Non-Investment Grade Securities. Non-investment grade fixed income and
convertible securities (sometimes referred to as "junk bonds") generally are
rated BB or below by S&P, Dominion or Fitch, or Ba or below by Moody's (or have
received a comparable rating from another NRSRO), or, if unrated, are
determined to be of comparable quality by the Investment Adviser.
Investment Strategy. The Balanced Portfolio may invest up to 20% of its total
assets, measured at the time of purchase, in non-investment grade securities,
including convertible securities, and the International Growth, International
Equity Index, Small Company Growth, Mid Cap Growth, Focused Growth and
Diversified Growth Portfolios may invest up to 15% of their total assets,
measured at the time of purchase, in non-investment grade securities, including
convertible securities, when the investment management team determines that
such securities are desirable in light of the Portfolios' investment objectives
and portfolio mix.
Special Risks. Non-investment grade securities are considered predominantly
speculative by traditional investment
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
54
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 also is greater
because low-rated securities generally are unsecured and often are subordinated
to the rights of other creditors of the issuers of such securities. Investment
by a Portfolio 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 Portfolio of its
initial investment and any anticipated income or appreciation will be
uncertain. A Portfolio also may incur additional expenses in seeking recovery
on defaulted securities.
The secondary market for lower quality securities is concentrated in relatively
few market makers and is dominated by institutional investors. Accordingly, the
secondary market for such securities is not as liquid as, and is more volatile
than, the secondary market for higher quality securities. In addition, market
trading volume for these securities generally is 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
Portfolio's ability to dispose of particular portfolio investments. A less
developed secondary market also may make it more difficult for a Portfolio 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 the Investment Advisers' credit analysis than would be the case
with investments in higher quality securities.
Portfolio Turnover. The investment management team will not consider the
portfolio turnover rate a limiting factor in making investment decisions for a
Portfolio. A high portfolio turnover rate (100% or more) is likely to involve
higher brokerage commissions and other transaction costs, which could reduce a
Portfolio's return. It also may result in higher short-term capital gains that
are taxable to shareholders. See "Financial Highlights" for the Portfolios'
historical portfolio turnover rates.
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 traded thinly 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 Portfolio 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 often are 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.
Structured Securities. The value of such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
securities, 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. Examples of structured
securities include, but are not limited to, debt obligations, where the
principal repayment at maturity is determined by the value of a specified
security or securities index.
Investment Strategy. Each Portfolio may invest in structured securities to the
extent consistent with its investment objective.
EQUITY PORTFOLIOS
55
Special Risks. The terms of some structured securities may provide that in
certain circumstances no principal is due at maturity and, therefore, a
Portfolio 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 also may be
more volatile, less liquid and more difficult to accurately price than less
complex securities due to their derivative nature.
Tracking Risk. The International Equity Index, Small Company Index and Equity
Index Portfolios (the "Index Portfolios") seek to track the performance of
their respective benchmark indices.
Investment Strategy. Under normal market conditions, the Investment Adviser
expects that the quarterly performance of the Index Portfolios, before
expenses, will track the performance of their respective benchmarks within a
0.95 correlation coefficient.
Special Risks. The Index Portfolios 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 Portfolio
from achieving its investment objective.
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. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, 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 Portfolios may purchase these and other types of
asset-backed securities. Such securities are subject to the same quality
requirements as other types of fixed income securities held by a Portfolio.
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 also may 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 generally are 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 Portfolios may borrow money
and enter into reverse repurchase agreements. Reverse repurchase agreements
involve the sale of securities held by a Portfolio subject to the Portfolio's
agreement to repurchase them at a mutually agreed upon date and price
(including interest).
Investment Strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of the value of its
total assets (including the amount borrowed). Each Portfolio also may borrow up
to an additional 5% of the value of its total assets for
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
56
temporary purposes. The Portfolios may enter into reverse repurchase agreements
when the investment management team expects that the interest income to be
earned from the investment of the transaction proceeds will be greater than the
related interest expense.
Special Risks. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Portfolios decline in value while these
transactions are outstanding, the net asset value of the Portfolios'
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 Portfolio (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 Portfolio will
decline below the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Portfolio.
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. Convertible
securities offer 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 Portfolios each may acquire convertible securities.
These securities are subject to the same rating requirements as fixed income
securities held by a Portfolio.
Special Risks. The price of a convertible security normally will vary in some
proportion to changes in the price of the underlying common stock because of
either a conversion or exercise feature. However, the value of a convertible
security may not increase or decrease as rapidly as the underlying common
stock. Additionally, a convertible security normally also will provide income
and therefore is subject to interest rate risk. While convertible securities
generally offer lower interest or dividend yields than non-convertible fixed
income securities of similar quality, their value tends to increase as the
market value of the underlying stock increases and to decrease when the value
of the underlying stock decreases. Also, a Portfolio may be forced to convert a
security before it would otherwise choose, which may have an adverse effect on
the Portfolio's ability to achieve its investment objective.
Custodial Receipts. Custodial receipts are participations in trusts that hold
U.S. government, bank, corporate or other obligations. They entitle the holder
to future interest payments or principal payments or both on securities held by
the custodian.
Investment Strategy. To the extent consistent with their respective investment
objectives, the Portfolios may invest a portion of their assets in custodial
receipts.
Special Risks. Like other stripped obligations (which are described below),
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 Portfolios 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 also may 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 Portfolio may suffer a loss, which
potentially is unlimited. The value of some components of an equity swap (such
as the dividends on a common stock) also may be sensitive to changes in
EQUITY PORTFOLIOS
57
interest rates. Furthermore, during the period a swap is outstanding, a
Portfolio may suffer a loss if the counterparty defaults. Because equity swaps
normally are illiquid, a Portfolio may not be able to terminate its obligations
when desired.
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. Each of the Portfolios 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. Each of the Portfolios 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 Growth Portfolio also may 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 Portfolio 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 Portfolio's
foreign holdings increases because of currency fluctuations. When used for
speculative purposes, forward currency exchange contracts may result in
additional losses that are not otherwise related to changes in the value of the
securities held by a Portfolio. The institutions that deal in forward currency
contracts are not required to continue to make markets in the currencies they
trade and these markets can experience periods of illiquidity.
Futures Contracts and Related Options. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell a specified
financial instrument or currency in the future at an agreed upon price. For
example, a futures contract may obligate a Portfolio, 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 Portfolio
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 Portfolio sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in futures contracts and options on futures contracts
on domestic or foreign exchanges or boards of trade. These investments may be
used for hedging purposes, to seek to increase total return or to maintain
liquidity to meet potential shareholder redemptions, invest cash balances or
dividends or minimize trading costs.
The Trust, on behalf of each Portfolio, has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act, and, therefore, is not subject to registration or regulation as a pool
operator under that Act with respect to the Portfolios.
Special Risks. Futures contracts and options present the following risks:
imperfect correlation between the change in market value of a Portfolio'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 potentially are unlimited; and the possible inability of
the investment management team to correctly predict the direction of securities
prices, interest
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
58
rates, currency exchange rates and other economic factors. Futures markets are
highly volatile and the use of futures may increase the volatility of a
Portfolio's NAV. As a result of the low margin deposits normally required in
futures trading, a relatively small price movement in a futures contract may
result in substantial losses to a Portfolio. Futures contracts and options on
futures may be illiquid, and exchanges may limit fluctuations in futures
contract prices during a single day. 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 Portfolio may invest up to 15% of its net assets in
securities that are illiquid. If otherwise consistent with their investment
objectives and policies, the Portfolios may purchase commercial paper issued
pursuant to Section 4(2) of the 1933 Act and 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 an Investment Adviser
determines, under guidelines approved by the Trust's Board of Trustees, that an
adequate trading market exists.
Special Risks. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Portfolio. The practice of investing in Rule 144A
Securities could increase the level of a Portfolio'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 Portfolio to make cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits interest to the Portfolio for a set time period.
Investment Strategy. The Portfolios may invest in IFAs issued by insurance
companies that meet quality and credit standards established by the Investment
Adviser.
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 of the non-governmental issuer. In addition, the transfer of
IFAs may be restricted and an active secondary market in IFAs currently does
not exist. This means that it may be difficult or impossible to sell an IFA at
an appropriate price.
Interest Rate Swaps, Currency Swaps, Total Rate of Return Swaps, Credit Swaps,
and Interest Rate Floors, Caps and Collars. Interest rate and currency swaps
are contracts that obligate a Portfolio and another party to exchange their
rights to pay or receive interest or specified amounts of currency,
respectively. Interest rate floors entitle the purchasers to receive interest
payments if a specified index falls below a predetermined interest rate.
Interest rate caps entitle the purchasers to receive interest payments if a
specified index exceeds a predetermined interest rate. An interest rate collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates. Total rate of return swaps are contracts
that obligate a party to pay or receive interest in exchange for the payment by
the other party of the total return generated by a security, a basket of
securities, an index or an index component. Credit swaps are contracts
involving the receipt of floating or fixed rate payments in exchange for
assuming potential credit losses of an underlying security. Credit swaps give
one party to a transaction the right to dispose of or acquire an asset (or
group of assets), or the right to receive or make a payment from the other
party, upon the occurrence of specific credit events.
EQUITY PORTFOLIOS
59
Investment Strategy. To the extent consistent with their respective investment
objectives and policies, the Portfolios may enter into swap transactions and
transactions involving interest rate floors, caps and collars for hedging
purposes or to seek to increase total return.
Special Risks. The use of swaps and interest rate floors, caps and collars is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. Like other derivative securities, the instruments can be highly
volatile. If an Investment Adviser is incorrect in its forecasts of market
values, interest rates and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if these
instruments were not used. Because these instruments normally are illiquid, a
Portfolio may not be able to terminate its obligations when desired. In
addition, if a Portfolio is obligated to pay the return under the terms of a
total rate of return swap, Portfolio losses due to unanticipated market
movements potentially are unlimited. A Portfolio also may suffer a loss if the
other party to a transaction defaults.
Investment Companies. To the extent consistent with their respective investment
objectives and policies, the Portfolios 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), iShares/SM/, S&P's Depositary Receipts ("SPDRs")
and other exchange-traded funds (or "ETFs"). Pursuant to an exemptive order
obtained from the SEC, other investment companies in which the Portfolios may
invest include money market funds which the Investment Advisers or any of their
affiliates serve as investment advisers.
Investment Strategy. Investments by a Portfolio in other investment companies,
including ETFs, will be subject to the limitations of the 1940 Act except as
permitted by SEC orders. The Portfolios may rely on SEC orders that permit them
to invest in certain ETFs beyond limits contained in the 1940 Act, subject to
certain terms and conditions. Although the Portfolios do not expect to do so in
the foreseeable future, each Portfolio is authorized to invest substantially
all of its assets in a single open-end investment company or series thereof
that has substantially the same investment objective, policies and fundamental
restrictions as the Portfolio.
Special Risks. As a shareholder of another investment company, a Portfolio
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 Portfolio. A Portfolio's investment in an ETF involves other
considerations. In particular, shares of ETFs are listed and traded on
securities exchanges and in over-the-counter markets, and the purchase and sale
of these shares involve transaction fees and commissions. In addition, shares
of an ETF are issued in "creation units" and are not redeemable individually
except upon termination of the ETF. To redeem, a Portfolio must accumulate
enough shares of an ETF to reconstitute a creation unit. The liquidity of a
small holding of an ETF, therefore, will depend upon the existence of a
secondary market. Also, even though the market price of an ETF is derived from
the securities it owns, such price at any given time may be at, below or above
the ETF's net asset value.
Mortgage Dollar Rolls. A mortgage dollar roll involves the sale by a Portfolio
of securities for delivery in the future (generally within 30 days). The
Portfolio simultaneously contracts with the same counterparty to repurchase
substantially similar (same type, coupon and maturity) but not identical
securities on a specified future date. During the roll period, the Portfolio
loses the right to receive principal and interest paid on the securities sold.
However, the Portfolio benefits to the extent of any difference between (a) the
price received for the securities sold and (b) the lower forward price for the
future purchase and/or fee income plus the interest earned on the cash proceeds
of the securities sold.
Investment Strategy. Each Portfolio may enter into mortgage dollar rolls in an
effort to enhance investment performance. For financial reporting and tax
purposes, the Portfolios treat mortgage dollar rolls as two separate
transactions: one involving the purchase of a security and a separate
transaction involving a sale. The Portfolios currently
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
60
do not intend to enter into mortgage dollar rolls that are accounted for as
financing and do not treat them as borrowings.
Special Risks. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's ability to predict correctly interest rates and mortgage
prepayments. If the Investment Adviser is incorrect in its prediction, a
Portfolio may experience a loss. Unless the benefits of a mortgage dollar roll
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
roll, the use of this technique will diminish the Portfolio's performance.
Options. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may write (sell) covered call options, buy put options, buy call
options and write secured put options for hedging (or cross-hedging) purposes
or to earn additional income. Options may relate to particular securities,
foreign or domestic securities indices, financial instruments or foreign
currencies. A Portfolio 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
Portfolio's assets subject to options written by the Portfolio will not be
greater than 25% of its net assets at the time the option is written. A
Portfolio may "cover" a call option by owning the security underlying the
option or through other means. Put options written by a Portfolio are "secured"
if the Portfolio 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
Portfolio 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 Portfolio will invest and trade in unlisted over-the-counter options only
with firms deemed creditworthy by the Investment Adviser. However, unlisted
options are not subject to the protections afforded purchasers of listed
options by the Options Clearing Corporation, which performs the obligations of
its members which fail to perform them in connection with the purchase or sale
of options.
Preferred Stock. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock owners but after bond owners.
Investment Strategy. Each Portfolio may invest in preferred stocks.
Special Risks. Unlike most debt securities, the obligations of an issuer of
preferred stock, including dividend and other payment obligations, typically
may not be accelerated by the holders of such preferred stock on the occurrence
of an event of default or other non-compliance by the issuer of the preferred
stock.
Real Estate Investment Trusts ("REITs"). REITs are pooled investment vehicles
that invest primarily in either real estate or real estate related loans.
Investment Strategy. The Portfolios 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 also are subject to risks generally
associated with investments in real estate. A Portfolio will indirectly bear
its proportionate share of any expenses, including management fees, paid by a
REIT in which it invests.
EQUITY PORTFOLIOS
61
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment Strategy. Each Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement never will occur more than one year after a Portfolio acquires the
securities.
Special Risks. In the event of a default, a Portfolio 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 Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In addition,
in the event of bankruptcy, a Portfolio could suffer additional losses if a
court determines that the Portfolio's interest in the collateral is
unenforceable by the Portfolio.
Securities Lending. In order to generate additional income, the Portfolios may
lend securities to banks, brokers and dealers or other qualified institutions.
In exchange, the Portfolios 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 Portfolio's total assets (including the loan collateral). Any
cash collateral received by a Portfolio in connection with these loans may be
invested in a variety of short-term investments, either directly or indirectly
through money market portfolios. Loan collateral (including any investment of
the collateral) is not included in the calculation of the percentage
limitations described elsewhere in this Prospectus regarding a Portfolio's
investments in particular types of securities.
Special Risks. A principal 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 Portfolio could experience delays in recovering
its securities and may incur a capital loss. A Portfolio will be responsible
for any loss that might result from its investment of the cash collateral it
receives from a borrower. Additionally, the amount of a Portfolio's
distributions that qualify for taxation at reduced long-term capital gains
rates for individuals, as well as the amount of a Portfolio's distributions
that qualify for the dividends received deduction available to corporate
shareholders (together, "qualifying dividends") may be reduced as a result of
such Portfolio's securities lending activities. This is because any dividends
paid on securities while on loan will not be deemed to have been received by
such Portfolio, and the equivalent amount paid to the Portfolio by the borrower
of the securities will not be deemed to be a qualifying dividend.
Short Sales Against-the-Box. A short sale against-the-box is a short sale such
that at all times when the short position is open the seller owns or has the
right to obtain, at no added cost, an equal amount of securities identical to
those sold short.
Investment Strategy. The International Growth, Small Company Growth, Mid Cap
Growth, Focused Growth, Diversified Growth and Balanced Portfolios may make
short sales against-the-box.
Special Risks. If a Portfolio sells securities short against-the-box, it may
protect itself from loss if the price of the securities declines in the future,
but will lose the opportunity to profit on such securities if the price rises.
If a Portfolio effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it actually had sold the securities (as a "constructive sale") on the date
it effects the short sale. However, such constructive sale treatment may not
apply if the Portfolio closes out the short position with securities other than
the appreciated securities held at the time of the short sale and if certain
other conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Portfolio may effect
short sales.
Stripped Obligations. These securities are issued by the U.S. government (or an
agency, instrumentality or a sponsored enterprise), foreign governments, banks
and
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
62
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 Portfolios 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
either interest rates or principal prepayments could depress the price of
stripped securities held by the Portfolios and adversely affect a Portfolio's
total returns.
Temporary Investments. The Portfolios temporarily may hold cash and/or invest
in short-term obligations including
U.S. government obligations, 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.
Certain Portfolios also may make temporary investments in longer-term debt
obligations and preferred stocks.
Investment Strategy. A Portfolio temporarily may hold cash or invest all or any
portion of its assets in short-term obligations pending investment or to meet
anticipated redemption requests. Except for the Equity Index, Small Company
Index and International Equity Index Portfolios, a Portfolio also may hold cash
or invest in short-term obligations, longer-term debt obligations or preferred
stock as a temporary measure mainly designed to limit a Portfolio's losses in
response to adverse market, economic or other conditions when the Investment
Adviser believes that it is in the best interest of the Portfolio to pursue
such defensive strategy. The Investment Adviser may, however, choose not to
make such temporary investments even in very volatile or adverse conditions.
Special Risks. A Portfolio may not achieve its investment objective when it
holds cash or invests its assets in short- term obligations or otherwise makes
temporary investments. A Portfolio also may miss investment opportunities and
have a lower total return during these periods.
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, its agencies, instrumentalities or
sponsored enterprises. Securities guaranteed as to principal and interest by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
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, an agency, instrumentality or sponsored enterprise thereof, and (b)
participations in loans made to foreign governments or their agencies that are
so guaranteed.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in a variety of U.S. Treasury obligations and also
may invest in obligations issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises.
Special Risks. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("Ginnie Mae"), 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 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 or sponsored enterprise. No assurance can be
given that the U.S. government would provide financial support to its agencies,
instrumentalities, or sponsored enterprises 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 periodically are adjusted either at set intervals or
that float at a
EQUITY PORTFOLIOS
63
margin tied to a specified 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 Portfolio obtains at the time
of purchase the right to put the bond back to the issuer or a third party at
par at a specified date and leveraged inverse floating rate instruments
("inverse floaters"). An inverse floater is leveraged to the extent that its
interest rate varies by an amount that exceeds the amount of the variation in
the index rate of interest. Some variable and floating rate instruments have
interest rates that periodically are adjusted as a result of changes in
inflation rates.
Investment Strategy. Each Portfolio may invest in variable and floating rate
instruments to the extent consistent with its investment objective.
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 Portfolios are not entitled to exercise their demand rights. As a result,
the Portfolios 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 Portfolio may invest in warrants and similar rights.
A Portfolio also may 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 Portfolio may purchase or sell securities on a
when-issued, delayed-delivery or forward commitment basis. Although the
Portfolios generally would purchase securities in these transactions with the
intention of acquiring the securities, the Portfolios may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special Risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities may
decrease by the time they actually are issued or delivered. Conversely, selling
securities in these transactions involves the risk that the value of the
securities may increase by the time they actually are issued or delivered.
These transactions also involve the risk that the counterparty 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 typically
are 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 Portfolio 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 Portfolio's investments in zero coupon,
pay-in-kind and capital appreciation bonds may require the Portfolio to sell
some of its Portfolio securities to generate sufficient cash to satisfy certain
income distribution requirements.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
64
DISCLAIMERS
The Equity Index Portfolio 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 Index or
any data included therein. S&P makes no warranty, express or implied, as to the
results to be obtained by the Portfolio, owners of the Portfolio or any person
or entity from the use of the S&P 500 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 Index or any data included therein.
The International Equity Index Portfolio is not sponsored, endorsed, sold or
promoted by Morgan Stanley Capital International Inc. ("MSCI"), its affiliates,
or information or service providers (collectively, the "MSCI Parties"). MSCI or
its affiliates are the owners and licensors of certain trademarks, service
marks and trade names and of the EAFE(R) Index, which is determined, composed
and calculated by MSCI without regard to the Portfolio, the Portfolio's
shareholders or any other person. The MSCI Parties make no representation or
warranty, express or implied, to the Portfolio or its shareholders or any other
person regarding the advisability of investing in securities generally or in
the Portfolio particularly, or the ability of the EAFE(R) Index to track stock
market performance or the results to be obtained by the Portfolio, the
Portfolio's shareholders or any other person, from the use of the EAFE(R) Index
or any data included therein. The MSCI Parties have no obligation to take the
needs of the Portfolio, the Portfolio's shareholders or any other person into
consideration in determining, composing or calculating the EAFE(R) Index. The
MSCI Parties are not responsible for and have not participated in the
determination of the timing, prices or quantities of the Portfolio's shares to
be issued or in the determination or calculation of the equation by which the
Portfolio's shares are redeemable. The MSCI Parties have no obligation or
liability to the Portfolio, the Portfolio's shareholders or any other person in
connection with the administration, marketing or offering of the Portfolio.
Although MSCI shall obtain information for inclusion in or for use in the
calculation of the EAFE(R) Index from sources that MSCI considers reliable, the
MSCI Parties do not guaranty the originality, accuracy and/or the completeness
of the EAFE(R) Index or any data included therein. The MSCI Parties make no
express or implied warranties of any kind, and hereby expressly disclaim all
warranties of merchantability and fitness for a particular purpose with respect
to the EAFE(R) Index or any data included therein. The MSCI Parties shall have
no liability for any errors, omissions or interruptions of or in connection
with the EAFE(R) Index or any data included therein. Without limiting any of
the foregoing, in no event shall any of the MSCI Parties have any liability for
any direct, indirect, special, punitive, consequential or any other damages
(including lost profits) even if notified of the possibility of such damages.
No purchaser, seller or holder of the Portfolio's shares or any other person
should use or refer to any MSCI trade name, trademark or service mark to
sponsor, endorse, market or promote the Portfolio without first contacting MSCI
to determine whether MSCI's permission is required. Under no circumstances may
any person claim any affiliation with MSCI without the prior written permission
of MSCI.
Neither the Small Company Index Portfolio, Small Company Growth Portfolio nor
the Mid Cap Growth Portfolio is sponsored, endorsed, sold or promoted by
Russell, nor does Russell guarantee the accuracy and/or completeness of the
Russell 2000 Index, Russell 2000 Growth Index, Russell Midcap Index or Russell
Midcap Growth Index or any data included therein. Russell makes no warranty,
express or implied, as to the results to be obtained by any Portfolio, owners
of any Portfolio or any person or entity from the use of the Russell 2000
Index, Russell 2000 Growth Index, Russell Midcap Index or Russell Midcap Growth
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 with respect to the Russell 2000 Index,
Russell 2000 Growth Index, Russell Midcap Index or Russell Midcap Growth Index
or any data included therein.
TNTC is sometimes referred to as "The Northern Trust Bank" in advertisements
and other sales literature.
EQUITY PORTFOLIOS
65
THIS PAGE INTENTIONALLY LEFT BLANK
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
66
FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND A
PORTFOLIO'S FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS (OR, IF SHORTER,
THE PERIOD OF THE PORTFOLIO'S OPERATIONS). Certain information reflects
financial results for a single Portfolio share. The total returns in the
tables represent the rate that an investor would have earned or lost on an
investment in a Portfolio for a share held for the entire period (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolio's
financial statements, is included in the Portfolios' annual report, which is
available upon request and without charge. As of November 30, 2003, no Class
C Shares of the International Growth, International Equity Index, Small
Company Growth, Small Company Index and Diversified Growth Portfolios were
outstanding.
--------------------------------------------------------------------------------
EQUITY PORTFOLIOS
67
FINANCIAL HIGHLIGHTS
INTERNATIONAL GROWTH PORTFOLIO
[Enlarge/Download Table]
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CLASS A
Selected per share data 2003/(4)/ 2002 2001 2000 1999
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Net asset value, beginning of period $6.33 $7.23 $11.22 $14.07 $11.78
Income (loss) from investment operations:
Net investment income (loss) 0.07 0.07 0.09 0.04 0.33
Net realized and unrealized gains (losses) 1.43 (0.93) (2.31) (0.44) 2.94
Total Income (loss) from investment operations 1.50 (0.86) (2.22) (0.40) 3.27
---------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income/(1)/ (0.05) (0.04) (0.25) (0.05) (0.22)
From net realized gains -- -- (1.52) (2.40) (0.76)
In excess of net investment income -- -- -- -- --
Total distributions paid (0.05) (0.04) (1.77) (2.45) (0.98)
---------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 $6.33 $7.23 $11.22 $14.07
---------------------------------------------------------------------------------------------------------
Total return/(2)/ 24.05% (12.01)% (23.51)% (4.26)% 30.07%
Supplemental data and ratios:
Net assets, in thousands, end of period $134,636 $124,966 $123,520 $151,426 $147,689
Ratio to average net assets of:/(3)/
Expenses, net of waivers and reimbursements 1.06% 1.06% 1.06% 1.06% 1.06%
Expenses, before waivers and reimbursements 1.21% 1.24% 1.33% 1.33% 1.31%
Net investment income (loss), net of waivers and
reimbursements 1.01% 0.87% 0.39% 0.56% 0.92%
Net investment income (loss), before waivers and
reimbursements 0.86% 0.69% 0.12% 0.29% 0.67%
Portfolio turnover rate 87.13% 215.34% 237.21% 171.93% 168.10%
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(1)Distributions to shareholders from net investment income include amounts
relating to foreign currency transactions which are treated as ordinary
income for federal income tax purposes.
(2)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(3)Annualized for periods less than one year.
(4)Financial highlights for the year ended were calculated using the average
shares outstanding method.
(5)Shares were reintroduced on June 15, 2001.
(6)No shares outstanding for the period August 23, 1999 through June 14, 2001.
(7)Class D shares were fully redeemed as of August 22, 1999. As such, no total
return or supplemental data and ratios were presented for the fiscal year
ended November 30, 1999.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
68
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
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CLASS D
2003/(4)/ 2002 2001/(5)/ 2000/(6)/ 1999/(7)/
-------------------------------------------------------
$6.30 $7.22 $8.00 -- $11.60
0.01 0.05 -- -- (0.01)
1.47 (0.94) (0.78) -- 2.59
1.48 (0.89) (0.78) -- 2.58
-------------------------------------------------------
(0.01) (0.03) -- -- --
-- -- -- -- (0.76)
-- -- -- -- (0.14)
(0.01) (0.03) -- -- (0.90)
-------------------------------------------------------
$7.77 $6.30 $7.22 -- $13.28/(7)/
-------------------------------------------------------
23.54% (12.39)% (9.75)% -- --
$303 $1,352 $1,817 -- --
1.45% 1.45% 1.45% -- --
1.60% 1.63% 1.72% -- --
0.62% 0.48% 0.00% -- --
0.47% 0.30% (0.27)% -- --
87.13% 215.34% 237.21% -- --
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EQUITY PORTFOLIOS
69
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY INDEX PORTFOLIO
[Enlarge/Download Table]
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CLASS A
Selected per share data 2003 2002/(3)/ 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $7.77 $9.00 $11.40 $13.50 $11.98
Income (loss) from investment operations:
Net investment income 0.24 0.13 0.12 0.14 0.23
Net realized and unrealized gains (losses) 1.60 (1.26) (2.24) (1.36) 2.07
Total Income (loss) from investment operations 1.84 (1.13) (2.12) (1.22) 2.30
----------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income/(1)/ (0.13) (0.08) (0.13) (0.11) (0.23)
From net realized gains -- (0.02) (0.15) (0.77) (0.54)
In excess of net investment income -- -- -- -- (0.01)
Total distributions paid (0.13) (0.10) (0.28) (0.88) (0.78)
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Net asset value, end of year $9.48 $7.77 $9.00 $11.40 $13.50
----------------------------------------------------------------------------------------------------------------------
Total return/(2)/ 24.22% (12.71)% (19.10)% (9.87)% 20.32%
Supplemental data and ratios:
Net assets, in thousands, end of year $59,240 $80,939 $89,005 $87,563 $56,479
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.51% 0.51% 0.55%/(4)/ 0.52%/(4)/ 0.53%/(4)/
Expenses, before waivers and reimbursements 0.70% 0.74% 0.94% 0.89% 0.91%
Net investment income, net of waivers and reimbursements 2.14% 1.57% 1.16% 1.15% 1.21%
Net investment income, before waivers and reimbursements 1.95% 1.34% 0.77% 0.78% 0.83%
Portfolio turnover rate 54.71% 32.10% 24.92% 41.65% 45.97%
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(1)Distributions to shareholders from net investment income include amounts
relating to foreign currency transactions which are treated as ordinary
income for federal income tax purposes.
(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.
(3)Financial highlights for the year ended were calculated using the average
shares outstanding method.
(4)Expense ratios, net of waivers and reimbursements, for the years would have
been 0.51% and 0.90% for Class A and Class D, respectively, absent the
effect of interest expense incurred by the Portfolio's temporary borrowing
against a line of credit.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
70
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
------------------------------------------------------
CLASS D
2003 2002/(3)/ 2001 2000 1999
------------------------------------------------------
$7.66 $8.80 $11.23 $13.40 $11.97
0.12 0.06 0.07 0.09 0.12
1.60 (1.14) (2.27) (1.43) 2.08
1.72 (1.08) (2.20) (1.34) 2.20
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(0.12) (0.04) (0.08) (0.06) (0.11)
-- (0.02) (0.15) (0.77) (0.54)
-- -- -- -- (0.12)
(0.12) (0.06) (0.23) (0.83) (0.77)
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$9.26 $7.66 $8.80 $11.23 $13.40
------------------------------------------------------
22.98% (12.37)% (20.01)% (10.83)% 19.48%
$84 $70 $10 $13 $14
0.90% 0.90% 0.94%/(4)/ 0.91%/(4)/ 0.92%/(4)/
1.09% 1.13% 1.33% 1.28% 1.30%
1.75% 1.18% 0.77% 0.76% 0.82%
1.56% 0.95% 0.38% 0.39% 0.44%
54.71% 32.10% 24.92% 41.65% 45.97%
------------------------------------------------------
EQUITY PORTFOLIOS
71
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
SMALL COMPANY GROWTH PORTFOLIO
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------
CLASS A CLASS D
Selected per share data 2003 2002/(3)(4)/ 2001 2000/(7)/ 2003 2002/(3)(5)/
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.19 $7.51 $9.42 $10.00 $6.17 $7.23
Income (loss) from investment operations:
Net investment income (loss) (0.05) (0.04) (0.03) 0.01 (0.07) (0.07)
Net realized and unrealized gains (losses) 2.03 (1.28) (1.88) (0.59) 2.01 (0.99)
Total income (loss) from investment operations 1.98 (1.32) (1.91) (0.58) 1.94 (1.06)
--------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income -- -- -- -- -- --
Total distributions paid -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.17 $6.19 $7.51 $9.42 $8.11 $6.17
--------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 31.99% (17.57)% (20.28)% (5.80)% 31.44% (14.66)%
Supplemental data and ratios:
Net assets, in thousands, end of period $33,608 $29,211 $35,253 $38,197 $56 $29
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements 0.91% 0.91% 0.92%/(6)/ 0.91% 1.30% 1.30%
Expenses, before waivers and reimbursements 1.35% 1.33% 1.63% 1.98% 1.74% 1.72%
Net investment income (loss), net of waivers
and reimbursements (0.61)% (0.66)% (0.44)% (0.15)% (1.00)% (1.05)%
Net investment income (loss), before waivers
and reimbursements (1.05)% (1.08)% (1.15)% (1.22)% (1.44)% (1.47)%
Portfolio turnover rate 263.21% 306.37% 499.84% 375.29% 263.21% 306.37%
--------------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Financial highlights for the periods ended were calculated using the average
shares outstanding method.
(4)Distributions from net investment income were less than $0.01 per share.
(5)For the period June 13, 2002 (commencement of operations) through November
30, 2002.
(6)Expense ratios, net of waivers and reimbursements for the period would have
been 0.91% for Class A, absent the effect of interest expense incurred by
the Portfolios temporary borrowings against a line of credit.
(7)For the period December 1, 1999 (commencement of operations) through
November 30, 2000.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
72
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EQUITY PORTFOLIOS
73
FINANCIAL HIGHLIGHTS
SMALL COMPANY INDEX PORTFOLIO
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003/(2)/ 2002/(2)/ 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $9.04 $10.23 $11.38 $13.14 $13.02
Income (loss) from investment operations:
Net investment income 0.10 0.10 0.12 0.14 0.12
Net realized and unrealized gains (losses) 3.12 (1.18) 0.40 (0.23) 1.61
Total income (loss) from investment operations 3.22 (1.08) 0.52 (0.09) 1.73
--------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.09) (0.11) (0.14) (0.13) (0.10)
From net realized gains -- -- (1.53) (1.54) (1.51)
Total distributions paid (0.09) (0.11) (1.67) (1.67) (1.61)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.17 $9.04 $10.23 $11.38 $13.14
--------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 36.11% (10.71)% 4.76% (1.12)% 14.97%
Supplemental data and ratios:
Net assets, in thousands, end of year $74,400 $165,559 $317,330 $243,169 $200,404
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.31% 0.31% 0.31% 0.31% 0.34%/(3)/
Expenses, before waivers and reimbursements 0.64% 0.59% 0.63% 0.66% 0.81%
Net investment income, net of waivers and reimbursements 1.12% 1.07% 1.30% 1.19% 1.27%
Net investment income, before waivers and reimbursements 0.79% 0.79% 0.98% 0.84% 0.80%
Portfolio turnover rate 24.61% 30.29% 39.63% 62.38% 101.01%
--------------------------------------------------------------------------------------------------------------------
(1)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.
(2)Financial highlights for the years ended were calculated using the average
shares outstanding method.
(3)Expense ratios, net of waivers and reimbursements, for the years would have
been 0.31% and 0.70% for Class A and Class D, respectively, absent the
effect of interest expense incurred by the Portfolio's temporary borrowings
against a line of credit.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
74
FOR THE FISCAL YEARS ENDED NOVEMBER 30
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-------------------------------------------------------
CLASS D
2003/(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/ 1999
-------------------------------------------------------
$8.92 $10.07 $11.20 $13.01 $12.94
0.06 0.05 0.22 0.08 0.10
3.07 (1.13) 0.23 (0.24) 1.52
3.13 (1.08) 0.45 (0.16) 1.62
-------------------------------------------------------
(0.07) (0.07) (0.05) (0.11) (0.04)
-- -- (1.53) (1.54) (1.51)
(0.07) (0.07) (1.58) (1.65) (1.55)
-------------------------------------------------------
$11.98 $8.92 $10.07 $11.20 $13.01
-------------------------------------------------------
35.40% (10.87)% 4.18% (1.76)% 14.13%
$135 $93 $62 $103 $446
0.70% 0.70% 0.70% 0.70% 0.73%/(3)/
1.03% 0.98% 1.02% 1.05% 1.20%
0.73% 0.68% 0.91% 0.80% 0.88%
0.40% 0.40% 0.59% 0.45% 0.41%
24.61% 30.29% 39.63% 62.38% 101.01%
-------------------------------------------------------
EQUITY PORTFOLIOS
75
FINANCIAL HIGHLIGHTS
MID CAP GROWTH PORTFOLIO
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C
Selected per share data 2003/(3)/ 2002/(3)/ 2001 2000/(4)/ 2003/(3)/ 2002/(3)/ 2001/(5)/
---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $7.94 $8.96 $10.33 $10.00 $7.90 $8.94 $8.59
Income (loss) from
investment operations:
Net investment loss (0.05) (0.05) (0.04) (0.01) (0.07) (0.07) (0.02)
Net realized and
unrealized gains
(losses) 2.07 (0.97) (1.33) 0.34 2.07 (0.97) 0.37
Total income (loss)
from investment
operations 2.02 (1.02) (1.37) 0.33 2.00 (1.04) 0.35
---------------------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment
income -- -- -- -- -- -- --
From net realized gains -- -- -- -- -- -- --
Total distributions paid -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $9.96 $7.94 $8.96 $10.33 $9.90 $7.90 $8.94
---------------------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 25.44% (11.38)% (13.26)% 3.30% 25.32% (11.63)% 4.07%
Supplemental data and
ratios:
Net assets, in
thousands, end of
period $27,536 $26,288 $34,083 $37,096 $3,186 $1,146 $946
Ratio to average net
assets of:/(2)/
Expenses, net of
waivers and
reimbursements 0.91% 0.93%/(7)/ 0.94%/(7)/ 0.93%/(7)/ 1.15% 1.17%/(7)/ 1.18%/(7)/
Expenses, before
waivers and
reimbursements 1.30% 1.29% 1.59% 2.08% 1.54% 1.53% 1.83%
Net investment loss,
net of waivers and
reimbursements (0.57)% (0.54)% (0.49)% (0.26)% (0.81)% (0.78)% (0.73)%
Net investment loss,
before waivers and
reimbursements (0.96)% (0.90)% (1.14)% (1.41)% (1.20)% (1.14)% (1.38)%
Portfolio turnover rate 236.64% 153.80% 220.85% 208.25% 236.64% 153.80% 220.85%
---------------------------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Financial highlights for the year ended were calculated using the average
shares outstanding method.
(4)For the period commencing after the close of business December 31, 1999
through November 30, 2000.
(5)For the period April 4, 2001 (commencement of operations) through November
30, 2001.
(6)For the period January 29, 2001 (commencement of operations) through
November 30, 2001.
(7)Expense ratios, net of waivers and reimbursements, for the periods would
have been 0.91%, 1.15% and 1.30% for Class A, Class C and Class D,
respectively, absent the effect of interest expense incurred by the
Portfolio's temporary borrowing against a line of credit.
(8)Expense ratios, net of waivers and reimbursements, for the periods would
have been 1.32% for Class D absent the effect of interest expense incurred
by the Portfolio's temporary borrowing against a line of credit.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
76
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
--------------------------------------------------
CLASS D
2003/(3)/ 2002/(3)/ 2001/(6)/
--------------------------------------------------
$7.88 $8.93 $11.06
(0.08) (0.08) (0.07)
2.05 (0.97) (2.06)
1.97 (1.05) (2.13)
--------------------------------------------------
-- -- --
-- -- --
-- -- --
--------------------------------------------------
$9.85 $7.88 $8.93
--------------------------------------------------
25.00% (11.76)% (19.26)%
$264 $195 $136
1.30% 1.32%/(7)/ 1.33%/(8)/
1.69% 1.68% 1.98%
(0.96)% (0.93)% (0.88)%
(1.35)% (1.29)% (1.53)%
236.64% 153.80% 220.85%
--------------------------------------------------
EQUITY PORTFOLIOS
77
FINANCIAL HIGHLIGHTS
FOCUSED GROWTH PORTFOLIO
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003/(2)/ 2002/(2)/ 2001 2000/(2)/ 1999
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.26 $12.72 $17.68 $20.41 $16.39
Income (loss) from investment operations:
Net investment income (loss) -- (0.02) 0.02 (0.09) --
Net realized and unrealized gains (losses) 0.97 (2.44) (3.33) 0.44 5.28
Total income (loss) from investment operations 0.97 (2.46) (3.31) 0.35 5.28
---------------------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income -- -- -- -- --
From net realized gains -- -- (1.65) (3.08) (1.26)
Total distributions paid -- -- (1.65) (3.08) (1.26)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.23 $10.26 $12.72 $17.68 $20.41
---------------------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 9.45% (19.34)% (20.92)% 1.17% 34.23%
Supplemental data and ratios:
Net assets, in thousands, end of year $210,064 $202,117 $247,114 $226,975 $180,557
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.86% 0.88% 0.91% 0.92%/(3)/ 0.92%/(3)/
Expenses, before waivers and reimbursements 1.00% 1.09% 1.27% 1.27% 1.26%
Net investment income (loss), net of waivers and
reimbursements (0.03)% (0.17)% (0.07)% (0.49)% (0.26)%
Net investment loss, before waivers and reimbursements (0.17)% (0.38)% (0.43)% (0.84)% (0.60)%
Portfolio turnover rate 202.69% 148.40% 122.09% 129.05% 110.80%
---------------------------------------------------------------------------------------------------------------------------------
(1)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.
(2)Financial highlights for the years ended were calculated using the average
shares outstanding method.
(3)Expense ratios, net of waivers and reimbursements, for the years would have
been 0.91%, 1.15% and 1.30% for Class A, Class C and Class D, respectively,
absent the effect of interest expense incurred by the Portfolio's temporary
borrowings against a line of credit.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
78
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Enlarge/Download Table]
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CLASS C CLASS D
2003/(2)/ 2002/(2)/ 2001 2000/(2)/ 1999 2003/(2)/ 2002/(2)/ 2001 2000/(2)/ 1999
--------------------------------------------------------------------------------------------------------------------------
$10.12 $12.57 $17.53 $20.30 $16.34 $9.89 $12.30 $17.20 $20.00 $16.14
-- (0.05) (0.02) (0.14) (0.03) (0.01) (0.06) 0.06 (0.18) (0.02)
0.93 (2.40) (3.29) 0.45 5.25 0.90 (2.35) (3.31) 0.46 5.14
0.93 (2.45) (3.31) 0.31 5.22 0.89 (2.41) (3.25) 0.28 5.12
--------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- -- --
-- -- (1.65) (3.08) (1.26) -- -- (1.65) (3.08) (1.26)
-- -- (1.65) (3.08) (1.26) -- -- (1.65) (3.08) (1.26)
--------------------------------------------------------------------------------------------------------------------------
$11.05 $10.12 $12.57 $17.53 $20.30 $10.78 $9.89 $12.30 $17.20 $20.00
--------------------------------------------------------------------------------------------------------------------------
9.30% (19.57)% (21.11)% 0.94% 33.95% 9.11% (19.67)% (21.18)% 0.78% 33.74%
$16,153 $7,247 $9,030 $11,442 $11,183 $1,800 $984 $597 $643 $514
1.10% 1.12% 1.15% 1.16%/(3)/ 1.16%/(3)/ 1.25% 1.27% 1.30% 1.31%/(3)/ 1.31%/(3)/
1.24% 1.33% 1.51% 1.51% 1.50% 1.39% 1.48% 1.66% 1.66% 1.65%
(0.27)% (0.41)% (0.31)% (0.73)% (0.50)% (0.42)% (0.56)% (0.46)% (0.88)% (0.65)%
(0.41)% (0.62)% (0.67)% (1.08)% (0.84)% (0.56)% (0.77)% (0.82)% (1.23)% (0.99)%
202.69% 148.40% 122.09% 129.05% 110.80% 202.69% 148.40% 122.09% 129.05% 110.80%
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EQUITY PORTFOLIOS
79
FINANCIAL HIGHLIGHTS
DIVERSIFIED GROWTH PORTFOLIO
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $6.17 $7.52 $15.36 $19.79 $17.76
Income (loss) from investment operations:
Net investment income (loss) 0.04 0.04 0.03 0.01 0.07
Net realized and unrealized gains (losses) 0.91 (1.36) (1.52) 0.08 3.95
Total income (loss) from investment operations 0.95 (1.32) (1.49) 0.09 4.02
-------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.03) (0.03) (0.01) (0.07) (0.07)
From net realized gains -- -- (6.34) (4.45) (1.92)
In excess of net investment income -- -- -- -- --
Total distributions paid (0.03) (0.03) (6.35) (4.52) (1.99)
-------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.09 $6.17 $7.52 $15.36 $19.79
-------------------------------------------------------------------------------------------------------------
Total return/(1)/ 15.58% (17.62)% (16.52)% (0.47)% 24.66%
Supplemental data and ratios:
Net assets, in thousands, end of year $59,580 $66,371 $102,133 $111,612 $189,077
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.76% 0.73%/(2)/ 0.66% 0.69%/(4)/ 0.67%/(4)/
Expenses, before waivers and reimbursements 0.97% 0.97% 1.00% 1.01% 0.96%
Net investment income (loss), net of waivers and
reimbursements 0.53% 0.49% 0.41% 0.06% 0.33%
Net investment income (loss), before waivers and
reimbursements 0.32% 0.25% 0.07% (0.26)% 0.04%
Portfolio turnover rate 104.96% 55.31% 55.76% 63.39% 67.47%
-------------------------------------------------------------------------------------------------------------
(1)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.
(2)Expense ratios, net of waivers and reimbursements, for the years would have
been 0.72% and 1.11% for Class A and Class D, respectively, absent the
effect of interest expense incurred by the Portfolio's temporary borrowings
against a line of credit.
(3)Distributions from net investment income were less than $0.01 per share.
(4)Expense ratios, net of waivers and reimbursements, for the years would have
been 0.66% and 1.05% for Class A and Class D, respectively, absent the
effect of interest expense incurred by the Portfolio's temporary borrowings
against a line of credit.
(5)Financial highlights for the years ended were calculated using average
shares outstanding method.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
80
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
-------------------------------------------------------
CLASS D
2003 2002/(3)/ 2001 2000/(5)/ 1999/(5)/
-------------------------------------------------------
$5.93 $7.23 $15.02 $19.49 $17.53
-- 0.03 0.12 (0.05) --
0.89 (1.33) (1.57) 0.07 3.89
0.89 (1.30) (1.45) 0.02 3.89
-------------------------------------------------------
(0.01) -- -- (0.04) --
-- -- (6.34) (4.45) (1.92)
-- -- -- -- (0.01)
(0.01) -- (6.34) (4.49) (1.93)
-------------------------------------------------------
$6.81 $5.93 $7.23 $15.02 $19.49
-------------------------------------------------------
15.07% (17.98)% (16.69)% (0.88)% 24.09%
$448 $397 $442 $515 $476
1.15% 1.12%/(2)/ 1.05% 1.08%/(4)/ 1.06%/(4)/
1.36% 1.36% 1.39% 1.40% 1.35%
0.14% 0.10% 0.02% (0.33)% (0.06)%
(0.07)% (0.14)% (0.32)% (0.65)% (0.35)%
104.96% 55.31% 55.76% 63.39% 67.47%
-------------------------------------------------------
EQUITY PORTFOLIOS
81
FINANCIAL HIGHLIGHTS
EQUITY INDEX PORTFOLIO
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003/(2)/ 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $12.36 $15.57 $21.58 $25.34 $22.69
Income (loss) from investment operations:
Net investment income 0.19 0.18 0.20 0.27 0.28
Net realized and unrealized gains (losses) 1.57 (2.68) (2.39) (1.25) 4.13
Total income (loss) from investment operations 1.76 (2.50) (2.19) (0.98) 4.41
------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.24) (0.19) (0.20) (0.23) (0.32)
From net realized gains (0.22) (0.52) (3.62) (2.55) (1.43)
In excess of net investment income -- -- -- -- (0.01)
Total distributions paid (0.46) (0.71) (3.82) (2.78) (1.76)
------------------------------------------------------------------------------------------------------
Net asset value, end of year $13.66 $12.36 $15.57 $21.58 $25.34
------------------------------------------------------------------------------------------------------
Total return/(1)/ 14.78% (16.69)% (12.19)% (4.57)% 20.53%
Supplemental data and ratios:
Net assets, in thousands, end of year $637,603 $797,850 $905,174 $999,478 $1,368,157
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.21% 0.21% 0.21% 0.21% 0.21%
Expenses, before waivers and reimbursements 0.35% 0.37% 0.45% 0.45% 0.44%
Net investment income, net of waivers and
reimbursements 1.59% 1.34% 1.19% 1.10% 1.19%
Net investment income, before waivers and
reimbursements 1.45% 1.18% 0.95% 0.86% 0.96%
Portfolio turnover rate 16.04% 26.53% 14.30% 8.49% 12.81%
------------------------------------------------------------------------------------------------------
(1)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.
(2)Financial highlights for the year ended were calculated using the average
shares outstanding method.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
82
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------
CLASS C CLASS D
2003/(2)/ 2002 2001 2000 1999 2003/(2)/ 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------
$12.31 $15.51 $21.52 $25.28 $22.64 $12.30 $15.51 $21.48 $25.25 $22.58
0.16 0.14 0.17 0.21 0.22 0.15 0.14 0.13 0.17 0.16
1.56 (2.66) (2.40) (1.23) 4.12 1.55 (2.69) (2.34) (1.23) 4.15
1.72 (2.52) (2.23) (1.02) 4.34 1.70 (2.55) (2.21) (1.06) 4.31
-----------------------------------------------------------------------------------------------
(0.21) (0.16) (0.16) (0.19) (0.21) (0.19) (0.14) (0.14) (0.16) (0.14)
(0.22) (0.52) (3.62) (2.55) (1.43) (0.22) (0.52) (3.62) (2.55) (1.43)
-- -- -- -- (0.06) -- -- -- -- (0.07)
(0.43) (0.68) (3.78) (2.74) (1.70) (0.41) (0.66) (3.76) (2.71) (1.64)
-----------------------------------------------------------------------------------------------
$13.60 $12.31 $15.51 $21.52 $25.28 $13.59 $12.30 $15.51 $21.48 $25.25
-----------------------------------------------------------------------------------------------
14.56% (16.89)% (12.43)% (4.77)% 20.23% 14.37% (17.05)% (12.36)% (4.93)% 20.15%
$27,885 $47,325 $70,494 $91,522 $113,588 $7,569 $5,397 $6,105 $9,904 $16,397
0.45% 0.45% 0.45% 0.45% 0.45% 0.60% 0.60% 0.60% 0.60% 0.60%
0.59% 0.61% 0.69% 0.69% 0.68% 0.74% 0.76% 0.84% 0.84% 0.83%
1.35% 1.10% 0.95% 0.86% 0.95% 1.20% 0.95% 0.80% 0.71% 0.80%
1.21% 0.94% 0.71% 0.62% 0.72% 1.06% 0.79% 0.56% 0.47% 0.57%
16.04% 26.53% 14.30% 8.49% 12.81% 16.04% 26.53% 14.30% 8.49% 12.81%
-----------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
83
FINANCIAL HIGHLIGHTS
BALANCED PORTFOLIO
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003/(3)/ 2002/(2)/ 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $10.65 $11.76 $13.69 $15.12 $14.95
Income (loss) from investment operations:
Net investment income 0.18 0.24 0.35 0.40 0.40
Net realized and unrealized gains (losses) 1.05 (1.08) (0.86) 0.18 1.55
Total income (loss) from investment operations 1.23 (0.84) (0.51) 0.58 1.95
----------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.18) (0.27) (0.37) (0.34) (0.47)
From net realized gains -- -- (1.05) (1.67) (1.30)
In excess of net investment income -- -- -- -- (0.01)
Total distributions paid (0.18) (0.27) (1.42) (2.01) (1.78)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.70 $10.65 $11.76 $13.69 $15.12
----------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 11.69% (7.26)% (4.11)% 3.98% 14.11%
Supplemental data and ratios:
Net assets, in thousands, end of year $129,674 $88,438 $97,121 $73,006 $76,884
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.61% 0.61% 0.61% 0.61% 0.61%
Expenses, before waivers and reimbursements 0.79% 0.86% 1.01% 1.07% 0.99%
Net investment income, net of waivers and reimbursements 1.61% 2.21% 3.02% 2.83% 2.69%
Net investment income, before waivers and reimbursements 1.43% 1.96% 2.62% 2.37% 2.31%
Portfolio turnover rate 147.53% 133.42% 110.80% 85.81% 77.19%
----------------------------------------------------------------------------------------------------------------------
(1)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.
(2)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
(3)Financial highlights for the year ended were calculated using the average
shares outstanding method.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
84
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Enlarge/Download Table]
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CLASS C CLASS D
2003/(3)/ 2002/(2)/ 2001 2000 1999/(3)/ 2003/(3)/ 2002/(2)/ 2001 2000 1999
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$10.64 $11.76 $13.69 $15.13 $14.91 $10.58 $11.69 $13.61 $15.06 $14.88
0.16 0.21 0.33 0.36 0.34 0.13 0.19 0.37 0.34 0.36
1.05 (1.09) (0.86) 0.18 1.60 1.05 (1.08) (0.92) 0.18 1.53
1.21 (0.88) (0.53) 0.54 1.94 1.18 (0.89) (0.55) 0.52 1.89
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(0.15) (0.24) (0.35) (0.31) (0.42) (0.14) (0.22) (0.32) (0.30) (0.41)
-- -- (1.05) (1.67) (1.30) -- -- (1.05) (1.67) (1.30)
-- -- -- -- -- -- -- -- -- --
(0.15) (0.24) (1.40) (1.98) (1.72) (0.14) (0.22) (1.37) (1.97) (1.71)
-----------------------------------------------------------------------------------------------------------
$11.70 $10.64 $11.76 $13.69 $15.13 $11.62 $10.58 $11.69 $13.61 $15.06
-----------------------------------------------------------------------------------------------------------
11.54% (7.56)% (4.33)% 3.72% 14.03% 11.24% (7.66)% (4.44)% 3.56% 13.73%
$1,098 $860 $905 $905 $805 $333 $317 $257 $487 $405
0.85% 0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 1.00% 1.00%
1.03% 1.10% 1.25% 1.31% 1.23% 1.18% 1.25% 1.40% 1.46% 1.38%
1.37% 1.97% 2.78% 2.59% 2.45% 1.22% 1.82% 2.63% 2.44% 2.30%
1.19% 1.72% 2.38% 2.13% 2.07% 1.04% 1.57% 2.23% 1.98% 1.92%
147.53% 133.42% 110.80% 85.81% 77.19% 147.53% 133.42% 110.80% 85.81% 77.19%
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EQUITY PORTFOLIOS
85
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
86
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EQUITY PORTFOLIOS
87
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORTS
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolios and their policies also is
available in the Portfolios' Additional Statement. The Additional Statement is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports, and the Additional Statement,
are available free upon request by calling the Northern Institutional Funds
Center at 800/637-1380.
To obtain other information and for shareholder inquiries:
BY TELEPHONE
Call 800/637-1380
BY MAIL
Northern Institutional Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Portfolios' documents are available online and may be
downloaded from:
.. The SEC's Web site at sec.gov
.. Northern Institutional Funds' Web site at northerninstitutionalfunds.com
You may review and obtain copies of Northern Institutional Funds documents by
visiting the SEC's Public Reference Room in Washington, D.C. You also may
obtain copies of Northern Institutional Funds documents by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-0102 or by electronic request at publicinfo@sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202/942-8090.
811-3605
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
88
NORTHERN INSTITUTIONAL FUNDS
FIXED INCOME PORTFOLIOS
.. INTERNATIONAL BOND PORTFOLIO
.. BOND PORTFOLIO
.. CORE BOND PORTFOLIO
.. U.S. TREASURY INDEX PORTFOLIO
.. INTERMEDIATE BOND PORTFOLIO
.. SHORT-INTERMEDIATE BOND PORTFOLIO
.. U.S. GOVERNMENT SECURITIES PORTFOLIO
Prospectus dated April 1, 2004
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other
government agency. An investment in a Portfolio involves investment risks,
including possible loss of principal.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
OVERVIEW
RISK/RETURN SUMMARY
Information about the objectives, principal strategies and risk characteristics
of each Portfolio.
[Download Table]
5
Fixed Income Portfolios
5
International Bond Portfolio
6
Bond Portfolio
7
Core Bond Portfolio
8
U.S. Treasury Index Portfolio
9
Intermediate Bond Portfolio
10
Short-Intermediate Bond Portfolio
11
U.S. Government Securities Portfolio
12
Principal Investment Risks
15
Portfolio Performance
16
International Bond Portfolio
17
Bond Portfolio
18
Core Bond Portfolio
19
U.S. Treasury Index Portfolio
20
Intermediate Bond Portfolio
21
Short-Intermediate Bond Portfolio
22
U.S. Government Securities Portfolio
23
Broad-Based Securities Market Indices
24
Portfolio Fees and Expenses
MANAGEMENT OF THE PORTFOLIOS
Details that apply to the Portfolios as a group.
31
Investment Advisers
32
Advisory Fees
33
Portfolio Management
34
Other Portfolio Services
[Download Table]
ABOUT YOUR ACCOUNT
How to open, maintain and close an account.
35
Purchasing and Selling Shares
35
Purchasing Shares
35
Opening an Account
36
Selling Shares
37
Account Policies and Other Information
37
Purchase and Redemption Minimums
37
Calculating Share Price
37
Timing of Purchase Requests
37
Miscellaneous Purchase Information
38
Timing of Redemption and Exchange Requests
38
Payment of Redemption Proceeds
38
Miscellaneous Redemption Information
38
Exchange Privileges
39
Excessive Trading in Portfolio Shares
39
In-Kind Purchases and Redemptions
39
Telephone Transactions
39
Making Changes to Your Account Information
39
Business Day
39
Good Order
40
Customer Identification Program
40
Early Closings
40
Emergency Events
40
Financial Intermediaries
41
Shareholder Communications
42
Dividends and Distributions
43
Tax Considerations
TABLE OF CONTENTS
[Download Table]
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL
INFORMATION
45
Risks, Securities and Techniques
45
Additional Information on Investment Objectives,
Principal Investment Strategies and Related Risks
50
Additional Description of Securities and Common
Investment Techniques
58
Disclaimers
59
Financial Information
60
Financial Highlights
FOR MORE INFORMATION
76
Annual/Semiannual Reports
76
Statement of Additional Information
OVERVIEW
NORTHERN INSTITUTIONAL FUNDS (THE "TRUST") OFFERS A SELECTION OF INVESTMENT
PORTFOLIOS TO INSTITUTIONAL INVESTORS, EACH WITH A DISTINCT INVESTMENT
OBJECTIVE AND RISK/REWARD PROFILE.
--------------------------------------------------------------------------------
The descriptions on the following pages may help you choose the portfolio or
portfolios that best fit your investment needs. Keep in mind, however, that no
portfolio can guarantee it will meet its investment objective, and no portfolio
should be relied upon as a complete investment program.
This Prospectus describes seven fixed income portfolios (the "Portfolios")
currently offered by the Trust. Each Portfolio is authorized to offer three
classes of shares: Class A, Class C and Class D Shares. The Trust also offers
balanced, equity and money market portfolios, which are described in separate
prospectuses.
In addition to the instruments described on the following pages, each Portfolio
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 45 of this Prospectus and
in the Statement of Additional Information ("Additional Statement").
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
4
FIXED INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in bonds and
other fixed income securities. The Portfolio intends to invest in the
securities of issuers located in a number of countries throughout the world.
The securities in which the Portfolio may invest include:
.. Obligations of foreign or domestic governments, their agencies,
instrumentalities or sponsored enterprises;
.. Obligations of supranational organizations (such as the World Bank);
.. Obligations of foreign or domestic corporations and banks;
.. Zero coupon bonds, debentures, preferred stock and convertible securities of
foreign or domestic issuers;
.. 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 Portfolio primarily invests in mature markets (such as Germany,
Japan and the U.S.), it may to a lesser extent also make investments in
emerging markets (such as Argentina and China). Investments are made based on
the investment management team's outlook for the relative economic growth,
expected inflation and other economic and political prospects of each country
or region.
Although the Portfolio primarily invests in investment grade fixed income
securities (i.e., obligations rated within the top four rating categories by a
nationally recognized statistical rating organization ("NRSRO") or of
comparable quality as determined by the Investment Advisers), it may invest to
a limited extent in securities that are rated below investment grade ("junk
bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as foreign governmental, supranational
and foreign corporate obligations) that the team believes will provide a
favorable return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between three and eleven years.
The Portfolio is "non-diversified" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and may invest more of its assets in fewer issuers
than "diversified" mutual funds.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, and currency contracts,
all of which are considered to be derivative instruments, for both hedging and
non-hedging purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, credit (or default),
currency, country, foreign regulatory, non-diversification, high-yield,
emerging markets and portfolio turnover risks. See page 12 for a discussion of
these risks.
FIXED INCOME PORTFOLIOS
5
BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in bonds and
other fixed income securities. These may include:
.. Obligations of the U.S. government, its agencies, instrumentalities or
sponsored enterprises;
.. Obligations of state, local and foreign governments;
.. Obligations of domestic and foreign banks and corporations;
.. Zero coupon bonds, debentures, preferred stock and convertible securities;
.. 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 Portfolio invests primarily in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by
an NRSRO or of comparable quality as determined by the Investment Advisers), it
may invest to a limited extent in obligations of foreign issuers and in
securities that are rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as treasury, agency, mortgage-related
and corporate securities) that the team believes will provide a favorable
return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between five and fifteen years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, all of which are
considered to be derivative instruments, for both hedging and non-hedging
purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, credit (or default),
currency, country, foreign regulatory, high-yield, emerging markets and
portfolio turnover risks. See page 12 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
6
CORE BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in bonds and
other fixed income securities. These may include:
.. Obligations of the U.S. government, its agencies, instrumentalities or
sponsored enterprises;
.. Obligations of state, local and foreign governments;
.. Obligations of domestic and foreign banks and corporations;
.. Zero coupon bonds, debentures, preferred stock and convertible securities;
.. 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.
The Portfolio invests primarily in the investment grade debt obligations of
domestic issuers. Investment grade debt obligations are obligations rated
within the top four rating categories by an NRSRO or determined by the
Investment Adviser to be of comparable quality. The Portfolio also may invest
to a limited extent in U.S. dollar-denominated investment grade obligations of
foreign issuers.
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as treasury, agency, mortgage-related
and corporate securities) that the team believes will provide a favorable total
return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between five and fifteen years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, all of which are
considered to be derivative instruments, for both hedging and non-hedging
purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, credit (or default),
currency, country, foreign regulatory and portfolio turnover risks. See page 12
for a discussion of these risks.
FIXED INCOME PORTFOLIOS
7
U.S. TREASURY INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide investment results approximating the performance
of the Lehman Brothers Treasury Bond Index (the "Lehman Index").
The Lehman Index is an unmanaged index that includes a broad range of U.S.
Treasury obligations and is considered representative of U.S. Treasury bond
performance overall. As of November 30, 2003, the duration of the Lehman Index
was 4.61 years.
Lehman Brothers ("Lehman") does not endorse any of the securities in the Lehman
Index. It is not a sponsor of the U.S. Treasury Index Portfolio and is not
affiliated with the Portfolio in any way.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. Under normal circumstances, the Portfolio will invest
substantially all (and at least 80%) of its net assets in a representative
sample of the U.S. Treasury obligations included in the Lehman Index. The
Portfolio will buy and sell securities with the goal of achieving an overall
duration and total return similar to that of the Lehman Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the Lehman Index using computer
programs and statistical procedures. As a result, the investment management
team does not use traditional methods of investment management for the
Portfolio, such as selecting securities on the basis of economic, financial and
market analysis. Because the Portfolio will have fees and transaction expenses
(while the Index has none), returns are likely to be below those of the Lehman
Index.
The Investment Adviser expects that, under normal circumstances, the quarterly
performance of the Portfolio, before expenses, will track the performance of
the Lehman Index within a 0.95 correlation coefficient.
In seeking to achieve its investment objective, the Portfolio may make
investments in structured securities, futures contracts, options and swaps, all
of which are considered to be derivative instruments, for both hedging and
non-hedging purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, U.S. government securities
and tracking risks. See page 12 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
8
INTERMEDIATE BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in bonds and
other fixed income securities. These may include:
.. Obligations of the U.S. government, its agencies, instrumentalities or
sponsored enterprises;
.. Obligations of state, local and foreign governments;
.. Obligations of domestic and foreign banks and corporations;
.. Zero coupon bonds, debentures, preferred stock and convertible securities;
.. 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 Portfolio primarily invests in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by
an NRSRO or of comparable quality as determined by the Investment Advisers), it
may invest to a limited extent in obligations of foreign issuers and in
securities that are rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as treasury, agency, mortgage-related
and corporate securities) that the team believes will provide a favorable
return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between three and ten years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, all of which are
considered to be derivative instruments, for both hedging and non-hedging
purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, credit (or default),
currency, country, foreign regulatory, high-yield and portfolio turnover risks.
See page 12 for a discussion of these risks.
FIXED INCOME PORTFOLIOS
9
SHORT-INTERMEDIATE BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return with minimal reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in bonds and
other fixed income securities. These may include:
.. Obligations of the U.S. government, its agencies, instrumentalities or
sponsored enterprises;
.. Obligations of state, local and foreign governments;
.. Obligations of domestic and foreign banks and corporations;
.. Zero coupon bonds, debentures, preferred stock and convertible securities;
.. 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 Portfolio primarily invests in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by
an NRSRO or of comparable quality as determined by the Investment Advisers), it
may invest to a limited extent in obligations of foreign issuers and in
securities that are rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as treasury, agency, mortgage-related
and corporate securities) that the team believes will provide a favorable
return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between two and five years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities and also may invest, to a
lesser extent, in futures contracts, options and swaps, all of which are
considered to be derivative instruments, for both hedging and non-hedging
purposes.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: market,
management, liquidity, derivatives, interest rate/maturity, structured
securities, prepayment (or call), debt extension, credit (or default),
currency, country, foreign regulatory, high-yield and portfolio turnover risks.
See page 12 for a discussion of these risks.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
10
U.S. GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return with minimal reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in
securities issued or guaranteed by the U.S. government, its agencies,
instrumentalities, or sponsored enterprises and repurchase agreements relating
to such securities. These may include:
.. U.S. Treasury bills, notes and bonds;
.. Obligations of the U.S. government, its agencies, instrumentalities or
sponsored enterprises;
.. Mortgage-related securities issued or guaranteed by the U.S. government its
agencies, instrumentalities or sponsored enterprises;
.. Stripped securities evidencing ownership of future interest or principal
payments on obligations of the U.S. government, its agencies,
instrumentalities or sponsored enterprises;
.. Structured debt securities that are issued or guaranteed directly by the U.S.
government, its agencies, instrumentalities or sponsored enterprises; and
.. Repurchase agreements relating to the above instruments.
The Portfolio also may make limited investments in the obligations of
supranational organizations (such as the World Bank).
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative
value approach, the investment management team will emphasize particular
securities and types of securities (such as treasury, agency and
mortgage-related securities) that the team believes will provide a favorable
return in light of these risks.
The Portfolio's dollar-weighted average maturity, under normal circumstances,
will range between one and five years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured securities that are issued or guaranteed
directly by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, and also may invest, to a lesser extent, in futures contracts,
options and swaps, all of which are considered to be derivative instruments,
for both hedging and non-hedging purposes.
The Portfolio may make significant investments in securities issued by U.S.
government-sponsored entities. Such securities are neither issued nor
guaranteed by the U.S. Treasury.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These principal investment risks apply to the Portfolio: U.S. government
securities, market, management, liquidity, derivatives, interest rate/maturity,
structured securities, prepayment (or call), debt extension and portfolio
turnover risks. See page 12 for a discussion of these risks.
FIXED INCOME PORTFOLIOS
11
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Portfolio's investments, its investment performance and the price of its
shares. As a result, loss of money is a risk of investing in each Portfolio.
AN INVESTMENT IN A PORTFOLIO IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED
OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
The following summarizes the principal risks that apply to the Portfolios.
--------------------------------------------------------------------------------
RISKS THAT APPLY TO ALL PORTFOLIOS
Market risk is the risk that the value of the securities in which a Portfolio
invests may go up or down in response to the prospects of individual issuers
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 Portfolio 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.
Derivatives risk is the risk that loss may result from a Portfolio's
investments in options, futures, swaps, structured debt securities and other
derivative instruments, which may be leveraged. Investments in derivative
instruments may result in losses exceeding the amounts invested.
Interest rate/maturity risk is the risk that increases in prevailing interest
rates will cause fixed income securities held by a Portfolio to decline in
value. The magnitude of this decline will often be greater for longer-term
fixed income securities than shorter-term securities.
Structured securities risk is the risk that loss may result from a Portfolio's
investments in structured securities, which are considered to be derivative
instruments because their value is based on changes in the specific currencies,
commodities, securities, indices or other financial indicators. For these
reasons structured securities present additional risk that the interest paid to
the Portfolio on a structured security will be less than expected, and that the
principal amount invested will not be returned to the Portfolio. As a result,
investments in structured securities may adversely affect the Portfolio's net
asset value. In some cases it is possible that a Portfolio may suffer a total
loss on its investment in a structured security.
Prepayment (or call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as a mortgage-backed
security) earlier than expected. This may happen during a period of declining
interest rates. Under these circumstances, a Portfolio 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 Portfolio'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 Portfolio (such as a mortgage-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
12
RISKS THAT APPLY PRIMARILY TO THE INTERNATIONAL BOND, BOND, CORE BOND,
INTERMEDIATE BOND AND SHORT-
INTERMEDIATE BOND PORTFOLIOS
Credit (or default) risk is the risk that a U.S. or foreign issuer or guarantor
of a security, or a counterparty to a transaction, may default on its payment
obligations or experience a decline in credit quality. Generally, the lower the
credit rating of a security, issuer, guarantor or counterparty, the greater the
risk of default. Also, a downgrade in the credit quality of a security or its
issuer or guarantor may cause the security to decline in value. Investment
grade fixed income securities generally are believed to have relatively low
degrees of credit risk.
Currency risk is the potential for price fluctuations in the dollar value of
foreign securities because of changing currency exchange rates.
Country risk is the potential for price fluctuations in foreign securities
because of political, financial and economic events in foreign countries.
Investment of more than 25% of a Portfolio's total assets in securities of
issuers located in one country will subject the Portfolio to increased country
risk with respect to the particular country.
Foreign regulatory risk is the risk that a foreign security could lose value
because of less stringent foreign securities regulations and accounting and
disclosure standards.
RISK THAT APPLIES PRIMARILY TO THE U.S. TREASURY INDEX AND U.S. GOVERNMENT
SECURITIES PORTFOLIOS
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. Although many
U.S. government securities purchased by the Portfolios, such as those issued by
the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan
Mortgage Corporation ("Freddie Mac") and Federal Home Loan Banks may be
chartered or sponsored by Acts of Congress, their securities are neither issued
nor guaranteed by the United States Treasury and, therefore, are not backed by
the full faith and credit of the United States. The maximum potential liability
of the issuers of some U.S. government securities held by a Portfolio may
greatly exceed their current resources, including their legal right to support
from the U.S. Treasury. It is possible that these issuers will not have the
funds to meet their payment obligations in the future.
RISK THAT APPLIES TO THE U.S. TREASURY INDEX PORTFOLIO
Tracking risk is the risk that a Portfolio's performance may vary substantially
from the performance of the benchmark index it tracks as a result of share
purchases and redemptions, transaction costs, expenses and other factors.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL BOND PORTFOLIO
Non-diversification risk is the risk that a non-diversified Portfolio may be
more susceptible to adverse financial, economic or other developments affecting
any single issuer, and more susceptible to greater losses because of these
developments.
FIXED INCOME PORTFOLIOS
13
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL BOND, BOND, INTERMEDIATE BOND
AND SHORT-INTERMEDIATE BOND PORTFOLIOS
High-yield risk may impact the value of non-investment grade securities held by
a Portfolio. Generally, these securities, sometimes 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 Portfolio may not achieve the expected return 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 INTERNATIONAL BOND AND BOND PORTFOLIOS
Emerging markets risk is the risk that the securities markets of emerging
countries are less liquid, are especially subject to greater price volatility,
have smaller market capitalizations, have less government regulation and are
not subject to as extensive and frequent accounting, financial and other
reporting requirements as the securities markets of more developed countries.
RISK THAT APPLIES PRIMARILY TO THE INTERNATIONAL BOND, BOND, CORE BOND,
INTERMEDIATE BOND, SHORT-INTERMEDIATE BOND AND U.S. GOVERNMENT SECURITIES
PORTFOLIOS
Portfolio turnover risk is the risk that high portfolio turnover is likely to
result in increased Portfolio expenses which may result in lower investment
returns. High portfolio turnover also is likely to result in higher short-term
capital gains taxable to shareholders. For the last fiscal year, the annual
portfolio turnover rates of the Bond, Core Bond, Intermediate Bond,
Short-Intermediate Bond and U.S. Government Securities Portfolios exceeded 100%.
More information about the Portfolios' investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 45. You should
carefully consider the risks discussed in this section and in "Risks,
Securities and Techniques" before investing in a Portfolio.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
14
PORTFOLIO PERFORMANCE
EACH PORTFOLIO IS AUTHORIZED TO OFFER THREE CLASSES OF SHARES--CLASS A, CLASS
C AND CLASS D. THE BAR CHARTS AND TABLES THAT FOLLOW PROVIDE AN INDICATION OF
THE RISKS OF INVESTING IN A PORTFOLIO BY SHOWING: (A) CHANGES IN THE
PERFORMANCE OF A PORTFOLIO'S CLASS A SHARES FROM YEAR TO YEAR; AND (B) HOW
THE AVERAGE ANNUAL RETURNS OF A PORTFOLIO'S OUTSTANDING CLASSES OF SHARES
COMPARE TO THOSE OF A BROAD-BASED SECURITIES MARKET INDEX. FOR A DESCRIPTION
OF EACH BROAD-BASED SECURITIES MARKET INDEX, PLEASE SEE PAGE 23.
The bar charts and tables assume reinvestment of dividends and distributions.
A Portfolio's past performance, before and after taxes, is not necessarily an
indication of how the Portfolio 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 Portfolio's
performance would have been reduced. Class C Shares and Class D Shares of a
Portfolio will have similar annual returns when compared with Class A Shares
because Class A, Class C, and Class D Shares of a Portfolio are invested in
the same portfolio of securities. The annual returns of Class A Shares will
differ from those of Class C and Class D Shares only to the extent that the
classes do not have the same expenses. Annual returns reflected since
inception will also differ according to the inception date for each class. As
of the date of this Prospectus, no Class C Shares of the International Bond,
Intermediate Bond, Short-Intermediate Bond and U.S. Government Securities
Portfolios were outstanding.
In calculating the federal income taxes due on redemptions, capital gains
taxes resulting from redemption are subtracted from the redemption proceeds
and the tax benefits from capital losses resulting from the redemption are
added to the redemption proceeds. Under certain circumstances, the addition
of the tax benefits from capital losses resulting from redemptions may cause
the Returns After Taxes on Distributions and Sale of Fund shares to be
greater than the Returns After Taxes on Distributions or even the Returns
Before Taxes.
--------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
15
INTERNATIONAL BOND PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ------ ------- -------- ------ ------
20.57% 7.23% (3.45)% 15.79% (7.98)% (1.49)% (0.40)% 13.76% 18.85%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q1 1995 10.88%
Worst Quarter Return Q1 1997 (5.91)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 3/28/94 18.85% 4.07% 6.38%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 13.84% 1.77% 3.80%
Return after taxes on distributions 12.20% 2.04% 3.86%
and sale of portfolio shares
J.P. Morgan Non-U.S. Government Bond Index* 18.63% 5.02% 6.94%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes** 11/20/95 17.97% 3.90% 4.87%
------------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. Government Bond Index* 18.63% 5.02% 5.56%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
** For Class D Shares, performance from 8/23/99 through 9/4/02 is that of Class A Shares. Because the fees and expenses of
Class D Shares are higher than those of Class A Shares, actual performance would have been lower if these higher fees had been
taken into account.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
16
BOND PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(3.88)% 22.72% 3.41% 9.98% 9.30% (2.39)% 11.35% 6.17% 8.03% 5.64%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q2 1995 7.66%
Worst Quarter Return Q1 1994 (2.27)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
------------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
------------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 1/11/93 5.64% 5.66% 6.80% 7.22%
------------------------------------------------------------------------------------------------------------------------------------
Return after taxes on 3.83% 3.20% 4.11% 4.43%
distributions
Return after taxes on
distributions and sale of 3.64% 3.26% 4.11% 4.42%
portfolio shares
Lehman Brothers Aggregate Bond Index* 4.10% 6.62% 6.95% 7.20%
------------------------------------------------------------------------------------------------------------------------------------
Class C Return before taxes 7/3/95 5.43% 5.42% N/A 6.68%
------------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index* 4.10% 6.62% N/A 7.22%
------------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 9/14/94 5.19% 5.19% N/A 7.33%
------------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index* 4.10% 6.62% N/A 7.67%
------------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
FIXED INCOME PORTFOLIOS
17
CORE BOND PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
2002 2003
------ ------
8.37% 4.05%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q3 2002 4.33%
Worst Quarter Return Q1 2002 (0.22)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
-----------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year Inception
-----------------------------------------------------------------------------------------------------------------
Class A Return before taxes 3/29/01 4.05% 5.92%
-----------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 2.65% 3.78%
Return after taxes on distributions
and sale of portfolio shares 2.62% 3.72%
Lehman Brothers Aggregate Bond Index* 4.10% 7.11%
-----------------------------------------------------------------------------------------------------------------
Class C Return before taxes 3/29/01 3.77% 5.79%
-----------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index* 4.10% 7.11%
-----------------------------------------------------------------------------------------------------------------
Class D Return before taxes 3/29/01 3.70% 5.77%
-----------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index* 4.10% 7.11%
-----------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not
reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and
may differ from those shown. After-tax returns shown are not relevant to investors who hold their shares
through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns
are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
18
U.S. TREASURY INDEX PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(3.41)% 17.81% 2.58% 9.63% 9.90% (2.93)% 13.17% 6.41% 11.57% 2.13%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q3 2002 7.40%
Worst Quarter Return Q1 1994 (2.94)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
---------------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
---------------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 1/11/93 2.13% 5.90% 6.48% 6.84%
---------------------------------------------------------------------------------------------------------------------------------
Return after taxes on 0.64% 5.38% 6.21% 6.53%
distributions
Return after taxes on
distributions and sale of 1.58% 5.40% 6.16% 6.46%
portfolio shares
Lehman Brothers Treasury Bond Index* 2.24% 6.18% 6.69% 7.05%
---------------------------------------------------------------------------------------------------------------------------------
Class C Return before taxes 10/6/98 1.88% 5.71% N/A 5.10%
---------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Treasury Bond Index* 2.24% 6.18% N/A 5.85%
---------------------------------------------------------------------------------------------------------------------------------
Class D Return before taxes 11/16/94 1.71% 5.51% N/A 7.25%
---------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Treasury Bond Index* 2.24% 6.18% N/A 7.87%
---------------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown.
After-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as 401(k)
plans or individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for other classes
will vary.
*The Index figures do not reflect any fees, expenses or taxes.
FIXED INCOME PORTFOLIOS
19
INTERMEDIATE BOND PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1998 1999 2000 2001 2002 2003
----- ------- ----- ----- ----- -----
7.13% (0.37)% 9.04% 8.00% 8.69% 4.04%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN Q3 2002 4.70%
WORST QUARTER RETURN Q2 1999 (0.64)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
-----------------------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
-----------------------------------------------------------------------------------------------------------------------------
Class A Return before taxes 8/1/97 4.04% 5.82% 5.95%
-----------------------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 2.80% 3.77% 3.80%
Return after taxes on distributions 2.61% 3.66% 3.71%
and sale of portfolio shares
Lehman Brothers Intermediate 4.31% 6.65% 6.94%
Government/Corporate Bond Index*
-----------------------------------------------------------------------------------------------------------------------------
Class D Return Before Taxes 10/2/98 3.70% 5.43% 5.10%
-----------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate Government/ 4.31% 6.65% 6.38%
Corporate Bond Index*
-----------------------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those
shown. After-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements, such as
401(k) plans or individual retirement accounts. After-tax returns are shown only for Class A Shares. After-tax returns for
other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
20
SHORT-INTERMEDIATE BOND PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ------ ----- ----- ----- ----- ----- ----- ----- ----
0.91% 12.06% 4.55% 6.76% 7.69% 1.41% 8.48% 6.92% 5.80% 3.21%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q2 1995 3.96%
Worst Quarter Return Q4 2001 (0.70)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
--------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
--------------------------------------------------------------------------------------------------------------
Class A Return before taxes 1/11/93 3.21% 5.13% 5.73% 5.80%
--------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 2.19% 2.75% 3.17% 3.29%
Return after taxes on distributions and sale of portfolio 2.08% 2.86% 3.26% 3.36%
shares
Merrill Lynch 1-5 Corporate/Government Bond Index* 3.30% 6.21% 6.25% 6.33%
--------------------------------------------------------------------------------------------------------------
Class D Return before taxes 9/14/94 2.81% 4.73% N/A 5.68%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-5 Corporate/Government Bond Index* 3.30% 6.21% N/A 6.70%
--------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do
not reflect the impact of state andlocal taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. After-tax returns shown are notrelevant to investors who hold
their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
After-taxreturns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
FIXED INCOME PORTFOLIOS
21
U.S. GOVERNMENT SECURITIES PORTFOLIO
CALENDAR YEAR TOTAL RETURN (CLASS A)
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
------- ------ ----- ----- ----- ----- ----- ----- ----- -----
(0.74)% 11.88% 4.11% 6.80% 6.92% 2.09% 8.40% 8.42% 7.84% 2.06%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q3 2001 4.09%
Worst Quarter Return Q1 1994 (1.13)%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
--------------------------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year 10-Year Inception
--------------------------------------------------------------------------------------------------------------
Class A Return before taxes 4/5/93 2.06% 5.72% 5.71% 5.64%
--------------------------------------------------------------------------------------------------------------
Return after taxes on distributions 0.69% 3.60% 3.49% 3.45%
Return after taxes on distributions and sale of portfolio 1.45% 3.59% 3.49% 3.45%
shares
Merrill Lynch 1-5 Government Index* 2.15% 5.82% 6.01% 5.94%
--------------------------------------------------------------------------------------------------------------
Class D Return before taxes 9/15/94 1.67% 5.31% N/A 5.77%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-5 Government Index* 2.15% 5.82% N/A 6.57%
--------------------------------------------------------------------------------------------------------------
After-tax returns are calculated using historical highest individual federal marginal income tax rates and do
not reflect the impact of state andlocal taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. After-tax returns shown are notrelevant to investors who hold
their shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts.
After-taxreturns are shown only for Class A Shares. After-tax returns for other classes will vary.
*The Index figures do not reflect any fees, expenses or taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
22
BROAD-BASED SECURITIES MARKET INDICES
The J.P. Morgan Non-U.S. Government Bond Index is an unmanaged index of prices
of non-U.S. government bonds with maturities of one to thirty years.
The Lehman Brothers Aggregate Bond Index is an unmanaged index of prices of
U.S. dollar-denominated investment grade fixed income securities with remaining
maturities of one year and longer.
The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index of prices of U.S. government and corporate bonds with remaining
maturities of one to ten years.
The Lehman Brothers Treasury Bond Index is an unmanaged index of prices of U.S.
Treasury bonds with maturities of one to thirty years.
The Merrill Lynch 1-5 Corporate/Government Bond Index is an unmanaged index of
prices of U.S. government and corporate bonds with maturities of one to five
years.
The Merrill Lynch 1-5 Government Index is an unmanaged index of prices of U.S.
Treasury notes with maturities of one to five years.
FIXED INCOME PORTFOLIOS
23
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Class A, C or D Shares of the Portfolios. Each class of shares represents pro
rata interests in a Portfolio except that different shareholder servicing and
transfer agency fees are payable due to the varying levels of administrative
support and transfer agency services provided to each class. Please note that
the following information does not reflect any charges that 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 37.)
[Enlarge/Download Table]
-----------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
-----------------------------------------------------------------------------------
Maximum Sales
Maximum Additional Charge (Load)
Sales Charge Transactional Fees Maximum Imposed on
(Load) Imposed (as a percentage of Deferred Sales Reinvested Redemption Exchange
Portfolio on Purchases amount invested) Charge (Load) Distributions Fees Fees
-------------------------------------------------------------------------------------------------------
International Bond
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
-------------------------------------------------------------------------------------------------------
Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
-------------------------------------------------------------------------------------------------------
Core Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
-------------------------------------------------------------------------------------------------------
U.S. Treasury Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
-------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
* As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
24
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
------------------------------------------------------------------------------------------------
Total Annual
Management Distribution Other Servicing Transfer Agency Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees Expenses/(1)/ Expenses/(2)/
------------------------------------------------------------------------------------------------
0.85% None 0.74% None 0.01% 0.73% 1.59%
0.85% None 0.98% 0.15% 0.10% 0.73% 1.83%
0.85% None 1.13% 0.25% 0.15% 0.73% 1.98%
------------------------------------------------------------------------------------------------
0.40% None 0.14% None 0.01% 0.13% 0.54%
0.40% None 0.38% 0.15% 0.10% 0.13% 0.78%
0.40% None 0.53% 0.25% 0.15% 0.13% 0.93%
------------------------------------------------------------------------------------------------
0.40% None 0.19% None 0.01% 0.18% 0.59%
0.40% None 0.43% 0.15% 0.10% 0.18% 0.83%
0.40% None 0.58% 0.25% 0.15% 0.18% 0.98%
------------------------------------------------------------------------------------------------
0.30% None 0.20% None 0.01% 0.19% 0.50%
0.30% None 0.44% 0.15% 0.10% 0.19% 0.74%
0.30% None 0.59% 0.25% 0.15% 0.19% 0.89%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
25
[Enlarge/Download Table]
-----------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
-----------------------------------------------------------------------------------
Maximum Sales
Maximum Additional Charge (Load)
Sales Charge Transactional Fees Maximum Imposed on
(Load) Imposed (as a percentage of Deferred Sales Reinvested Redemption Exchange
Portfolio on Purchases amount invested) Charge (Load) Distributions Fees Fees
--------------------------------------------------------------------------------------------------------------
Intermediate Bond
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
Short-Intermediate Bond
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
U.S. Government Securities
Class A None None None None None None
Class C* None None None None None None
Class D None None None None None None
--------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
26
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
------------------------------------------------------------------------------------------------
Total Annual
Management Distribution Other Servicing Transfer Agency Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees Expenses/(1)/ Expenses/(2)/
------------------------------------------------------------------------------------------------
0.40% None 0.27% None 0.01% 0.26% 0.67%
0.40% None 0.51% 0.15% 0.10% 0.26% 0.91%
0.40% None 0.66% 0.25% 0.15% 0.26% 1.06%
------------------------------------------------------------------------------------------------
0.40% None 0.15% None 0.01% 0.14% 0.55%
0.40% None 0.39% 0.15% 0.10% 0.14% 0.79%
0.40% None 0.54% 0.25% 0.15% 0.14% 0.94%
------------------------------------------------------------------------------------------------
0.40% None 0.16% None 0.01% 0.15% 0.56%
0.40% None 0.40% 0.15% 0.10% 0.15% 0.80%
0.40% None 0.55% 0.25% 0.15% 0.15% 0.95%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
27
FOOTNOTES
/1/"Other Operating Expenses," along with "Servicing Fees" and "Transfer Agency
Fees," is a subcategory of "Other Expenses" and includes co-administration
fees and all other ordinary operating expenses of the Portfolios not listed
above. The Co-Administrators are entitled to a co-administration fee from
the Portfolios at an annual rate of 0.15% of the average daily net assets of
the International Bond Portfolio, and 0.10% of the average daily net assets
of each other Portfolio. Under the Co-Administration Agreement with the
Trust, which may be amended without shareholder approval, the
Co-Administrators have agreed to reimburse expenses (including fees payable
to the Co-Administrators, but excluding management fees, transfer agency
fees, servicing fees, taxes, interest and other extraordinary expenses)
which exceed on an annualized basis 0.25% of the International Bond
Portfolio's average daily net assets and 0.10% of each other Portfolio's
average daily net assets.
/2/The Investment Advisers have voluntarily agreed to waive a portion of their
management fees, as shown below. Also set forth below are the distribution
(12b-1) fees, other expenses and total annual portfolio operating expenses
that are actually incurred by the Portfolios as a result of these voluntary
fee reductions and the expense reimbursements discussed in footnote 1.
Voluntary fee reductions may be modified, terminated or implemented at any
time at the option of the Investment Advisers or any other service provider
to the Portfolios. If this occurs, "Total Annual Operating Expenses" may
increase (or decrease) without shareholder approval.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
28
[Download Table]
--------------------------------------------------------------------------------
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
--------------------------------------------------------------------------------
International Bond
Class A 0.70% None 0.26% 0.96%
Class C* 0.70% None 0.50% 1.20%
Class D 0.70% None 0.65% 1.35%
--------------------------------------------------------------------------------
Bond
Class A 0.25% None 0.11% 0.36%
Class C 0.25% None 0.35% 0.60%
Class D 0.25% None 0.50% 0.75%
--------------------------------------------------------------------------------
Core Bond
Class A 0.25% None 0.11% 0.36%
Class C 0.25% None 0.35% 0.60%
Class D 0.25% None 0.50% 0.75%
--------------------------------------------------------------------------------
U.S. Treasury Index
Class A 0.15% None 0.11% 0.26%
Class C 0.15% None 0.35% 0.50%
Class D 0.15% None 0.50% 0.65%
--------------------------------------------------------------------------------
Intermediate Bond
Class A 0.25% None 0.11% 0.36%
Class C* 0.25% None 0.35% 0.60%
Class D 0.25% None 0.50% 0.75%
--------------------------------------------------------------------------------
Short-Intermediate Bond
Class A 0.25% None 0.11% 0.36%
Class C* 0.25% None 0.35% 0.60%
Class D 0.25% None 0.50% 0.75%
--------------------------------------------------------------------------------
U.S. Government Securities
Class A 0.25% None 0.11% 0.36%
Class C* 0.25% None 0.35% 0.60%
Class D 0.25% None 0.50% 0.75%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
FIXED INCOME PORTFOLIOS
29
EXAMPLE
The following Example is intended to help you compare the cost of investing in
a Portfolio (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 Portfolio 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 Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
[Download Table]
----------------------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
International Bond
Class A $162 $502 $866 $1,889
Class C $186 $576 $990 $2,148
Class D $201 $621 $1,068 $2,306
----------------------------------------------------------
Bond
Class A $55 $173 $302 $677
Class C $80 $249 $433 $966
Class D $95 $296 $515 $1,143
----------------------------------------------------------
Core Bond
Class A $60 $189 $329 $738
Class C $85 $265 $460 $1,025
Class D $100 $312 $542 $1,201
----------------------------------------------------------
U.S. Treasury Index
Class A $51 $160 $280 $628
Class C $76 $237 $411 $918
Class D $91 $284 $493 $1,096
----------------------------------------------------------
Intermediate Bond
Class A $68 $214 $373 $835
Class C $93 $290 $504 $1,120
Class D $108 $337 $585 $1,294
----------------------------------------------------------
Short-Intermediate Bond
Class A $56 $176 $307 $689
Class C $81 $252 $439 $978
Class D $96 $300 $520 $1,155
----------------------------------------------------------
U.S. Government Securities
Class A $57 $179 $313 $701
Class C $82 $255 $444 $990
Class D $97 $303 $525 $1,166
----------------------------------------------------------
----------------------------------------------------------
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
30
INVESTMENT ADVISERS
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser," formerly
known and conducting business as Northern Trust Investments, Inc.) and Northern
Trust Global Investments (Europe) Limited ("NTGIE"), each a direct or indirect
subsidiary of The Northern Trust Company ("TNTC"), serve jointly as the
Investment Advisers of the International Bond, Bond, Short-Intermediate Bond
and Intermediate Bond Portfolios. NTI serves as the Investment Adviser of each
of the other Portfolios. NTI is located at 50 South LaSalle Street, Chicago, IL
60675 and NTGIE is located at 6 Devonshire Square, London, EC2A 4YE, United
Kingdom. Unless otherwise indicated, NTI, NTGIE and TNTC are referred to
collectively in this Prospectus as "Northern Trust."
NTI is an investment adviser registered under the Investment Advisers Act of
1940. It primarily manages assets for defined contribution and benefit plans,
investment companies and other institutional investors.
NTGIE was formed in 2000 as a private company with limited liability under the
laws of the United Kingdom and is authorized and regulated by the U.K.
Financial Services Authority and registered with the Investment Management
Regulatory Organization. It is also registered as an investment adviser under
the Investment Advisers Act of 1940 with respect to its U.S. clients. NTGIE
primarily manages the assets of foreign and U.S. institutional clients,
including U.S. mutual funds.
TNTC is an Illinois state chartered banking organization and a member of the
Federal Reserve System. Formed in 1889, it administers and manages assets for
individuals, personal trusts, defined contribution and benefit plans and other
institutional and corporate clients. It is the principal subsidiary of Northern
Trust Corporation, a bank holding company.
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors, and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
Under the Advisory Agreement with Northern Institutional Funds, each Investment
Adviser, subject to the general supervision of Northern Institutional Funds'
Board of Trustees, is responsible for making investment decisions for the
Portfolios and for placing purchase and sale orders for portfolio securities.
FIXED INCOME PORTFOLIOS
31
ADVISORY FEES
As compensation for advisory services and the assumption of related expenses,
the Investment Advisers are 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 Portfolio's respective average daily net assets). The table
also reflects the advisory fees (after voluntary fee waivers) paid by the
Portfolios for the fiscal year ended November 30, 2003.
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Portfolios reflects the fact 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.
[Download Table]
-----------------------------------------------------------
Advisory Fee
Contractual Paid for Fiscal Year
Portfolio Rate Ended 11/30/03
-----------------------------------------------------------
International Bond 0.85% 0.70%
-----------------------------------------------------------
Bond 0.40% 0.25%
-----------------------------------------------------------
Core Bond 0.40% 0.25%
-----------------------------------------------------------
U.S. Treasury Index 0.30% 0.15%
-----------------------------------------------------------
Intermediate Bond 0.40% 0.25%
-----------------------------------------------------------
Short-Intermediate Bond 0.40% 0.25%
-----------------------------------------------------------
U.S. Government Securities 0.40% 0.25%
-----------------------------------------------------------
-----------------------------------------------------------
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
32
PORTFOLIO MANAGEMENT
THE INVESTMENT ADVISERS EMPLOY A TEAM APPROACH TO THE INVESTMENT MANAGEMENT
OF THE PORTFOLIOS.
BELOW IS INFORMATION REGARDING THE MANAGEMENT OF THE ACTIVELY MANAGED
PORTFOLIOS.
--------------------------------------------------------------------------------
Wayne G. Bowers, Vice President of Northern Trust, is the management team
leader for the International Bond Portfolio. Mr. Bowers has had such
responsibility since September 2002. Mr. Bowers joined Northern Trust in 1999
and manages various fixed income portfolios. From 1995 to 1999, he was a
proprietary trader with ABN AMRO London.
The management team leaders for the Bond, Core Bond and Intermediate Bond
Portfolios are Colin A. Robertson, Senior Vice President of Northern Trust, and
Matthew Toms, Vice President of Northern Trust. Mr. Robertson has had such
responsibility since November 2003, and Mr. Toms since April 2004. Mr.
Robertson joined Northern Trust in 1999 and manages various fixed income
portfolios. From 1996 to 1999, he was with Mellon Financial Corporation where
he was responsible for the management of securities lending cash collateral
positions. Mr. Toms joined Northern Trust in 2000 and has managed various fixed
income portfolios. From 1996 to 2000, Mr. Toms was with Lincoln Financial Group
where he had been a research analyst and fixed income portfolio manager.
The management team leader for the Short-Intermediate Bond Portfolio is Colin
A. Robertson. He has had such responsibility since September 2002.
FIXED INCOME PORTFOLIOS
33
OTHER PORTFOLIO SERVICES
TNTC serves as Transfer Agent and Custodian for each Portfolio. The Transfer
Agent performs various shareholder servicing functions, and any shareholder
inquiries should be directed to it. In addition, NTI and PFPC Inc. ("PFPC")
serve as Co-Administrators for the Portfolios. The fees that TNTC, NTI and PFPC
receive for their services in these capacities are described under "Portfolio
Fees and Expenses" and in the Additional Statement.
Pursuant to an exemptive order issued by the SEC concerning such arrangements,
TNTC also may render securities lending services to the Portfolios. For such
services, TNTC may receive a fee of up to 35% of the net revenue earned by a
Portfolio on each securities loan. In addition, cash collateral received by a
Portfolio in connection with a securities loan may be invested in shares of
other registered or unregistered portfolios that pay investment advisory or
other fees to NTI, TNTC or an affiliate.
TNTC, NTI and other Northern Trust affiliates may provide other services to the
Portfolios and receive compensation for such services, if consistent with the
1940 Act and the rules, exemptive orders and no-action letters issued by the
SEC thereunder. Unless required, investors in a Portfolio may or may not
receive specific notice of such additional services and fees.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
34
PURCHASING AND SELLING SHARES
PURCHASING SHARES
Institutional investors, acting on their own behalf or on behalf of customers
and other beneficial owners ("Customers"), may purchase shares of the
Portfolios through their institutional accounts at Northern Trust or an
affiliate. They also may purchase shares directly from the Trust. There is no
sales charge imposed on purchases of shares. Institutional investors include:
.. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
.. Corporations, partnerships, business trusts, and other institutions and
organizations.
The Portfolios currently offer a choice of three classes of shares to meet the
special needs of institutional investors ("Institutions").
Class A Shares are designed for Institutions that can obtain information about
their shareholder accounts and do not require the additional services available
to other classes.
Class C Shares are designed for Institutions that require the Transfer Agent
and a Service Organization to provide certain account-related services incident
to Customers being the beneficial owners of shares.
Class D Shares are designed for Institutions that require the Transfer Agent
and a Service Organization to provide them and their Customers with certain
account-related services and other information.
Different shareholder servicing and transfer agency fees are payable by each
class of shares (see "Portfolio Fees and Expenses" on page 24). In addition,
any person entitled to receive compensation for selling or servicing shares of
a Portfolio may receive different compensation with respect to one particular
class of shares over another in the same Portfolio.
OPENING AN ACCOUNT
You may purchase shares of the Portfolios through your institutional account at
Northern Trust (or an affiliate) or you may open an account directly with the
Trust with a minimum initial investment of $5 million in one or more
Portfolios. There is no minimum for subsequent investments.
Through an Institutional Account. If you are opening an institutional account
at Northern Trust, a Northern Trust representative can assist you with all
phases of your investment. To purchase shares through your account, contact
your Northern Trust representative for further information.
Directly from the Trust. An Institution may open a shareholder account and
purchase shares directly from the Trust as described in this Prospectus.
For your convenience, there are a number of ways to invest directly in the
Portfolios:
BY MAIL
.. Read this Prospectus carefully.
.. Complete and sign the New Account Application.
.. Include a certified corporate resolution (or other acceptable evidence of
authority).
.. Enclose a check or Federal Reserve draft payable to Northern Institutional
Funds.
.. Mail your check, corporate resolution (if needed) and completed New Account
Application to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
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.
FIXED INCOME PORTFOLIOS
35
BY TELEPHONE
.. Read this prospectus carefully.
.. Call the Northern Institutional Funds Center at 800/637-1380.
To open a new account please provide:
.. The name of the Portfolio in which you would like to invest
.. The number of shares or dollar amount to be invested
.. The method of payment
To add to an existing account, please provide:
.. The Institution's name
.. Your Account Number
BY WIRE OR AUTOMATED CLEARING HOUSE TRANSFER ("ACH TRANSFER")
To open a new account:
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. For more information about the purchase of shares, call the Northern
Institutional Funds Center at 800/637-1380.
To add to an existing account:
.. Have your bank wire federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10-Digit Portfolio Account Number)
(Reference Shareholder's Name)
SELLING SHARES
Through an Institutional Account. Institutions may sell (redeem) shares through
their institutional account by contacting their Northern Trust account
representative.
Directly through the Trust. Institutions that purchase shares directly from the
Trust may redeem their shares through the Transfer Agent in one of the
following ways:
BY MAIL
Send a written request to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
The letter of instruction must include:
.. The signature of a duly authorized person
.. Your Account Number
.. The name of the Portfolio
.. The number of shares or the dollar amount to be redeemed
BY TELEPHONE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. 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 WIRE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. You must have given prior authorization for expedited wire redemption.
.. The minimum amount that may be redeemed by this method is $10,000.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
36
ACCOUNT POLICIES AND OTHER INFORMATION
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in one or more Portfolios. There is no minimum for subsequent
investments. A $10,000 minimum applies for redemptions by wire. The Trust
reserves the right to waive purchase and redemption minimums and to determine
the manner in which a minimum is satisfied.
Calculating Share Price. The Trust issues shares and redeems shares at net
asset value ("NAV"). The NAV for each share class of a Portfolio is calculated
by dividing the value of the Portfolio's net assets attributed to that class by
the number of outstanding shares of that class. The NAV is calculated on each
Business Day as of 3:00 p.m., Central time for each class. The NAV used in
determining the price of your shares is the one calculated after your purchase
order is received and accepted and after your exchange or redemption order is
received in good order as described below.
Investments of the Portfolios for which market quotations are readily available
are priced at their market value. If market quotations are not readily
available, or if it is believed that that such quotations do not accurately
reflect fair value, the fair value of the Portfolios' investments may be
otherwise determined in good faith under procedures established by the
Trustees. For example, the Trust, in its discretion, may make adjustments to
the prices of securities held by a Portfolio if an event occurs after the
publication of market values normally used by a Portfolio but before the time
as of which the Portfolio calculates its NAV, depending on the nature and
significance of the event, consistent with applicable regulatory guidance. The
use of fair valuation involves the risk that the values used by the Portfolios
to price their investments may be higher or lower than the values used by other
unaffiliated investment companies and investors to price the same investments.
Short-term obligations held by a Portfolio are valued at their amortized cost
which, according to the Investment Adviser, approximates market value.
A Portfolio may hold foreign securities that trade on weekends or other days
when the Portfolio 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 Purchase Requests. Purchase requests received in good order and
accepted by the Transfer Agent or other authorized intermediary by 3:00 p.m.,
Central time, on any Business Day will be executed the day they are received by
the Transfer Agent or other authorized intermediary, at that day's closing
share price provided that:
.. The Transfer Agent receives payment by 3:00 p.m., Central time, on the same
Business Day; or
.. The order is placed by a financial or authorized intermediary and payment in
federal or other immediately available funds is received by the Transfer
Agent by the close of the same Business Day or on the next Business Day,
depending on the terms of the Trust's agreement with the intermediary; or
.. Payment in federal or other immediately available funds is received by the
next Business Day in an institutional account maintained with Northern Trust
or an affiliate.
Purchase requests received in good order 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. If an Institution pays for
shares by check, federal funds generally will become available within two
Business Days after a purchase order is received.
Miscellaneous Purchase Information.
.. Institutions are responsible for transmitting purchase orders and delivering
required funds on a timely basis.
.. Institutions are responsible for all losses and expenses of a Portfolio, and
purchase orders may be cancelled, in the event of any failure to make payment
according to the procedures outlined in this Prospectus. In addition, a $20
charge will be imposed if a check does not clear.
FIXED INCOME PORTFOLIOS
37
.. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
.. In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 40.
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., Central time, will be executed on the same day
at that day's closing share price (less any additional transaction fee, in the
case of an exchange).
Redemption and exchange requests received in good order by the Transfer Agent
or other authorized intermediary on a non-Business Day or after 3:00 p.m.,
Central time, on a Business Day will be executed the next Business Day, at that
day's closing share price (less any additional transaction fee, in the case of
an exchange).
Payment of Redemption Proceeds. Redemption proceeds will normally be sent or
credited on the Business Day following the Business Day on which such
redemption request is received in good order by the deadline noted above.
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds also
may be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed New Account Application,
including a corporate resolution or other acceptable evidence of authority.
.. The Trust may require any information reasonably necessary to ensure that
redemption has been duly authorized.
.. Redemption requests made to the Transfer Agent by mail must be signed by a
person authorized by acceptable documentation on file with the Transfer Agent.
.. The Trust 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 Portfolio.
.. If you are redeeming recently purchased shares, your redemption request may
not be honored until your check or electronic transaction has cleared. This
may delay your transaction for up to 15 days.
.. Institutions are responsible for transmitting redemption orders and crediting
their Customers' accounts with redemption proceeds on a timely basis.
.. The Trust and the Transfer Agent reserve the right to redeem shares held by
any shareholder in circumstances deemed to be in the best interest of a
Portfolio.
.. The Trust reserves the right to change or discontinue any of its redemption
procedures.
.. In certain circumstances, the Trust may advance the time by which redemption
and exchange orders must be received. See "Early Closings" on page 40.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of a Portfolio for shares of
other investment portfolios of the Trust. The registration of both accounts
involved must be identical. Both accounts must have the same owner's name and
title, if applicable. A $1,000 minimum applies to exchanges. An exchange is a
redemption of shares you own and the purchase of shares you are acquiring. It
is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days' written notice to shareholders and to reject any
exchange request. Exchanges are only available in states where an exchange
legally can be made. Before making an exchange you should read the Prospectus
for the shares you are acquiring.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
38
Excessive Trading in Portfolio Shares. The Trust discourages excessive
short-term trading that could be disruptive to the management of a Portfolio.
If a shareholder makes more than two "round trips" in a Portfolio during a
calendar quarter, the Trust may, in its discretion, refuse to process
additional purchase or exchange orders by the shareholder. A "round trip" is a
redemption or exchange out of a Portfolio followed by a purchase or exchange
into the same Portfolio. In addition, the Trust may, in its discretion, reject
any additional purchase or exchange order from a shareholder if the Trust
determines that the shareholder's short-term trading activity is excessive,
regardless of whether or not the shareholder has made two round trips in a
calendar quarter. It should be noted that the Trust's ability to monitor and
limit the trading activity of shareholders investing in a Portfolio through the
omnibus account of a financial intermediary may be significantly limited or
absent where the intermediary maintains the underlying shareholder accounts.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See
the Additional Statement for further information about the terms of these
purchases and redemptions.
Telephone Transactions. Telephone requests are recorded. 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, the Trust 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.
The Trust 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 certified corporate resolution,
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
Trust and Transfer Agent may charge a shareholder reasonable costs in locating
a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the New York
Stock Exchange ("the Exchange") is open for business. For the period April 1,
2004 through March 31, 2005, the Portfolios will be closed on the following
holidays: Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day (observed), Labor Day, Thanksgiving Day and Christmas Day
(observed).
Good Order. A purchase, redemption or exchange request is considered to be "in
good order" when all necessary information is provided and all required
documents are properly completed, signed and delivered, including a certified
resolution or other acceptable evidence of authority. Additionally, a purchase
order initiating the opening of an account will not be considered to be "in
good order" unless the investor has provided all information required by the
Trust's "Customer Identification Program" described below.
FIXED INCOME PORTFOLIOS
39
Customer Identification Program. Federal law requires the Trust to obtain,
verify and record identifying information, which may include the name, business
street address, taxpayer identification number or other identifying information
for each investor who opens or reopens an account with the Trust. Applications
without this information, or without an indication that a taxpayer
identification number has been applied for, may not be accepted. After
acceptance, to the extent permitted by applicable law or the Trust's customer
identification program, the Trust reserves the right to: (a) place limits on
account transactions until an Institution's identity is verified; (b) refuse an
investment in the Trust; or (c) involuntarily redeem an investor's shares and
close an account in the event that an investor's identity is not verified. The
Trust and its agents will not be responsible for any loss in an investor's
account resulting from the investor's delay in providing all required
identifying information or from closing an account and redeeming an investor's
shares when an investor's identity cannot be verified.
Early Closings. The Portfolios reserve the right to advance the time for
accepting purchase, redemption or exchange orders for same Business Day credit
when the Exchange closes or closes early, trading on the Exchange is
restricted, an emergency arises or as otherwise permitted by the SEC. In
addition, the Board of Trustees of the Portfolios may, for any Business Day,
decide to change the time as of which a Portfolio's NAV is calculated in
response to new developments such as altered trading hours, or as otherwise
permitted by the SEC.
Emergency Events. In the event the Exchange does not open for business because
of an emergency, the Trust may, but is not required to, open one or more
Portfolios for purchase, redemption and exchange transactions if the Federal
Reserve wire payment system is open. To learn whether a Portfolio is open for
business during an emergency situation, please call 800/637-1380 or visit
northerninstitutionalfunds.com.
Financial Intermediaries. The Trust may authorize certain Institutions acting
as financial intermediaries (including banks, trust companies, brokers and
investment advisers), to accept purchase, redemption and exchange orders from
their Customers on behalf of the Trust. These authorized intermediaries also
may designate other intermediaries to accept such orders, if approved by the
Trust. A Portfolio will be deemed to have received an order when the order is
accepted by the authorized intermediary, and the order will be priced at the
Portfolio's per share NAV next determined, provided that the authorized
intermediary forwards the order (and payment for any purchase order) to the
Transfer Agent on behalf of the Trust within agreed-upon time periods. If the
order (or payment for any purchase order) is not received by the Transfer Agent
within such time periods, the authorized intermediary may be liable for fees
and losses and the transaction may be cancelled.
Certain financial intermediaries, including affiliates of Northern Trust, may
perform (or arrange to have performed) various administrative support services
for Customers who are the beneficial owners of Class C or D Shares through
Servicing Agreements with the Trust ("Service Organizations"). These agreements
are permitted under the Trust's Shareholder Servicing Plan. The level of
support services required by an Institution and its Customers generally will
determine whether they purchase Class A, C or D Shares.
Administrative support services may include:
.. processing purchase, exchange and redemption requests from investors;
.. placing net purchase and redemption orders with the Transfer Agent;
.. providing necessary personnel and facilities to establish and maintain
investor accounts and records; and
.. providing information periodically to investors showing their positions in
Portfolio shares.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
40
Service Organizations will receive fees from the Portfolios for such services
at an annual rate of up to 0.15% and 0.25% of the average daily net asset value
of Class C and Class D Shares, respectively. These fees will be borne
exclusively by the beneficial owners of Class C and D Shares.
Northern Trust also may provide compensation to certain dealers and other
financial intermediaries, including affiliates of Northern Trust, that provide
services to their Customers who invest in the Trust or whose Customers purchase
significant amounts of a Portfolio'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 the Investment Advisers, (after
adjustments). This additional compensation will be paid by Northern Trust or
its affiliates and will not represent an additional expense to the Trust or its
shareholders.
Customers purchasing shares through a financial intermediary should read their
account agreements carefully. A financial intermediary's requirements may
differ from those listed in this Prospectus. A financial intermediary also may
impose account charges, such as asset allocation fees, account maintenance
fees, and other charges that will reduce the net return on an investment in a
Portfolio. If a Customer has agreed with a particular financial intermediary to
maintain a minimum balance and the balance falls below this minimum, the
Customer may be required to redeem all or a portion of the Customer's
investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation by a
Service Organization or other financial intermediary in connection with the
investment of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Reserve Board and
state banking commissions, and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult their legal counsel.
State securities laws regarding the registration of dealers may differ from
federal law. As a result, Service Organizations and other financial
intermediaries investing in the Portfolios on behalf of their Customers may be
required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Trust's fiscal year on November 30, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses, proxy
statements or information statements to all shareholders who share the same
mailing address with your account, you may revoke your consent at any time by
contacting the Northern Institutional Funds Center by phone at 800/637-1380 or
by mail at Northern Institutional Funds, P.O. Box 75986, Chicago, IL 60675-5986.
FIXED INCOME PORTFOLIOS
41
DIVIDENDS AND DISTRIBUTIONS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS OF EACH PORTFOLIO ARE AUTOMATICALLY
REINVESTED IN ADDITIONAL SHARES OF THE SAME PORTFOLIO WITHOUT ANY SALES
CHARGE OR ADDITIONAL PURCHASE PRICE AMOUNT.
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You may, however, elect to have dividends or capital gain distributions (or
both) paid in cash or reinvested in the same class of shares of another
Portfolio at their net asset value per share. If you would like to receive
dividends or distributions in cash or have them reinvested in another
Portfolio, 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 only may be reinvested in a
Portfolio in which you maintain an account.
The following table summarizes the general distribution policies for each of
the Portfolios. A Portfolio with an annual dividend or distribution policy may,
in some years, pay additional dividends or make additional distributions to the
extent necessary for the Portfolio to avoid incurring unnecessary tax
liabilities or for other reasons.
A Portfolio may pay additional dividends or make additional distributions to
the extent necessary for the Portfolio to avoid incurring unnecessary tax
liabilities or for other reasons.
[Download Table]
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Dividends, if any, Capital Gains, if any,
Portfolio Declared and Paid Declared and Paid
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International Bond Annually Annually
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Bond Monthly Annually
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Core Bond Monthly Annually
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U.S. Treasury Index Monthly Annually
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Intermediate Bond Monthly Annually
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Short-Intermediate Bond Monthly Annually
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U.S. Government Securities Monthly Annually
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
42
TAX CONSIDERATIONS
Each Portfolio intends to qualify as a regulated investment company for federal
tax purposes, and to distribute to shareholders substantially all of its net
investment income and net capital gain each year. In general, the Portfolios'
dividends and distributions will be taxable to you for federal, state and local
income tax purposes, unless you have a tax-advantaged account. Dividends and
distributions are taxable whether they are received in cash or reinvested in
Portfolio shares. For federal tax purposes, Portfolio distributions
attributable to short-term capital gains and net investment income are taxable
to you as ordinary income. Distributions attributable to any excess of net
long-term capital gains of a Portfolio over net short-term capital losses
generally are taxable to you as long-term capital gains. This is true no matter
how long you own your shares.
You should note that the Portfolios do not expect to pay dividends that are
eligible for the recently enacted reduced tax rates on corporate dividends.
This is because the Portfolios will generally be invested in debt instruments
and not in shares of stock on which dividend income will be received.
Dividends and distributions from each Portfolio will generally be taxable to
you in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of
ordinary income and capital gains distributed to your account for the previous
year.
It is not expected that any dividends paid by the Portfolios will qualify for
the dividends-received deduction for corporations.
A Portfolio's share price may, at any time, reflect undistributed capital gains
or income and unrealized appreciation. When these amounts are distributed, they
will be taxable to you. For this reason, you should be especially mindful that
if you buy shares on or just before the record date of a dividend or capital
gain distribution, you will pay the full price for the shares and then receive
back a portion of the money you have just invested in the form of a taxable
dividend or capital gain.
The sale of Portfolio shares is a taxable event on which a gain or loss may be
recognized. For tax purposes, an exchange is considered the same as a sale. The
amount of gain or loss is based on the difference between your tax basis in the
Portfolio shares and the amount you receive for them upon disposition.
Generally, you will recognize long-term capital gain or loss if you have held
your Portfolio shares for over twelve months at the time you sell or exchange
them. Shares held six months or less may also generate long-term capital loss
to the extent of any capital gains distributions received on the shares while
they were held by you. Additionally, any loss realized on a sale, exchange or
redemption of shares of a Portfolio may be disallowed under "wash sale" rules
to the extent the shares disposed of are replaced with other shares of that
Portfolio within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to a dividend
reinvestment in shares of that Portfolio. If disallowed, the loss will be
reflected in an adjustment to the basis of the shares acquired.
FIXED INCOME PORTFOLIOS
43
So long as more than 50% of the value of the total assets of the International
Bond Portfolio consists of stock or securities (including debt securities) of
foreign corporations at the close of a taxable year, the Portfolio may elect,
for federal income tax purposes, to treat certain foreign taxes paid by them,
including generally any withholding and other foreign income taxes, as paid by
their shareholders. If the Portfolio make this election, the amount of such
foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and such shareholders will be entitled either (a) to credit their
proportionate amounts of such taxes against their federal income tax
liabilities, or (b) to deduct such proportionate amounts from their federal
taxable income under certain circumstances.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States federal
income tax treatment. Your investment in the Portfolios could have additional
tax consequences. You should consult your tax professional for information
regarding all tax consequences applicable to your investments in the
Portfolios. More tax information is provided in the Additional Statement. This
short summary is not intended as a substitute for careful tax planning.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
44
RISKS, SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE PORTFOLIOS' PRINCIPAL
INVESTMENT STRATEGIES AND RELATED RISKS WHICH ARE SUMMARIZED IN THE
RISK/RETURN SUMMARIES FOR EACH PORTFOLIO. It also explores the various
investment securities and techniques that the investment management team may
use. The Portfolios may invest in other securities and are subject to further
restrictions and risks which are described in the Additional Statement.
Additionally, the Portfolios may purchase other types of securities or
instruments similar to those described in this section if otherwise
consistent with the Portfolios' investment objectives and policies.
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ADDITIONAL INFORMATION ON INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
Investment Objectives. The investment objectives of the Core Bond Portfolio and
Intermediate Bond Portfolio may be changed without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in a Portfolio having an investment objective different from the
objective that the shareholder considered appropriate at the time of investment
in the Portfolio. The investment objectives of the other Portfolios may not be
changed without shareholder approval.
Derivatives. The Portfolios may purchase certain "derivative" instruments for
hedging or speculative purposes. A derivative is a financial instrument whose
value is derived from--or based upon--the performance of underlying assets,
interest or currency exchange rates, or other indices. Derivative securities
include futures contracts, options, interest rate and currency swaps, forward
currency contracts and structured securities (including collateralized mortgage
obligations and other types of asset-backed securities, "stripped" securities
and various floating rate instruments, including leveraged "inverse floaters").
Investment Strategy. Under normal market conditions, a Portfolio may to a
moderate extent invest in derivative securities if the potential risks and
rewards are consistent with the Portfolio's objective, strategies and overall
risk profile. In unusual circumstances, including times of increased market
volatility, a Portfolio may make more significant investments in derivatives.
The Portfolios may use derivatives for hedging purposes to offset a potential
loss in one position by establishing an interest in an opposite position. The
Portfolios also may use derivatives for speculative purposes to invest for
potential income or capital gain. Each Portfolio may invest more than 5% of its
assets in derivative instruments for non-hedging purposes.
Special Risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio'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 Portfolio 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
recently have been developed and have not been tested over complete market
cycles. For these reasons, a Portfolio may suffer a loss whether or not the
analysis of the investment management team is accurate.
FIXED INCOME PORTFOLIOS
45
Foreign Investments. Foreign securities include direct investments in non-U.S.
dollar-denominated securities primarily traded outside of the United States and
dollar-denominated securities of foreign issuers. Foreign securities also
include indirect investments such as American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are receipts that are traded in the U.S., and entitle the
holder to all income and capital gain distributions that are paid out on the
underlying foreign shares. EDRs and GDRs are receipts that often trade on
foreign exchanges. They represent ownership in an underlying foreign or U.S.
security and generally are denominated in a foreign currency. Foreign
government obligations may include debt obligations of supranational entities,
including international organizations (such as the European Coal and Steel
Community and the International Bank for Reconstruction and Development, also
known as the World Bank) and international banking institutions and related
government agencies.
Investment Strategy. The International Bond Portfolio intends to invest a
substantial portion of its total assets in foreign securities. The Bond,
Intermediate Bond and Short-Intermediate Bond Portfolios may invest up to 25%
of their total assets in foreign securities including ADRs, EDRs and GDRs.
These Portfolios also may invest in foreign time deposits and other short-term
instruments. The Core Bond Portfolio may invest up to 25% of its total assets
in the U.S. dollar-denominated securities of foreign issuers. The U.S.
Government Securities Portfolio may make limited investments (but in no event
more than 20% of its net assets) in supranational obligations.
The International Bond Portfolio may invest more than 25% of its total assets
in the securities of issuers located in a single foreign country having
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. The International Bond
Portfolio may invest up to 25% of total assets in emerging markets.
Special Risks. Foreign securities involve special risks and costs, which are
considered by the Investment Adviser in evaluating creditworthiness of issuers
and making investment decisions for the Portfolios. 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 obligations. The performance of investments
in securities denominated in a foreign currency also will 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
otherwise could 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 also
may 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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
46
Additional risks are involved when investing in countries with emerging
economies or securities markets. These countries generally are located in the
Asia and Pacific regions, the Middle East, Eastern Europe, Central and South
America and Africa. In general, the securities markets of these countries are
less liquid, are subject to greater price volatility, have smaller market
capitalizations and have problems with securities registration and custody. In
addition, because the securities settlement procedures are less developed in
these countries, a Portfolio may be required to deliver securities before
receiving payment and also may 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 Portfolios.
While the Portfolios' investments may, if permitted, be denominated in foreign
currencies, the portfolio securities and other assets held by the Portfolios
are valued in U.S. dollars. Currency exchange rates may fluctuate significantly
over short periods of time causing a Portfolio'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 Portfolio is invested in foreign securities while
also maintaining currency positions, it may be exposed to greater combined
risk. The Portfolios' respective net currency positions may expose them to
risks independent of their securities positions.
On January 1, 1999, the European Economic and Monetary Union ("EMU") introduced
a new single currency called the euro. The euro has replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal
and Spain. In addition, ten new countries, Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, are preparing
for entry into the EMU in 2004.
The new European Central Bank has control over each country's monetary
policies. Therefore, the member countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The change to the euro as a single currency is relatively new and untested. The
elimination of currency risk among EMU countries has affected the economic
environment and behavior of investors, particularly in European markets, but
the long-term impact of those changes on currency values or on the business or
financial condition of European countries and issuers cannot be assessed fully
at this time. In addition, the introduction of the euro presents other unique
uncertainties, including the fluctuation of the euro relative to non-euro
currencies; 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 that now are or may in the
future become members of the European Union ("EU") will have an impact on the
euro. Also, it is possible that the euro could be abandoned in the future by
countries that have already adopted its use. These or other events, including
political and economic developments, could cause market disruptions, and could
affect adversely the value of securities held by the Portfolios. Because of the
number of countries using this single currency, a significant portion of the
assets held by certain Portfolios 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 & Poor's Rating Services ("S&P");
.. Baa or higher by Moody's Investors Service, Inc. ("Moody's");
.. BBB or higher by Fitch Ratings ("Fitch"); or
.. BBB or higher by Dominion Bond Rating Service Limited ("Dominion").
FIXED INCOME PORTFOLIOS
47
A security will be considered investment grade if it receives one of the above
ratings, or a comparable rating from another organization that is recognized as
an NRSRO, even if it receives a lower rating from other rating organizations.
An unrated security also may be considered investment grade if the Investment
Adviser determines the security is comparable in quality to a security that has
been rated investment grade.
Investment Strategy. The Portfolios may invest in fixed income and convertible
securities to the extent consistent with their respective investment policies.
Except as stated in the next section, fixed income and convertible securities
purchased by the Portfolios generally will be investment grade.
Special Risks. Although securities rated BBB by S&P, Dominion 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
Portfolio, a rated security may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio and may be in
default. The Investment Adviser will consider such an event in determining
whether a Portfolio should continue to hold the security.
Non-Investment Grade Securities. Non-investment grade fixed income and
convertible securities (sometimes referred to as "junk bonds") generally are
rated BB or below by S&P, Dominion or Fitch, or Ba or below by Moody's (or have
received a comparable rating from another NRSRO), or, if unrated, are
determined to be of comparable quality by the Investment Adviser.
Investment Strategy. The International Bond, Bond, Intermediate Bond and
Short-Intermediate Bond Portfolios may invest up to 20% of their total assets,
measured at the time of purchase, in non-investment grade securities, including
convertible securities, when the investment management team determines that
such securities are desirable in light of the Portfolios' investment objectives
and portfolio mix.
Special Risks. Non-investment grade securities are considered predominantly
speculative by traditional investment standards. The market value of these
low-rated securities tends to be more sensitive to individual corporate
developments and changes in interest rates and economic conditions than
higher-rated securities. In addition, they generally present a higher degree of
credit risk. Issuers of low-rated securities are often highly leveraged, so
their ability to repay their debt during an economic downturn or periods of
rising interest rates may be impaired. The risk of loss due to default by these
issuers also is greater because low-rated securities generally are unsecured
and often are subordinated to the rights of other creditors of the issuers of
such securities. Investment by a Portfolio 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 Portfolio of its initial investment and any anticipated income or
appreciation will be uncertain. A Portfolio also may incur additional expenses
in seeking recovery on defaulted securities.
The secondary market for lower quality securities is concentrated in relatively
few market makers and is dominated by institutional investors. Accordingly, the
secondary market for such securities is not as liquid as, and is more volatile
than, the secondary market for higher quality securities. In addition, market
trading volume for these securities generally is 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
Portfolio's ability to dispose of particular portfolio investments. A less
developed secondary market also may make it more difficult for a Portfolio 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 the Investment Adviser's credit analysis than would be the case
with investments in higher quality securities.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
48
Maturity Risk. Each Portfolio normally will maintain the dollar-weighted
average maturity of its portfolio 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 Portfolios 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
portfolio turnover rate a limiting factor in making investment decisions for a
Portfolio. A high portfolio turnover rate (100% or more) is likely to involve
higher brokerage commissions and other transaction costs, which could reduce a
Portfolio's return. It also may result in higher short-term capital gains that
are taxable to shareholders. See "Financial Highlights" for the Portfolios'
historical portfolio turnover rates.
Structured Securities. The value of such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
securities, 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. Examples of structured
securities include, but are not limited to, debt obligations, where the
principal repayment at maturity is determined by the value of a specified
security or securities index.
Investment Strategy. Each Portfolio 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
Portfolio 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 also may be
more volatile, less liquid and more difficult to accurately price than less
complex securities due to their derivative nature.
Tracking Risk. The U.S. Treasury Index Portfolio seeks to track the performance
of its benchmark index.
Investment Strategy. Under normal market conditions, the Investment Adviser
expects that the quarterly performance of the U.S. Treasury Index Portfolio,
before expenses, will track the performance of its benchmark within a 0.95
correlation coefficient.
Special Risks. The U.S. Treasury Index Portfolio is 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
Portfolio from achieving its investment objective.
FIXED INCOME PORTFOLIOS
49
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. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, 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 Securities Portfolio may purchase
securities that are secured or backed by mortgages issued by U.S. government
agencies, instrumentalities or sponsored enterprises or guaranteed by the U.S.
government. The International Bond, Bond, Core Bond, Intermediate Bond, and
Short-Intermediate Bond Portfolios may purchase these and other types of
asset-backed securities. Asset-backed securities are subject to the same
quality requirements as the other types of fixed income securities held by a
Portfolio.
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 also may 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 generally are 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 Portfolios may borrow money
and enter into reverse repurchase agreements. Reverse repurchase agreements
involve the sale of securities held by a Portfolio subject to the Portfolio's
agreement to repurchase them at a mutually agreed upon date and price
(including interest).
Investment Strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of the value of its
total assets (including the amount borrowed). Each Portfolio also may borrow up
to an additional 5% of the value of its total assets for temporary purposes.
The Portfolios may enter into reverse repurchase agreements when the investment
management team expects that the interest income to be earned from the
investment of the transaction proceeds will be greater than the related
interest expense.
Special Risks. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Portfolios decline in value while these
transactions are outstanding, the net asset value of the Portfolios'
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 Portfolio (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 Portfolio will
decline below the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Portfolio.
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. Convertible
securities offer 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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
50
Investment Strategy. The International Bond, Bond, Core Bond, Intermediate Bond
and Short-Intermediate Bond Portfolios may each acquire convertible securities.
These securities are subject to the same rating requirements as fixed income
securities held by a Portfolio.
Special Risks. The price of a convertible security normally will vary in some
proportion to changes in the price of the underlying common stock because of
either a conversion or exercise feature. However, the value of a convertible
security may not increase or decrease as rapidly as the underlying common
stock. Additionally, a convertible security normally also will provide income
and therefore is subject to interest rate risk. While convertible securities
generally offer lower interest or dividend yields than non-convertible fixed
income securities of similar quality, their value tends to increase as the
market value of the underlying stock increases and to decrease when the value
of the underlying stock decreases. Also, a Portfolio may be forced to convert a
security before it would otherwise choose, which may have an adverse effect on
the Portfolio's ability to achieve its investment objective.
Custodial Receipts. Custodial receipts are participations in trusts that hold
U.S. government, bank, corporate or other obligations. They entitle the holder
to future interest payments or principal payments or both on securities held by
the custodian.
Investment Strategy. To the extent consistent with their respective investment
objectives, the Portfolios may invest a portion of their assets in custodial
receipts. Investments by the U.S. Treasury Index and U.S. Government Securities
Portfolios in custodial receipts, if any, are anticipated to be minimal and in
no event will exceed 20% of the value of such Portfolios' net assets.
Special Risks. Like other stripped obligations (which are described below),
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.
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 International Bond, Bond, Intermediate Bond and
Short-Intermediate Bond Portfolios 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 International Bond, Bond, Intermediate Bond and
Short-Intermediate Bond Portfolios 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 Bond
Portfolio also may 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 Portfolio 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 Portfolio's
foreign holdings increases because of currency fluctuations. When used for
speculative purposes, forward currency exchange contracts may result in
additional losses that are not otherwise related to changes in the value of the
securities held by a Portfolio. The institutions that deal in forward currency
contracts are not required to continue to make markets in the currencies they
trade and these markets can experience periods of illiquidity.
FIXED INCOME PORTFOLIOS
51
Futures Contracts and Related Options. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell a specified
financial instrument or currency in the future at an agreed upon price. For
example, a futures contract may obligate a Portfolio, 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 Portfolio
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 Portfolio sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in futures contracts and options on futures contracts
on domestic or foreign exchanges or boards of trade. These investments may be
used for hedging purposes, to seek to increase total return or to maintain
liquidity to meet potential shareholder redemptions, invest cash balances or
dividends or minimize trading costs.
The Trust, on behalf of each Portfolio, has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act, and, therefore, is not subject to registration or regulation as a pool
operator under that Act with respect to the Portfolios.
Special Risks. Futures contracts and options present the following risks:
imperfect correlation between the change in market value of a Portfolio'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 potentially are 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.
Futures markets are highly volatile and the use of futures may increase the
volatility of a Portfolio's NAV. As a result of the low margin deposits
normally required in futures trading, a relatively small price movement in a
futures contract may result in substantial losses to a Portfolio. Futures
contracts and options on futures may be illiquid, and exchanges may limit
fluctuations in futures contract prices during a single day. 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 Portfolio may invest up to 15% of its net assets in
securities that are illiquid. If otherwise consistent with their investment
objectives and policies, the Portfolios may purchase commercial paper issued
pursuant to Section 4(2) of the 1933 Act and 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 an Investment Adviser
determines, under guidelines approved by the Trust's Board of Trustees, that an
adequate trading market exists.
Special Risks. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Portfolio. The practice of investing in Rule 144A
Securities could increase the level of a Portfolio'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 Portfolio to make cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits interest to the Portfolio for a set time period.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
52
Investment Strategy. The Bond, Core Bond, Intermediate Bond and
Short-Intermediate Bond Portfolios may invest in IFAs issued by insurance
companies that meet quality and credit standards established by the Investment
Adviser.
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 of the non-governmental issuer. In addition, the transfer of
IFAs may be restricted and an active secondary market in IFAs currently does
not exist. This means that it may be difficult or impossible to sell an IFA at
an appropriate price.
Interest Rate Swaps, Currency Swaps, Total Rate of Return Swaps, Credit Swaps,
and Interest Rate Floors, Caps and Collars. Interest rate and currency swaps
are contracts that obligate a Portfolio and another party to exchange their
rights to pay or receive interest or specified amounts of currency,
respectively. Interest rate floors entitle the purchasers to receive interest
payments if a specified index falls below a predetermined interest rate.
Interest rate caps entitle the purchasers to receive interest payments if a
specified index exceeds a predetermined interest rate. An interest rate collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates. Total rate of return swaps are contracts
that obligate a party to pay or receive interest in exchange for the payment by
the other party of the total return generated by a security, a basket of
securities, an index or an index component. Credit swaps are contracts
involving the receipt of floating or fixed rate payments in exchange for
assuming potential credit losses of an underlying security. Credit swaps give
one party to a transaction the right to dispose of or acquire an asset (or
group of assets), or the right to receive or make a payment from the other
party, upon the occurrence of specific credit events.
Investment Strategy. The Portfolios may enter into swap transactions and
transactions involving interest rate floors, caps and collars for hedging
purposes or to seek to increase total return.
Special Risks. The use of swaps and interest rate floors, caps and collars is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. Like other derivative securities, the instruments can be highly
volatile. If the Investment Adviser is incorrect in its forecasts of market
values, interest rates and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if these
instruments were not used. Because these instruments normally are illiquid, a
Portfolio may not be able to terminate its obligations when desired. In
addition, if a Portfolio is obligated to pay the return under the terms of a
total rate of return swap, Portfolio losses due to unanticipated market
movements potentially are unlimited. A Portfolio also may suffer a loss if the
other party to a transaction defaults.
Investment Companies. To the extent consistent with their respective investment
objectives and policies, the Portfolios may invest in securities issued by
other investment companies, including money market funds, index funds,
iShares/SM/ and other exchange-traded funds (or "ETFs"). Pursuant to an
exemptive order obtained from the SEC, other investment companies in which the
Portfolios may invest include money market funds which the Investment Advisers
or any of their affiliates serve as investment advisers.
Investment Strategy. Investments by a Portfolio in other investment companies,
including ETFs, will be subject to the limitations of the 1940 Act except as
permitted by SEC orders. The Portfolios may rely on SEC orders that permit them
to invest in certain ETFs beyond limits contained in the 1940 Act, subject to
certain terms and conditions. Although the Portfolios do not expect to do so in
the foreseeable future, each Portfolio is authorized to invest substantially
all of its assets in a single open end investment company or series thereof
that has substantially the same investment objective, policies and fundamental
restrictions as the Portfolio.
Special Risks. As a shareholder of another investment company, a Portfolio
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 Portfolio. A Portfolio's
FIXED INCOME PORTFOLIOS
53
investment in an ETF involves other considerations. In particular, shares of
ETFs are listed and traded on securities exchanges and in over-the-counter
markets, and the purchase and sale of these shares involve transaction fees and
commissions. In addition, shares of an ETF are issued in "creation units" and
are not redeemable individually except upon termination of the ETF. To redeem,
a Portfolio must accumulate enough shares of an ETF to reconstitute a creation
unit. The liquidity of a small holding of an ETF, therefore, will depend upon
the existence of a secondary market. Also, even though the market price of an
ETF is derived from the securities it owns, such price at any given time may be
at, below or above the ETF's net asset value.
Mortgage Dollar Rolls. A mortgage dollar roll involves the sale by a Portfolio
of securities for delivery in the future (generally within 30 days). The
Portfolio simultaneously contracts with the same counterparty to repurchase
substantially similar (same type, coupon and maturity) but not identical
securities on a specified future date. During the roll period, the Portfolio
loses the right to receive principal and interest paid on the securities sold.
However, the Portfolio benefits to the extent of any difference between (a) the
price received for the securities sold and (b) the lower forward price for the
future purchase and/or fee income plus the interest earned on the cash proceeds
of the securities sold.
Investment Strategy. Each Portfolio may enter into mortgage dollar rolls in an
effort to enhance investment performance. For financial reporting and tax
purposes, the Portfolios treat mortgage dollar rolls as two separate
transactions: one involving the purchase of a security and a separate
transaction involving a sale. The Portfolios currently do not intend to enter
into mortgage dollar rolls that are accounted for as financing and do not treat
them as borrowings.
Special Risks. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's ability to predict correctly interest rates and mortgage
prepayments. If the Investment Adviser is incorrect in its prediction, a
Portfolio may experience a loss. Unless the benefits of a mortgage dollar roll
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
roll, the use of this technique will diminish the Portfolio's performance.
Options. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may write (sell) covered call options, buy put options, buy call
options and write secured put options for hedging (or cross-hedging) purposes
or to earn additional income. Options may relate to particular securities,
foreign or domestic securities indices, financial instruments or foreign
currencies.
Special Risks. Options trading is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
Portfolio 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 Portfolio will invest and trade in unlisted over-the-counter options only
with firms deemed creditworthy by the Investment Adviser. However, unlisted
options are not subject to the protections afforded purchasers of listed
options by the Options Clearing Corporation, which performs the obligations of
its members which fail to perform them in connection with the purchase or sale
of options.
Preferred Stock. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock owners but after bond owners.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
54
Investment Strategy. To the extent consistent with their respective investment
objectives and policies, the International Bond, Bond, Core Bond, Intermediate
Bond and Short-Intermediate Bond Portfolio, may invest in preferred stocks.
Special Risks. Unlike most debt securities, the obligations of an issuer of
preferred stock, including dividend and other payment obligations, typically
may not be accelerated by the holders of such preferred stock on the occurrence
of an event of default or other non-compliance by the issuer of the preferred
stock.
Real Estate Investment Trusts ("REITs"). REITs are pooled investment vehicles
that invest primarily in either real estate or real estate related loans.
Investment Strategy. The Portfolios 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 also are subject to risks generally
associated with investments in real estate. A Portfolio 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 Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment Strategy. Each Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement never will occur more than one year after a Portfolio acquires the
securities.
Special Risks. In the event of a default, a Portfolio 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 Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In addition,
in the event of bankruptcy, a Portfolio could suffer additional losses if a
court determines that the Portfolio's interest in the collateral is
unenforceable by the Portfolio.
Securities Lending. In order to generate additional income, the Portfolios may
lend securities to banks, brokers and dealers or other qualified institutions.
In exchange, the Portfolios 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 Portfolio's total assets (including the loan collateral). Any
cash collateral received by a Portfolio in connection with these loans may be
invested in a variety of short-term investments, either directly or indirectly
through money market portfolios. Such instruments are not limited to U.S.
government securities and may include short-term obligations of banks and other
corporations. Loan collateral (including any investment of the collateral) is
not included in the calculation of the percentage limitations described
elsewhere in this Prospectus regarding a Portfolio's investments in particular
types of securities.
Special Risks. A principal 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 Portfolio could experience delays in recovering
its securities and may incur a capital loss. A Portfolio will be responsible
for any loss that might result from its investment of the cash collateral it
receives from a borrower. Additionally, the amount of income to shareholders of
a Portfolio that is taxable at the state level may increase as a result of such
Portfolio's securities lending activities. Any state tax-exempt interest paid
on securities while on loan
FIXED INCOME PORTFOLIOS
55
will not be deemed to have been received by such Portfolio, and the equivalent
amount paid by the borrower of the securities to the Portfolio will not be
deemed to be dividends exempt from state taxes, but is likely to be deemed
taxable income to shareholders.
Stripped Obligations. These securities are issued by the U.S. government (or an
agency, instrumentality or a sponsored enterprise), 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 Portfolios 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
either interest rates or principal prepayments could depress the price of
stripped securities held by the Portfolios and adversely affect a Portfolio's
total return.
Temporary Investments. The Portfolios temporarily may hold cash and/or invest
in short-term obligations including U.S. government obligations, 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.
Investment Strategy. A Portfolio temporarily may hold cash or invest all or any
portion of its assets in short-term obligations pending investment or to meet
anticipated redemption requests. Except for the U.S. Treasury Index Portfolio,
a Portfolio also may hold cash or invest in short-term obligations as a
temporary measure mainly designed to limit a Portfolio's losses in response to
adverse market, economic or other conditions when the Investment Adviser
believes that it is in the best interest of the Portfolio to pursue such
defensive strategy. The Investment Adviser may, however, choose not to make
such temporary investments even in very volatile or adverse conditions.
Special Risks. A Portfolio may not achieve its investment objective when it
holds cash or invests its assets in short-term obligations or otherwise makes
temporary investments. A Portfolio also may miss investment opportunities and
have a lower total return during these periods.
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, its agencies, instrumentalities or
sponsored enterprises. Securities guaranteed as to principal and interest by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
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, an agency, instrumentality or sponsored enterprise thereof, and (b)
participations in loans made to foreign governments or their agencies that are
so guaranteed.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in a variety of U.S. Treasury obligations and, with
the exception of the U.S. Treasury Index Portfolio, also may invest in
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
Special Risks. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("Ginnie Mae"), 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 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 or sponsored enterprise. No assurance can be
given that the U.S. government would provide financial support to its
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
56
agencies, instrumentalities or sponsored enterprises 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 periodically are adjusted either at set intervals or
that float at a margin tied to a specified 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 Portfolio obtains
at the time of purchase the right to put the bond back to the issuer or a third
party at par at a specified date and leveraged inverse floating rate
instruments ("inverse floaters"). An inverse floater is leveraged to the extent
that its interest rate varies by an amount that exceeds the amount of the
variation in the index rate of interest. Some variable and floating rate
instruments have interest rates that periodically are adjusted as a result of
changes in inflation rates.
Investment Strategy. Each Portfolio may invest in variable and floating rate
instruments to the extent consistent with its investment objective.
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 Portfolios are not entitled to exercise their demand rights. As a result,
the Portfolios could suffer a loss with respect to these instruments.
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 Portfolio may purchase or sell securities on a
when-issued, delayed-delivery or forward commitment basis. Although the
Portfolios generally would purchase securities in these transactions with the
intention of acquiring the securities, the Portfolios may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special Risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities may
decrease by the time they actually are issued or delivered. Conversely, selling
securities in these transactions involves the risk that the value of the
securities may increase by the time they actually are issued or delivered.
These transactions also involve the risk that the counterparty 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 typically
are 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 Portfolio 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 Portfolio's investments in zero coupon,
pay-in-kind and capital appreciation bonds may require the Portfolio to sell
some of its Portfolio securities to generate sufficient cash to satisfy certain
income distribution requirements.
FIXED INCOME PORTFOLIOS
57
DISCLAIMERS
The U.S. Treasury Index Portfolio is not sponsored, endorsed, sold or promoted
by Lehman, nor does Lehman guarantee the accuracy and/or completeness of the
Lehman Index or any data included therein. Lehman makes no warranty, express or
implied, as to the results to be obtained by the Portfolio, owners of the
Portfolio or any person or entity from the use of the Lehman Index or any data
included therein. Lehman makes no express or implied warranties and expressly
disclaims all such warranties of merchantability or fitness for a particular
purpose or use with respect to the Lehman Index or any data included therein.
TNTC is sometimes referred to as "The Northern Trust Bank" in advertisements
and other sales literature.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
58
FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND A
PORTFOLIO'S FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS (OR, IF SHORTER,
THE PERIOD OF THE PORTFOLIO'S OPERATIONS).
Certain information reflects financial results for a single Portfolio share.
The total returns in the tables represent the rate that an investor would
have earned or lost on an investment in a Portfolio for a share held for the
entire period (assuming reinvestment of all dividends and distributions).
This information has been audited by Ernst & Young LLP, whose report, along
with the Portfolios' financial statements, is included in the Portfolios'
annual report, which is available upon request and without charge. As of
November 30, 2003, no Class C Shares of the International Bond, Intermediate
Bond, Short-Intermediate Bond and U.S. Government Securities Portfolios were
outstanding.
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FIXED INCOME PORTFOLIOS
59
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND PORTFOLIO
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CLASS A
Selected per share data 2003/(4)/ 2002/(4)/ 2001 2000 1999
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Net asset value, beginning of period $19.48 $18.77 $17.74 $18.86 $21.35
Income (loss) from investment operations:
Net investment income (loss) 1.54 0.67 0.71 (1.38) 0.96
Net realized and unrealized gains (losses) 1.72 0.62 0.32 0.26 (2.07)
Total income (loss) from investment operations 3.26 1.29 1.03 (1.12) (1.11)
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Less distributions paid:
From net investment income/(1)/ (1.96) (0.58) -- -- (1.24)
From net realized gains -- -- -- -- (0.14)
Total distributions paid (1.96) (0.58) -- -- (1.38)
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Net asset value, end of period $20.78 $19.48 $18.77 $17.74 $18.86
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Total return/(2)/ 18.32% 7.06% 5.81% (5.94)% (5.76)%
Supplemental data and ratios:
Net assets, in thousands, end of period $11,917 $26,188 $26,969 $28,905 $28,397
Ratio to average net assets of:/(3)/
Expenses, net of waivers and reimbursements 0.96% 0.96% 0.96% 0.96% 0.96%
Expenses, before waivers and reimbursements 1.59% 1.37% 1.52% 1.54% 1.44%
Net investment income, net of waivers and reimbursements 2.21% 3.61% 4.11% 3.86% 4.89%
Net investment income, before waivers and reimbursements 1.58% 3.20% 3.55% 3.28% 4.41%
Portfolio Turnover Rate 62.15% 201.22% 371.96% 179.26% 17.85%
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(1)Distributions to shareholders from net investment income include amounts
relating to foreign currency transactions which are treated as ordinary
income for federal income tax purposes.
(2)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(3)Annualized for periods less than one year.
(4)Financial highlights for the years ended were calculated using the average
shares outstanding method.
(5)Shares were reintroduced on September 5, 2002. Financial highlights were
calculated using the average shares outstanding method.
(6)No shares outstanding for the period August 23, 1999 through September 4,
2002.
(7)Class D shares were fully redeemed as of August 22, 1999. As such, no total
return or supplemental data and ratios were presented for the fiscal years
ended November 30, 1999-2001.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
60
FOR THE FISCAL YEARS ENDED NOVEMBER 30
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CLASS D
2003/(4)/ 2002/(5)/ 2001/(6)/ 2000/(6)/ 1999/(7)/
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$19.46 $19.71 -- -- $21.26
1.39 0.19 -- -- 0.29
1.72 (0.44) -- -- (1.25)
3.11 (0.25) -- -- (0.96)
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(1.96) -- -- -- (0.54)
-- -- -- -- (0.14)
(1.96) -- -- -- (0.68)
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$20.61 $19.46 -- -- $19.62/(7)/
-----------------------------------------------------
17.48% (1.27)% -- -- --
$1 $104 -- -- --
1.35% 1.35% -- -- --
1.98% 1.76% -- -- --
1.82% 3.22% -- -- --
1.19% 2.81% -- -- --
62.15% 201.22% -- -- --
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FIXED INCOME PORTFOLIOS
61
FINANCIAL HIGHLIGHTS
BOND PORTFOLIO
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CLASS A
Selected per share data 2003/(2)/ 2002/(2)(3)/ 2001 2000 1999
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Net asset value, beginning of year $19.81 $19.94 $19.49 $19.31 $21.61
Income (loss) from investment operations:
Net investment income 0.84 1.04 1.28 1.37 1.35
Net realized and unrealized gains (losses) 0.42 (0.08) 0.45 0.21 (1.63)
Total income (loss) from investment operations 1.26 0.96 1.73 1.58 (0.28)
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Less distributions paid:
From net investment income (0.93) (1.09) (1.28) (1.40) (1.34)
From net realized gains -- -- -- -- (0.68)
Total distributions paid (0.93) (1.09) (1.28) (1.40) (2.02)
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Net asset value, end of year $20.14 $19.81 $19.94 $19.49 $19.31
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Total return/(1)/ 6.45% 4.99% 9.08% 8.56% (1.35)%
Supplemental data and ratios:
Net assets, in thousands, end of year $593,559 $697,601 $877,920 $1,034,495 $879,161
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Expenses, before waivers and reimbursements 0.54% 0.59% 0.74% 0.74% 0.74%
Net investment income, net of waivers and
reimbursements 4.14% 5.27% 6.38% 7.23% 6.95%
Net investment income, before waivers and
reimbursements 3.96% 5.04% 6.00% 6.85% 6.57%
Portfolio Turnover Rate 325.90% 277.45% 297.81% 143.72% 72.61%
----------------------------------------------------------------------------------------------------------
(1)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.
(2)Financial highlights for the years ended were calculated using the average
shares outstanding method.
(3)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
62
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------
CLASS C CLASS D
2003/(2)/ 2002/(2)(3)/ 2001/(2)/ 2000/(2)/ 1999 2003/(2)/ 2002/(2)(3)/ 2001/(2)/ 2000/(2)/ 1999
---------------------------------------------------------------------------------------------------------
$19.81 $19.93 $19.48 $19.30 $21.60 $19.78 $19.91 $19.47 $19.28 $21.58
0.82 1.01 1.23 1.31 1.32 0.74 0.90 0.43 1.23 1.31
0.39 (0.09) 0.45 0.22 (1.65) 0.43 (0.02) 1.21 0.23 (1.67)
1.21 0.92 1.68 1.53 (0.33) 1.17 0.88 1.64 1.46 (0.36)
---------------------------------------------------------------------------------------------------------
(0.88) (1.04) (1.23) (1.35) (1.29) (0.85) (1.01) (1.20) (1.27) (1.26)
-- -- -- -- (0.68) -- -- -- -- (0.68)
(0.88) (1.04) (1.23) (1.35) (1.97) (0.85) (1.01) (1.20) (1.27) (1.94)
---------------------------------------------------------------------------------------------------------
$20.14 $19.81 $19.93 $19.48 $19.30 $20.10 $19.78 $19.91 $19.47 $19.28
---------------------------------------------------------------------------------------------------------
6.24% 4.73% 8.83% 8.33% (1.59)% 6.00% 4.60% 8.64% 7.92% (1.74)%
$3,624 $9,874 $21,144 $39,868 $62,557 $329 $317 $187 $144 $1,497
0.60% 0.60% 0.60% 0.60% 0.60% 0.75% 0.75% 0.75% 0.75% 0.75%
0.78% 0.83% 0.98% 0.98% 0.98% 0.93% 0.98% 1.13% 1.13% 1.13%
3.90% 5.03% 6.14% 6.99% 6.71% 3.75% 4.88% 5.99% 6.84% 6.56%
3.72% 4.80% 5.76% 6.61% 6.33% 3.57% 4.65% 5.61% 6.46% 6.18%
325.90% 277.45% 297.81% 143.72% 72.61% 325.90% 277.45% 297.81% 143.72% 72.61%
---------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
63
FINANCIAL HIGHLIGHTS
CORE BOND PORTFOLIO
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------
CLASS A CLASS C
Selected per share data 2003 2002/(3)(4)/ 2001/(5)/ 2003 2002/(3)(4)/ 2001/(5)/
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.92 $10.06 $10.00 $9.92 $10.01 $10.00
Income from investment operations:
Net investment income 0.33 0.50 0.40 0.33 0.50 0.40
Net realized and unrealized gains 0.17 0.03 0.05 0.15 0.07 --
Total income from investment operations 0.50 0.53 0.45 0.48 0.57 0.40
-----------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.38) (0.54) (0.39) (0.37) (0.53) (0.39)
From net realized gains -- (0.13) -- -- (0.13) --
Total distributions paid (0.38) (0.67) (0.39) (0.37) (0.66) (0.39)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.04 $9.92 $10.06 $10.03 $9.92 $10.01
-----------------------------------------------------------------------------------------------------------------
Total return/(1)/ 5.04% 5.61% 4.54% 4.76% 6.04% 4.05%
Supplemental data and ratios:
Net assets, in thousands, end of period $110,907 $103,184 $155,542 $1 $1 $--
Ratio to average net assets of:/(2)/
Expenses, net of waivers and
reimbursements 0.36% 0.36% 0.36% 0.60% 0.60% 0.60%
Expenses, before waivers and
reimbursements 0.59% 0.68% 0.81% 0.83% 0.92% 1.05%
Net investment income, net of waivers
and reimbursements 3.27% 5.13% 5.91% 3.03% 4.89% 5.67%
Net investment income, before waivers
and reimbursements 3.04% 4.81% 5.46% 2.80% 4.57% 5.22%
Portfolio turnover rate 380.92% 257.35% 197.85% 380.92% 257.35% 197.85%
-----------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
(4)Financial highlights for the year ended were calculated using the average
shares outstanding method.
(5)For the period March 29, 2001 (commencement of operations) through November
30, 2001.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
64
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
--------------------------------
CLASS D
2003 2002/(3)(4)/ 2001/(5)/
--------------------------------
$9.93 $10.01 $10.00
0.33 0.50 0.40
0.14 0.08 --
0.47 0.58 0.40
--------------------------------
(0.34) (0.53) (0.39)
-- (0.13) --
(0.34) (0.66) (0.39)
--------------------------------
$10.06 $9.93 $10.01
--------------------------------
4.80% 6.07% 4.05%
$1 $1 $--
0.75% 0.75% 0.75%
0.98% 1.07% 1.20%
2.88% 4.74% 5.52%
2.65% 4.42% 5.07%
380.92% 257.35% 197.85%
--------------------------------
..
FIXED INCOME PORTFOLIOS
65
FINANCIAL HIGHLIGHTS
U.S. TREASURY INDEX PORTFOLIO
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $21.99 $21.90 $21.06 $20.25 $21.77
Income (loss) from investment operations:
Net investment income 0.77 0.94 1.11 1.19 1.09
Net realized and unrealized gains (losses) 0.06 0.63 0.85 0.83 (1.54)
Total income (loss) from investment operations 0.83 1.57 1.96 2.02 (0.45)
-----------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.77) (0.93) (1.12) (1.21) (1.07)
From net realized gains (0.44) (0.55) -- -- --
Total distributions paid (1.21) (1.48) (1.12) (1.21) (1.07)
-----------------------------------------------------------------------------------------------------------
Net asset value, end of year $21.61 $21.99 $21.90 $21.06 $20.25
-----------------------------------------------------------------------------------------------------------
Total return/(1)/ 3.78% 7.62% 9.55% 10.31% (2.10)%
Supplemental data and ratios:
Net assets, in thousands, end of year $63,061 $49,429 $44,323 $34,979 $22,033
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.26% 0.26% 0.26% 0.26% 0.26%
Expenses, before waivers and reimbursements 0.50% 0.56% 0.75% 0.84% 0.77%
Net investment income, net of waivers and reimbursements 3.53% 4.36% 5.23% 5.86% 5.24%
Net investment income, before waivers and reimbursements 3.29% 4.06% 4.74% 5.28% 4.73%
Portfolio turnover rate 65.88% 89.88% 102.56% 110.97% 84.77%
-----------------------------------------------------------------------------------------------------------
(1)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.
(2)Financial highlights for the years ended were calculated using the average
shares outstanding method.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
66
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------
CLASS C CLASS D
2003 2002 2001 2000/(2)/ 1999 2003/(2)/ 2002 2001/(2)/ 2000/(2)/ 1999/(2)/
---------------------------------------------------------------------------------------------
$21.98 $21.89 $21.09 $20.25 $21.81 $21.97 $21.88 $21.04 $20.22 $21.74
0.71 0.89 1.09 1.21 0.96 0.68 0.71 1.00 1.12 1.05
0.06 0.64 0.79 0.79 (1.50) 0.07 0.78 0.88 0.83 (1.59)
0.77 1.53 1.88 2.00 (0.54) 0.75 1.49 1.88 1.95 (0.54)
---------------------------------------------------------------------------------------------
(0.71) (0.89) (1.08) (1.16) (1.02) (0.69) (0.85) (1.04) (1.13) (0.98)
(0.44) (0.55) -- -- -- (0.44) (0.55) -- -- --
(1.15) (1.44) (1.08) (1.16) (1.02) (1.13) (1.40) (1.04) (1.13) (0.98)
---------------------------------------------------------------------------------------------
$21.60 $21.98 $21.89 $21.09 $20.25 $21.59 $21.97 $21.88 $21.04 $20.22
---------------------------------------------------------------------------------------------
3.58% 7.38% 9.12% 10.21% (2.49)% 3.42% 7.22% 9.12% 9.97% (2.50)%
$1,938 $2,947 $1,047 $341 $194 $2,121 $531 $229 $117 $177
0.50% 0.50% 0.50% 0.50% 0.50% 0.65% 0.65% 0.65% 0.65% 0.65%
0.74% 0.80% 0.99% 1.08% 1.01% 0.89% 0.95% 1.14% 1.23% 1.16%
3.29% 4.12% 4.99% 5.62% 5.00% 3.14% 3.97% 4.84% 5.47% 4.85%
3.05% 3.82% 4.50% 5.04% 4.49% 2.90% 3.67% 4.35% 4.89% 4.34%
65.88% 89.88% 102.56% 110.97% 84.77% 65.88% 89.88% 102.56% 110.97% 84.77%
---------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
67
FINANCIAL HIGHLIGHTS
INTERMEDIATE BOND PORTFOLIO
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003 2002/(2)/ 2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $20.15 $19.83 $18.99 $18.98 $20.15
Income (loss) from investment operations:
Net investment income 0.68 0.80 1.05 1.26 1.10
Net realized and unrealized gains (losses) 0.39 0.33 0.85 0.01 (1.05)
Total income (loss) from investment operations 1.07 1.13 1.90 1.27 0.05
------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.69) (0.81) (1.06) (1.26) (1.10)
From net realized gains -- -- -- -- (0.12)
Total distributions paid (0.69) (0.81) (1.06) (1.26) (1.22)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $20.53 $20.15 $19.83 $18.99 $18.98
------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 5.40% 5.80% 10.27% 7.00% 0.25%
Supplemental data and ratios:
Net assets, in thousands, end of year $45,728 $45,186 $44,372 $28,950 $49,414
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.37%/(3)/ 0.36%
Expenses, before waivers and reimbursements 0.67% 0.72% 0.98% 0.94% 0.80%
Net investment income, net of waivers and reimbursements 3.21% 4.05% 5.49% 6.37% 5.65%
Net investment income, before waivers and reimbursements 2.90% 3.69% 4.87% 5.80% 5.21%
Portfolio turnover rate 336.00% 250.64% 254.48% 60.37% 193.44%
------------------------------------------------------------------------------------------------------------------
(1)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.
(2)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
(3)Expense ratios, net of waivers and reimbursements, for the year would have
been 0.36% and 0.75% for Class A and Class D, respectively, absent the
effect of interest expense incurred by the Portfolio's temporary borrowings
against a line of credit.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
68
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
--------------------------------------------------
CLASS D
2003 2002/(2)/ 2001 2000 1999
--------------------------------------------------
$20.13 $19.82 $18.96 $18.95 $20.13
0.60 0.73 1.01 1.11 1.06
0.40 0.32 0.84 0.09 (1.10)
1.00 1.05 1.85 1.20 (0.04)
--------------------------------------------------
(0.61) (0.74) (0.99) (1.19) (1.02)
-- -- -- -- (0.12)
(0.61) (0.74) (0.99) (1.19) (1.14)
--------------------------------------------------
$20.52 $20.13 $19.82 $18.96 $18.95
--------------------------------------------------
4.95% 5.41% 9.98% 6.62% (0.21)%
$96 $68 $27 $27 $26
0.75% 0.75% 0.75% 0.76%/(3)/ 0.75%
1.06% 1.11% 1.37% 1.33% 1.19%
2.82% 3.66% 5.19% 5.98% 5.26%
2.51% 3.30% 4.57% 5.41% 4.82%
336.00% 250.64% 254.48% 60.37% 193.44%
--------------------------------------------------
FIXED INCOME PORTFOLIOS
69
FINANCIAL HIGHLIGHTS
SHORT-INTERMEDIATE BOND PORTFOLIO
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003 2002/(2)(3)/ 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $18.62 $18.67 $18.28 $18.50 $20.03
Income from investment operations:
Net investment income 0.52 0.79 1.07 1.36 1.79
Net realized and unrealized gains (losses) 0.23 (0.07) 0.46 (0.13) (1.36)
Total income from investment operations 0.75 0.72 1.53 1.23 0.43
--------------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.55) (0.77) (1.14) (1.45) (1.69)
From net realized gains -- -- -- -- (0.27)
Total distributions paid (0.55) (0.77) (1.14) (1.45) (1.96)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $18.82 $18.62 $18.67 $18.28 $18.50
--------------------------------------------------------------------------------------------------------------------
Total return/(1)/ 4.01% 3.97% 8.59% 7.01% 2.25%
Supplemental data and ratios:
Net assets, in thousands, end of year $165,595 $192,710 $272,003 $248,054 $184,382
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Expenses, before waivers and reimbursements 0.55% 0.62% 0.75% 0.77% 0.76%
Net investment income, net of waivers and reimbursements 2.75% 4.26% 5.77% 7.56% 9.35%
Net investment income, before waivers and
reimbursements 2.56% 4.00% 5.38% 7.15% 8.95%
Portfolio turnover rate 257.17% 184.27% 107.31% 48.97% 88.29%
--------------------------------------------------------------------------------------------------------------------
(1)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.
(2)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
(3)Financial highlights for the years ended were calculated using the average
shares outstanding method.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
70
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
-------------------------------------------------------
CLASS D
2003 2002/(2)(3)/ 2001/(3)/ 2000/(3)/ 1999/(3)/
-------------------------------------------------------
$18.57 $18.62 $18.24 $18.45 $19.97
0.45 0.67 0.48 1.31 1.79
0.22 (0.02) 0.98 (0.16) (1.43)
0.67 0.65 1.46 1.15 0.36
-------------------------------------------------------
(0.48) (0.70) (1.08) (1.36) (1.61)
-- -- -- -- (0.27)
(0.48) (0.70) (1.08) (1.36) (1.88)
-------------------------------------------------------
$18.76 $18.57 $18.62 $18.24 $18.45
-------------------------------------------------------
3.61% 3.59% 8.16% 6.59% 1.84%
$59 $65 $38 $30 $121
0.75% 0.75% 0.75% 0.75% 0.75%
0.94% 1.01% 1.14% 1.16% 1.15%
2.36% 3.87% 5.38% 7.17% 8.96%
2.17% 3.61% 4.99% 6.76% 8.56%
257.17% 184.27% 107.31% 48.97% 88.29%
-------------------------------------------------------
FIXED INCOME PORTFOLIOS
71
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT SECURITIES PORTFOLIO
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------
CLASS A
Selected per share data 2003 2002/(2)/ 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $20.60 $20.55 $19.67 $19.48 $20.27
Income from investment operations:
Net investment income 0.48 0.75 0.97 1.14 0.99
Net realized and unrealized gains (losses) 0.10 0.43 0.95 0.18 (0.51)
Total income from investment operations 0.58 1.18 1.92 1.32 0.48
---------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.55) (0.80) (1.04) (1.13) (0.98)
From net realized gains (0.39) (0.33) -- -- (0.29)
Total distributions paid (0.94) (1.13) (1.04) (1.13) (1.27)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of year $20.24 $20.60 $20.55 $19.67 $19.48
---------------------------------------------------------------------------------------------------------------
Total return/(1)/ 2.92% 5.94% 10.03% 7.03% 2.43%
Supplemental data and ratios:
Net assets, in thousands, end of year $121,523 $113,071 $105,605 $90,182 $87,699
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Expenses, before waivers and reimbursements 0.56% 0.62% 0.81% 0.81% 0.77%
Net investment income, net of waivers and reimbursements 2.34% 3.68% 5.16% 5.87% 5.14%
Net investment income, before waivers and reimbursements 2.14% 3.42% 4.71% 5.42% 4.73%
Portfolio turnover rate 250.94% 246.91% 171.29% 139.01% 50.70%
---------------------------------------------------------------------------------------------------------------
(1)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.
(2)As required, effective December 1, 2001, the Portfolios adopted the
provisions of the new AICPA Audit and Accounting Guide for Investment
Companies and began recording paydown gains and losses on mortgage- and
asset-backed securities as interest income, rather than realized gains and
losses. The financial highlights for the prior years have not been restated
to reflect this change in presentation.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
72
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
----------------------------------------------
CLASS D
2003 2002/(2)/ 2001 2000 1999
----------------------------------------------
$20.53 $20.49 $19.62 $19.43 $20.22
0.40 0.66 0.96 1.08 0.93
0.11 0.43 0.88 0.17 (0.53)
0.51 1.09 1.84 1.25 0.40
----------------------------------------------
(0.48) (0.72) (0.97) (1.06) (0.90)
(0.39) (0.33) -- -- (0.29)
(0.87) (1.05) (0.97) (1.06) (1.19)
----------------------------------------------
$20.17 $20.53 $20.49 $19.62 $19.43
----------------------------------------------
2.48% 5.50% 9.59% 6.65% 1.95%
$1,646 $1,502 $958 $876 $810
0.75% 0.75% 0.75% 0.75% 0.75%
0.95% 1.01% 1.20% 1.20% 1.16%
1.95% 3.29% 4.77% 5.48% 4.75%
1.75% 3.03% 4.32% 5.03% 4.34%
250.94% 246.91% 171.29% 139.01% 50.70%
----------------------------------------------
FIXED INCOME PORTFOLIOS
73
THIS PAGE INTENTIONALLY LEFT BLANK
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
74
THIS PAGE INTENTIONALLY LEFT BLANK
FIXED INCOME PORTFOLIOS
75
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORTS
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolios and their policies also is
available in the Portfolios' Additional Statement. The Additional Statement is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports and the Additional Statement are
available free upon request by calling the Northern Institutional Funds Center
at 800/637-1380.
To obtain other information and for shareholder inquiries:
BY TELEPHONE
Call 800/637-1380
BY MAIL
Northern Institutional Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Portfolios' documents are available online and may be
downloaded from:
.. The SEC's Web site at sec.gov
.. Northern Institutional Funds' Web site at northerninstitutionalfunds.com
You may review and obtain copies of Northern Institutional Funds documents by
visiting the SEC's Public Reference Room in Washington, D.C. You also may
obtain copies of Northern Institutional Funds documents by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-0102 or by electronic request at publicinfo@sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202/942-8090.
811-3605
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
76
NORTHERN INSTITUTIONAL FUNDS
MONEY MARKET PORTFOLIOS--SHARES
.. DIVERSIFIED ASSETS PORTFOLIO
.. GOVERNMENT PORTFOLIO
.. GOVERNMENT SELECT PORTFOLIO
.. TAX-EXEMPT PORTFOLIO
.. MUNICIPAL PORTFOLIO
Prospectus dated April 1, 2004
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other
government agency. An investment in a Portfolio involves investment risks,
including possible loss of principal.
Although each of the Portfolios seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in the Portfolios.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
OVERVIEW
RISK/RETURN SUMMARY
Information about the objectives, principal strategies and risk characteristics
of each Portfolio.
[Download Table]
4
Portfolios
4
Diversified Assets Portfolio
5
Government Portfolio
5
Government Select Portfolio
6
Tax-Exempt Portfolio
7
Municipal Portfolio
8 Principal Investment Risks
10 Portfolio Performance
11
Diversified Assets Portfolio
12
Government Portfolio
13
Government Select Portfolio
14
Tax-Exempt Portfolio
15
Municipal Portfolio
16
Portfolio Fees and Expenses
MANAGEMENT OF THE PORTFOLIOS
Details that apply to the Portfolios as a group.
21 Investment Adviser
22 Advisory Fees
23 Other Portfolio Services
ABOUT YOUR ACCOUNT
How to open, maintain and close an account.
24
Purchasing and Selling Shares
24
Investors
24
Share Classes
24
Opening an Account
25
Selling Shares
[Download Table]
26
Account Policies and Other Information
26
Automatic Investment Arrangements
26
Purchase and Redemption Minimums
26
Calculating Share Price
26
Timing of Purchase Requests
26
In-Kind Purchases and Redemptions
27
Miscellaneous Purchase Information
27
Timing of Redemption and Exchange Requests
27
Payment of Redemption Proceeds
27
Miscellaneous Redemption Information
28
Exchange Privileges
28
Telephone Transactions
28
Advance Notification of Large Transactions
28
Making Changes to Your Account Information
28
Business Day
28
Good Order
29
Customer Identification Program
29
Early Closings
29
Emergency Events
29
Financial Intermediaries
30
Shareholder Communications
31
Distributions and Taxes
31
Distributions
31
Taxes
32
Other Tax Information
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL
INFORMATION
33
Risks, Securities and Techniques
41
Financial Information
42
Financial Highlights
FOR MORE INFORMATION
48
Annual/Semiannual Reports
48
Statement of Additional Information
OVERVIEW
NORTHERN INSTITUTIONAL FUNDS (THE "TRUST") OFFERS FIVE MONEY MARKET
PORTFOLIOS (EACH A "PORTFOLIO") TO INSTITUTIONAL INVESTORS. EACH PORTFOLIO IS
AUTHORIZED TO OFFER THREE CLASSES OF SHARES: SHARES, SERVICE SHARES AND
PREMIER SHARES. SERVICE SHARES AND PREMIER SHARES ARE DESCRIBED IN A SEPARATE
PROSPECTUS.
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The descriptions on the following pages may help you choose the Portfolio or
Portfolios that best fit your investment needs. Keep in mind, however, that no
Portfolio can guarantee it will meet its investment objective and no Portfolio
should be relied upon as a complete investment program. The Trust also offers
other money market, fixed income, balanced and equity portfolios, which are
described in separate prospectuses.
The Portfolios seek to maintain a stable net asset value ("NAV") of $1.00 per
share. Consistent with this policy, each of the Portfolios:
.. 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 Portfolio limits its investments to "Eligible Securities" as
defined by the 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 Portfolio 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 they are determined to be of comparable quality by the Investment Adviser
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
Portfolio may continue to hold the issue if the Investment Adviser believes it
is in the best interest of the Portfolio and its shareholders. Securities that
are in the highest short-term rating category (and comparable unrated
securities) are called "First Tier Securities." Under normal circumstances, the
Diversified Assets, Government and Government Select Portfolios intend to limit
purchases of securities to First Tier Securities. Securities in which the
Portfolios may invest may not earn as high a level of income as long-term or
lower quality securities, which generally have greater market risk and more
fluctuation in market value.
In accordance with current SEC regulations, each Portfolio generally 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. The Portfolios may, however, 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 ("Additional Statement").
In addition to the instruments described above and on the following pages, each
Portfolio may use various investment techniques in seeking its investment
objective. You can learn more about these techniques and related risks by
reading "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus and in the Additional Statement.
MONEY MARKET PORTFOLIOS
3
PORTFOLIOS
DIVERSIFIED ASSETS PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve 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 (such as credit card and automobile receivables);
.. Securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies, instrumentalities or sponsored enterprises 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;
.. Municipal securities issued or guaranteed by state or local governmental
bodies; and
.. Repurchase agreements relating to the above instruments.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), counterparty failure, guarantor (or credit
enhancement), management, liquidity, prepayment (or call), debt extension and
foreign securities risks. See page 7 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
4
GOVERNMENT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve its objective by
investing, under normal circumstances, substantially all (and at least 80%) of
its net assets in securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies, instrumentalities and sponsored
enterprises and repurchase agreements backed by such securities.
The Portfolio may make significant investments in securities issued by U.S.
government-sponsored entities. Such securities are neither issued nor
guaranteed by the U.S. Treasury.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, prepayment (or call), debt extension, U.S. government
securities, counterparty failure, guarantor (or credit enhancement), management
and liquidity risks. See page 7 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
GOVERNMENT SELECT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve its objective by
investing, under normal circumstances, substantially all (and at least 80%) of
its net assets in securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies, instrumentalities or sponsored
enterprises. Under normal circumstances, the Portfolio will seek to acquire
only those U.S. government securities paying interest that generally is exempt
from state income taxation. These securities include obligations issued by the
U.S. Treasury and certain U.S. government agencies, instrumentalities or
sponsored enterprises, such as the Federal Home Loan Bank and the Federal Farm
Credit Banks Funding Corp.
Under unusual circumstances, as when appropriate securities which are exempt
from state taxes are unavailable, the Portfolio also may 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 hold uninvested
cash.
The Portfolio may make significant investments in securities issued by U.S.
government-sponsored entities. Such securities are neither issued nor
guaranteed by the U.S. Treasury.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, prepayment (or call), debt extension, counterparty failure, U.S.
government securities, guarantor (or credit enhancement), management and
liquidity risks. See page 7 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
MONEY MARKET PORTFOLIOS
5
TAX-EXEMPT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide its shareholders, to the extent consistent with
the preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio seeks to achieve its objective by
investing primarily in high-quality short-term municipal instruments, the
interest on which is exempt from regular federal income tax. The high level of
income sought by the Portfolio is relative to yields currently available in the
tax-exempt marketplace. Municipal instruments may include:
.. Fixed, variable and floating rate notes and similar debt instruments;
.. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
.. 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, instrumentalities or
sponsored enterprises.
Except in extraordinary circumstances, at least 80% of the Portfolio's net
assets will be invested in debt instruments, the interest on which is exempt
from regular federal income tax. Alternative Minimum Tax ("AMT") obligations,
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
be eligible debt instruments for the purposes of determining whether the
Portfolio meets this policy. For shareholders subject to AMT, a limited portion
of the Portfolio's dividends may be subject to federal income tax.
During temporary defensive periods, all or any portion of the Portfolio's
assets may be held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments may consist of those instruments that may be
purchased by the Diversified Assets Portfolio. The Portfolio may not achieve
its investment objective when this temporary defensive strategy is used.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), guarantor (or credit enhancement),
counterparty failure, management, liquidity, prepayment (or call), debt
extension, project/industrial development bond and tax risks. See page 7 for a
discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
6
MUNICIPAL PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide, to the extent consistent with the preservation
of capital, a high level of income exempt from regular federal income tax by
investing primarily in municipal instruments. This objective may be changed
without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio seeks to achieve its objective by
investing primarily in high-quality short-term municipal instruments, the
interest on which is exempt from regular federal income tax. The high level of
income sought by the Portfolio is relative to yields currently available in the
tax-exempt marketplace. Municipal instruments may include:
.. Fixed, variable and floating rate notes and similar debt instruments;
.. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
.. 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, instrumentalities or
sponsored enterprises.
Except in extraordinary circumstances, at least 80% of the Portfolio's net
assets will be invested in debt instruments that pay interest which is exempt
from regular federal income tax. AMT obligations, which pay interest that may
be treated as an item of tax preference to shareholders under the federal
alternative minimum tax, will be deemed eligible investments for the purposes
of determining whether the portfolio meets this policy. To the extent that the
Portfolio invests in AMT obligations, a significant portion of the Portfolio's
dividends may be subject to federal income tax for shareholders subject to AMT.
Although the Portfolio is not limited in the amount of its assets that may be
invested in AMT obligations, the Portfolio currently does not intend to invest
in AMT obligations.
During temporary defensive periods, all or any portion of the Portfolio's
assets may be held uninvested or invested in taxable instruments. Taxable
investments may consist of those instruments that may be purchased by the
Diversified Assets Portfolio. The Portfolio may not achieve its investment
objective when this temporary defensive strategy is used.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), guarantor (or credit enhancement),
counterparty failure, management, liquidity, prepayment (or call), debt
extension, project/industrial development bond and tax risks. See page 7 for a
discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
MONEY MARKET PORTFOLIOS
7
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Portfolio, its yield and investment performance, and the price of its shares.
AN INVESTMENT IN EACH OF THE PORTFOLIOS IS NOT A DEPOSIT OF ANY BANK AND IS
NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH EACH OF THE PORTFOLIOS SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE PORTFOLIOS.
The following summarizes the principal risks that may affect the Portfolios.
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RISKS THAT APPLY TO ALL PORTFOLIOS
Stable NAV risk is the risk that a Portfolio will not be able to maintain a net
asset value per share of $1.00 at all times.
Interest rate risk is the risk that during periods of rising interest rates, a
Portfolio'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
Portfolio's yield (and the market value of its securities) will tend to be
higher.
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 Portfolio'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.
Counterparty failure risk is the risk that a bank or other financial
institution that has entered into a repurchase agreement or other transaction
may default on its payment obligations.
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 Portfolio 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.
RISK THAT APPLIES PRIMARILY TO THE GOVERNMENT AND GOVERNMENT SELECT PORTFOLIOS
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. Although many
U.S. government securities purchased by the Portfolios, such as those issued by
the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan
Mortgage Corporation ("Freddie Mac") and Federal Home Loan Banks may be
chartered or sponsored by Acts of Congress, their securities are neither issued
nor guaranteed by the United States Treasury and, therefore, are not backed by
the full faith and credit of the United States. The maximum potential liability
of the issuers of some U.S. government securities held by a Portfolio may
greatly exceed their current resources, including their legal right to support
from the U.S. Treasury. It is possible that these issuers will not have the
funds to meet their payment obligations in the future.
RISKS THAT APPLY PRIMARILY TO THE DIVERSIFIED ASSETS, TAX-EXEMPT AND MUNICIPAL
PORTFOLIOS
Credit (or default) risk is the risk that an issuer of fixed income securities
held by a Portfolio 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 securities generally are believed to have relatively low degrees of
credit risk.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
8
Prepayment (or call) risk is the risk than an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as an asset-backed
security) sooner than expected. This may happen during a period of falling
interest rates. Accordingly, a Portfolio's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Portfolio (such as an asset-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
RISKS THAT APPLY TO THE TAX-EXEMPT AND MUNICIPAL PORTFOLIOS
Project/industrial development bond risk is the risk that a Portfolio may be
more sensitive to an adverse economic, business or political development if it
invests more than 25% of its assets 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 materially may affect the ability of a Portfolio to pay tax-exempt
dividends or the value of municipal instruments.
RISK THAT APPLIES TO THE DIVERSIFIED ASSETS PORTFOLIO
Foreign securities risk is the risk that a foreign security, even if it is a
U.S. dollar-denominated foreign security, could lose value as a result of
political, financial and economic events in foreign countries, less stringent
foreign securities regulations and accounting and disclosure standards, or
other factors.
More information about the Portfolios' investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33. You should
consider carefully the risks discussed in this section and "Risks, Securities
and Techniques" before investing in a Portfolio.
EQUITY PORTFOLIOS
9
PORTFOLIO PERFORMANCE
THE BAR CHARTS AND TABLES THAT FOLLOW PROVIDE AN INDICATION OF THE RISKS OF
INVESTING IN A PORTFOLIO BY SHOWING CHANGES IN THE PERFORMANCE OF A
PORTFOLIO'S SHARES FROM YEAR TO YEAR.
The bar charts and tables assume reinvestment of dividends and distributions.
A Portfolio's past performance is not necessarily an indication of how the
Portfolio will perform in the future. Performance reflects certain expense
limitations that were in effect during the periods presented. If expense
limitations were not in place, a Portfolio's performance would have been
reduced.
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
10
DIVERSIFIED ASSETS PORTFOLIO
CALENDAR YEAR TOTAL RETURN
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
4.06% 5.79% 5.28% 5.45% 5.39% 5.03% 6.28% 4.16% 1.67% 0.93%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN WORST QUARTER RETURN
------------------- --------------------
Q4 2000 Q4 2003
------------------- --------------------
1.61% 0.20%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
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Inception Since
Date 1-Year 5-Year 10-Year Inception
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Diversified Assets Portfolio 6/1/83 0.93% 3.60% 4.39% 5.77%
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The 7-day yield for Shares of the Portfolio as of December 31, 2003: 0.80%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
EQUITY PORTFOLIOS
11
GOVERNMENT PORTFOLIO
CALENDAR YEAR TOTAL RETURN
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
3.93% 5.65% 5.17% 5.34% 5.30% 4.91% 6.18% 3.91% 1.53% 0.89%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN WORST QUARTER RETURN
------------------- --------------------
Q3 2000 Q4 2003
------------------- --------------------
1.60% 0.19%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
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Inception Since
Date 1-Year 5-Year 10-Year Inception
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Government Portfolio 10/29/85 0.89% 3.46% 4.27% 5.15%
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The 7-day yield for Shares of the Portfolio as of December 31, 2003: 0.75%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
12
GOVERNMENT SELECT PORTFOLIO
CALENDAR YEAR TOTAL RETURN
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
4.09% 5.82% 5.29% 5.44% 5.40% 4.99% 6.27% 4.01% 1.60% 0.95%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN WORST QUARTER RETURN
------------------- --------------------
Q4 2000 Q4 2003
------------------- --------------------
1.61% 0.21%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
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Inception Since
Date 1-Year 5-Year 10-Year Inception
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Government Select Portfolio 11/7/90 0.95% 3.55% 4.37% 4.38%
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The 7-day yield for Shares of the Portfolio as of December 31, 2003: 0.82%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
EQUITY PORTFOLIOS
13
TAX-EXEMPT PORTFOLIO
CALENDAR YEAR TOTAL RETURN
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
2.61% 3.73% 3.33% 3.46% 3.29% 2.99% 3.92% 2.62% 1.28% 0.80%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN WORST QUARTER RETURN
------------------- --------------------
Q4 2000 Q3 2003
------------------- --------------------
1.01% 0.16%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
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Inception Since
Date 1-Year 5-Year 10-Year Inception
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Tax-Exempt Portfolio 8/12/83 0.80% 2.32% 2.80% 3.72%
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The 7-day yield for Shares of the Portfolio as of December 31, 2003: 0.90%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
14
MUNICIPAL PORTFOLIO
CALENDAR YEAR TOTAL RETURN
[CHART]
2000 2001 2002 2003
----- ----- ----- -----
4.03% 2.72% 1.37% 0.91%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
BEST QUARTER RETURN WORST QUARTER RETURN
------------------- --------------------
Q2 2000 Q3 2003
------------------- --------------------
1.05% 0.19%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
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Inception Since
Date 1-Year Inception
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Municipal Portfolio 12/1/99 0.91% 2.28%
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The 7-day yield for Shares of the Portfolio as of December 31, 2003: 1.02%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
EQUITY PORTFOLIOS
15
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Portfolios. Please note that the following information does not
reflect any charges that may be imposed by The Northern Trust Company ("TNTC"),
its affiliates, correspondent banks and other institutions on their Customers
(as defined on page 24). (For more information, please see "Account Policies
and Other Information" on page 26.)
[Enlarge/Download Table]
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SHAREHOLDER FEES
(fees paid directly from your investment)
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Sales Charge
Sales Charge (Load) Imposed
(Load) Imposed Deferred Sales on Reinvested Redemption Exchange
Portfolio on Purchases Charge (Load) Distributions Fees Fees
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Diversified Assets None None None None None
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Government None None None None None
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Government Select None None None None None
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Tax-Exempt None None None None None
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Municipal None None None None None
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
16
[Download Table]
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ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
-----------------------------------------------------------
Total Annual
Management Distribution Other Portfolio Operating
Fees (12b-1) Fees Expenses/(1)/ Expenses/(2)/
-----------------------------------------------------------
0.25% None 0.12% 0.37%
-----------------------------------------------------------
0.25% None 0.12% 0.37%
-----------------------------------------------------------
0.20% None 0.12% 0.32%
-----------------------------------------------------------
0.25% None 0.13% 0.38%
-----------------------------------------------------------
0.20% None 0.13% 0.33%
-----------------------------------------------------------
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MONEY MARKET PORTFOLIOS
17
FOOTNOTES
/1/"Other Expenses" include co-administration fees and all other ordinary
operating expenses of each Portfolio not listed above. The Co-Administrators
are entitled to a co-administration fee from the Portfolios at the annual
rate of 0.10% of the average daily net assets of each Portfolio. Under the
Co-Administration Agreement with the Trust, which may be amended without
shareholder approval, the Co-Administrators have agreed to reimburse
expenses (including fees payable to the Co-Administrators, but excluding
management fees, transfer agency fees, servicing agent fees, taxes, interest
and other extraordinary expenses) which exceed on an annualized basis 0.10%
of each Portfolio's average daily net assets. The Shares class has no
servicing agent fees and a less than 0.01% annualized transfer agent fee,
both of which are included in "Other Expenses." The Service and Premier
Shares classes, as described in a separate Prospectus, have servicing agent
fees of 0.25% and 0.50%, respectively, and transfer agent fees of 0.01% and
0.02%, respectively.
/2/For certain Portfolios the Investment Adviser has voluntarily agreed to
waive a portion of its management fee, as shown below. Also set forth below
are the distribution (12b-1) fees, other expenses and total annual portfolio
operating expenses that actually are incurred by the Portfolios as a result
of these voluntary fee waivers and the expense reimbursements discussed in
footnote 1. Voluntary fee reductions may be modified, terminated or
implemented at any time at the option of the Investment Adviser or other
service providers to the Portfolios. If this occurs, "Total Annual Portfolio
Operating Expenses" may increase (or decrease) without shareholder approval.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
18
[Download Table]
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Total Annual
Management Distribution Other Portfolio Operating
Portfolio Fees (12b-1) Fees Expenses Expenses
-------------------------------------------------------------------------
Diversified Assets 0.25% None 0.10% 0.35%
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Government 0.25% None 0.10% 0.35%
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Government Select 0.10% None 0.10% 0.20%
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Tax-Exempt 0.25% None 0.10% 0.35%
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Municipal 0.10% None 0.10% 0.20%
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MONEY MARKET PORTFOLIOS
19
EXAMPLE
The following Example is intended to help you compare the cost of investing in
Shares of a Portfolio (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 Portfolio 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 Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
[Download Table]
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Portfolio 1 Year 3 Years 5 Years 10 Years
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Diversified Assets
Shares $38 $119 $208 $468
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Government
Shares $38 $119 $208 $468
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Government Select
Shares $33 $103 $180 $406
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Tax-Exempt
Shares $39 $122 $213 $480
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Municipal
Shares $34 $106 $185 $418
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
20
INVESTMENT ADVISER
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser," formerly
known and conducting business as Northern Trust Investments, Inc.), a
subsidiary of TNTC, serves as the Investment Adviser of each of the Portfolios.
NTI is located at 50 South LaSalle Street, Chicago, Illinois 60675. Unless
otherwise indicated, NTI and TNTC are referred to collectively in this
Prospectus as "Northern Trust."
NTI is an investment adviser registered under the Investment Advisers Act of
1940. It primarily manages assets for defined contribution and benefit plans,
investment companies and other institutional investors.
TNTC is an Illinois state chartered banking organization and a member of the
Federal Reserve System. Formed in 1889, it administers and manages assets for
individuals, personal trusts, defined contribution and benefit plans and other
institutional and corporate clients. It is the principal subsidiary of Northern
Trust Corporation, a bank holding company.
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors, and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
Under its Advisory Agreement with the Trust, the Investment Adviser, subject to
the general supervision of the Trust's Board of Trustees, is responsible for
making investment decisions for the Portfolios and for placing purchase and
sale orders for portfolio securities.
MONEY MARKET PORTFOLIOS
21
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, the Investment Adviser is entitled to an advisory fee from the
Portfolios, computed daily and payable monthly, at annual rates set forth in
the table below (expressed as a percentage of each Portfolio's respective
average daily net assets). The table also reflects the advisory fees (after
voluntary fee waivers) paid by the Portfolios as a percentage of net assets for
the fiscal year ended November 30, 2003.
The difference, if any, between the contractual advisory fee and the actual
advisory fees paid by the Portfolios reflects that the Investment Adviser did
not charge the full amount of the advisory fees to which it was entitled. The
Investment Adviser may discontinue or modify its voluntary limitations in the
future at its discretion.
[Download Table]
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Advisory Fee
Contractual Paid for Fiscal Year
Portfolio Rate Ended 11/30/2003
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Diversified Assets 0.25% 0.25%
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Government 0.25% 0.25%
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Government Select 0.20% 0.10%
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Tax-Exempt 0.25% 0.25%
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Municipal 0.20% 0.10%
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
22
OTHER PORTFOLIO SERVICES
TNTC serves as Transfer Agent and Custodian for each Portfolio. The Transfer
Agent performs various shareholder servicing functions, and any shareholder
inquiries should be directed to it. In addition, NTI and PFPC Inc. ("PFPC")
serve as Co-Administrators for each Portfolio. The fees that TNTC, NTI and PFPC
receive for their services in these capacities are described under "Portfolio
Fees and Expenses" and in the Additional Statement.
Pursuant to an exemptive order issued by the SEC concerning such arrangements,
TNTC also may render securities lending services to the Portfolios. For such
services, TNTC may receive a fee of up to 35% of the net revenue earned by a
Portfolio on each securities loan. In addition, cash collateral received by a
Portfolio in connection with a securities loan may be invested in shares of
other registered or unregistered funds that pay investment advisory or other
fees to NTI, TNTC or an affiliate.
TNTC, NTI and other Northern Trust affiliates may provide other services to the
Portfolios and receive compensation for such services if consistent with the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules,
exemptive orders and no-action letters issued by the SEC thereunder. Unless
required, investors in a Portfolio may or may not receive specific notice of
such additional services and fees.
MONEY MARKET PORTFOLIOS
23
PURCHASING AND SELLING SHARES
INVESTORS
Institutional investors, acting on their own behalf or on behalf of customers
and other beneficial owners ("Customers"), may invest in the shares of each
Portfolio through their institutional accounts at Northern Trust or an
affiliate. They also may establish accounts directly with the Trust. There is
no sales charge imposed on investments. Institutional investors
("Institutions") include:
.. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
.. Corporations, partnerships, business trusts and other institutions and
organizations.
SHARE CLASSES
Each Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares. Service Shares and Premier Shares are described in a separate
prospectus.
.. Shares do not provide for payments by the Portfolio to Institutions for
administrative support or shareholder liaison services.
.. Service Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support services to
Customers.
.. Premier Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support and
shareholder liaison services to Customers.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except amounts payable under the Service Plan that has been
adopted for the Portfolio's Service Shares and Premier Shares and transfer
agency fees. Because of these class-specific expenses, the performance of the
Shares of a Portfolio described in this Prospectus is expected to be higher
than the performance of both the Service Shares and Premier Shares of the same
Portfolio and the performance of a Portfolio's Service Shares is expected to be
higher than the performance of the same Portfolio's Premier Shares.
OPENING AN ACCOUNT
You may purchase shares of each Portfolio through your institutional account at
Northern Trust (or an affiliate) or you may open an account directly with the
Trust with a minimum initial investment of $5 million in one or more portfolios
of the Trust. This minimum does not apply, however, to shares purchased through
a Northern Trust cash sweep program. There is no minimum for subsequent
investments.
Through an Institutional Account. If you are opening an institutional account
at Northern Trust, a Northern Trust representative can assist you with all
phases of your investment. To purchase shares through your account, contact
your Northern Trust representative for further information.
Directly from the Trust. An Institution may open a shareholder account and
purchase shares directly from the Trust as described in this Prospectus.
BY MAIL
.. Read this Prospectus carefully.
.. Complete and sign the New Account Application.
.. Include a certified corporate resolution (or other acceptable evidence of
authority).
.. Enclose a check or Federal Reserve draft payable to Northern Institutional
Funds.
.. Mail your check, corporate resolution and completed New Account Application
to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
24
BY TELEPHONE
.. Read this Prospectus carefully.
.. Call the Northern Institutional Funds Center at 800/637-1380.
To open a new account please provide:
.. The name of the Portfolio in which you would like to invest
.. The number of shares or dollar amount to be invested
.. The method of payment
To add to an existing account, please provide:
.. The Institution's name
.. Your Account Number
BY WIRE OR AUTOMATED CLEARING HOUSE TRANSFER ("ACH TRANSFER")
To open a new account:
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. For more information about the purchase of shares, call the Northern
Institutional Funds Center at 800/637-1380.
To add to an existing account:
.. Have your bank wire federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10-Digit Portfolio Account Number) (Reference Shareholder's Name)
SELLING SHARES
Through an Institutional Account. Institutions may sell (redeem) shares through
their institutional account by contacting their Northern Trust account
representative.
Directly through the Trust. Institutions that purchase shares directly from the
Trust may redeem their shares through the Transfer Agent in one of the
following ways:
BY MAIL
Send a written request to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
The letter of instruction must include:
.. The signature of a duly authorized person
.. Your Account Number
.. The name of the Portfolio
.. The number of shares or the dollar amount to be redeemed
BY TELEPHONE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. 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 WIRE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. You must have given authorization for expedited wire redemption.
.. The minimum amount that may be redeemed by this method is $10,000.
MONEY MARKET PORTFOLIOS
25
ACCOUNT POLICIES AND OTHER INFORMATION
Automatic Investment Arrangements. Institutions may purchase shares through
their institutional accounts at Northern Trust either by directing automatic
investment of cash balances in excess of certain agreed upon amounts or by
directing investments from time to time on a non-automatic basis. Northern
Trust will place a purchase order generated under an automatic investment
direction either on the Business Day that funds are available in the account or
on the next Business Day, depending upon the terms of the automatic investment
arrangement. Similarly, Northern Trust will place a redemption order generated
under an automatic investment direction either on the Business Day Northern
Trust calculates the redemption amount needed to bring the account balance up
to the agreed upon amount or on the next Business Day, depending upon the terms
of the automatic investment arrangement. If a redemption order is placed on the
next Business Day, Northern Trust normally will provide funds by provisionally
crediting the Institution's account on the day the calculation is made.
Institutions should contact Northern Trust for more information about their
automatic investment arrangements.
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in a Portfolio and one or more other investment portfolios of the
Trust. This minimum does not apply, however, to shares purchased through a
Northern Trust cash sweep program. There is no minimum for subsequent
investments. A $10,000 minimum applies for redemptions by wire. The Trust
reserves the right to waive purchase and redemption minimums and to determine
the manner in which a minimum is satisfied.
Calculating Share Price. The Trust issues and redeems shares at net asset value
("NAV"). The NAV for each class of shares of a Portfolio is calculated by
dividing the value of net assets attributed to that class by the number of
outstanding shares of the class. For each class of shares of the Government
Select, Tax-Exempt and Municipal Portfolios, the NAV is calculated as of 1:00
p.m., Central time, on each Business Day. For each class of shares of the
Diversified Assets and Government Portfolios, the NAV is calculated as of 2:00
p.m., Central time, on each Business Day. The NAV used in determining the price
of your shares is the one calculated after your purchase order is received and
accepted and after your exchange or redemption order is received in good order
as described below.
Each Portfolio seeks to maintain an NAV of $1.00 per share by valuing the
obligations held by it at amortized cost in accordance with SEC regulations.
Amortized cost will normally approximate market value.
Timing of Purchase Requests. Purchase requests received in good order and
accepted by the Transfer Agent or other authorized intermediary on any Business
Day by 1:00 p.m., Central time, with respect to the Government Select,
Tax-Exempt and Municipal Portfolios, and by 2:00 p.m., Central time, with
respect to the Diversified Assets and Government Portfolios, will be executed
on the same day they are received by the Transfer Agent or other authorized
intermediary, provided that either:
.. The Transfer Agent receives the payment in federal or other immediately
available funds on the same Business Day by 1:00 p.m., Central time, with
respect to the Government Select, Tax-Exempt and Municipal Portfolios, and by
2:00 p.m., Central time, with respect to the Diversified Assets and
Government Portfolios;
.. The request is placed by a financial or authorized intermediary and payment
in federal or other immediately available funds is received by the Transfer
Agent by the close of the same Business Day in accordance with the terms of
the Trust's agreement with the intermediary; or
.. Payment in federal or other immediately available funds is received by the
close of the same Business Day in an institutional account maintained with
Northern Trust or an affiliate.
Purchase requests received in good order by the Transfer Agent or other
authorized intermediary on a non-Business Day or after the deadlines described
above on a Business Day will be executed on the next Business Day, provided
that payment is made as noted above.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See
the Additional Statement for further information about the terms of these
purchases and redemptions.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
26
Miscellaneous Purchase Information.
.. Institutions are responsible for transmitting purchase orders and delivering
required funds on a timely basis.
.. Institutions are responsible for all losses and expenses of a Portfolio, and
purchase orders may be cancelled, in the event of any failure to make payment
according to the procedures outlined in this Prospectus. In addition, a $20
charge will be imposed if a check does not clear.
.. Shares of a Portfolio are entitled to the dividends declared by the Portfolio
beginning on the Business Day the purchase order is executed, provided
payment in federal or other immediately available funds is received by the
Transfer Agent by the time designated above.
.. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
.. In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 29.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary
on any Business Day by 1:00 p.m., Central time, with respect to the Government
Select, Tax-Exempt and Municipal Portfolios, and by 2:00 p.m., Central time,
with respect to the Diversified Assets and Government Portfolios, will be
executed on the same day, at that day's closing share price.
Redemption and exchange requests received in good order by the Transfer Agent
or other authorized intermediary on a non-Business Day or after the deadline
described above on a Business Day will be executed the next Business Day, at
that day's closing share price.
Payment of Redemption Proceeds. Redemption proceeds normally will be sent or
credited on the next Business Day following the Business Day on which the
redemption request is received in good order by the deadline noted above,
unless payment in immediately available funds on the same Business Day is
requested.
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds also
may be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed New Account Application,
including a corporate resolution or other acceptable evidence of authority.
.. The Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to 7 days (or such longer period permitted by the SEC) after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect a Portfolio.
.. If you are redeeming recently purchased shares, your redemption request may
not be honored until your check or electronic transaction has cleared. This
may delay your transaction for up to 15 days.
.. Institutions are responsible for transmitting redemption orders and crediting
their Customers' accounts with redemption proceeds on a timely basis.
.. Redemption requests made to the Transfer Agent by mail must be signed by a
person authorized by acceptable documentation on file with the Transfer Agent.
.. Dividends on shares are earned through and including the day prior to the day
on which they are redeemed.
.. The Trust and the Transfer Agent reserve the right to redeem shares held by
any shareholder in circumstances deemed to be in the best interests of the
Portfolios.
.. The Trust may require any information reasonably necessary to ensure that a
redemption request has been duly authorized.
.. The Trust reserves the right to change or discontinue any of its redemption
procedures.
.. In certain circumstances, the Trust may advance the time by which redemption
and exchange orders must be received. See "Early Closings" on page 29.
MONEY MARKET PORTFOLIOS
27
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of a Portfolio for shares of
other investment portfolios of the Trust. The registration of both accounts
involved must be identical. Both accounts must have the same owner's name and
title, if applicable. A $1,000 minimum applies to exchanges. An exchange is a
redemption of shares you own and the purchase of shares you are acquiring. It
is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days' written notice to shareholders and to reject any
exchange request. Exchanges only are available in states where an exchange
legally can be made. Before making an exchange you should read the prospectus
for the shares you are acquiring.
Telephone Transactions. Telephone requests are recorded. 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, the Trust 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.
The Trust reserves the right to refuse a telephone redemption.
Advance Notification of Large Transactions. The Trust requests that an
Institution give advance notice to the Transfer Agent by 11:00 a.m., Central
time, if it intends to place a purchase or redemption order of $5 million or
more on a Business Day.
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 certified corporate resolution,
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
Trust and Transfer Agent may charge a shareholder reasonable costs in locating
a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the Transfer
Agent or the New York Stock Exchange (the "Exchange") is open for business. For
the period April 1, 2004 through March 31, 2005, the Portfolios will be closed
on the following holidays: Martin Luther King, Jr. Day, Presidents' Day,
Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed).
Good Order. A purchase, redemption or exchange request is considered to be "in
good order" when all necessary information is provided and all documents are
properly completed, signed and delivered, including a certified resolution or
other acceptable evidence of authority. Additionally, a purchase order
initiating the opening of an account will not be considered to be "in good
order" unless the investor has provided all information required by the Trust's
"Customer Identification Program" described below.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
28
Customer Identification Program. Federal law requires the Trust to obtain,
verify and record identifying information, which may include the name, business
street address, taxpayer identification number or other identifying information
for each investor who opens or reopens an account with the Trust. Applications
without this information, or without an indication that a taxpayer
identification number has been applied for, may not be accepted. After
acceptance, to the extent permitted by applicable law or the Trust's customer
identification program, the Trust reserves the right to: (a) place limits on
account transactions until an Institution's identity is verified; (b) refuse an
investment in the Trust; or (c) involuntarily redeem an investor's shares and
close an account in the event that an investor's identity is not verified. The
Trust and its agents will not be responsible for any loss in an investor's
account resulting from an investor's delay in providing all required
identifying information or from closing an account and redeeming an investor's
share when an investor's identity cannot be verified.
Early Closings. The Portfolios reserve the right to advance the time for
accepting purchase, redemption or exchange orders for same Business Day credit
when the Exchange closes or closes early, trading on the Exchange is
restricted, an emergency arises or as otherwise permitted by the SEC. In
addition, the Board of Trustees of the Portfolios may, for any Business Day,
decide to change the time as of which a Portfolio's NAV is calculated in
response to new developments such as altered trading hours, or as otherwise
permitted by the SEC.
Emergency Events. In the event the Exchange does not open for business because
of an emergency, the Trust may, but is not required to, open one or more
Portfolios for purchase, redemption and exchange transactions if the Federal
Reserve wire payment system is open. To learn whether a Portfolio is open for
business during an emergency situation, please call 800/637-1380 or visit
northerninstitutionalfunds.com.
Financial Intermediaries. The Trust may authorize certain Institutions acting
as financial intermediaries (including banks, trust companies, brokers and
investment advisers) to accept purchase, redemption and exchange orders from
their Customers on behalf of the Trust. These authorized intermediaries also
may designate other intermediaries to accept such orders, if approved by the
Trust. A Portfolio will be deemed to have received an order when the order is
accepted by the authorized intermediary, and the order will be priced at the
Portfolio's per share NAV next determined, provided that the authorized
intermediary forwards the order (and payment for any purchase order) to the
Transfer Agent on behalf of the Trust within agreed-upon time periods. If the
order (or payment for any purchase order) is not received by the Transfer Agent
within such time periods, the authorized intermediary may be liable for fees
and losses and the transaction may be cancelled.
Northern Trust may provide compensation to certain dealers and other financial
intermediaries, including affiliates of Northern Trust, that provide services
to their Customers who invest in the Trust or whose Customers purchase
significant amounts of shares of a Portfolio. 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 the Investment Adviser (after
adjustments). This additional compensation will be paid by Northern Trust or
its affiliates and will not represent an additional expense to the Trust or its
shareholders.
MONEY MARKET PORTFOLIOS
29
Customers purchasing shares of a Portfolio through a financial intermediary
should read their account agreements carefully. A financial intermediary's
requirements may differ from those listed in this Prospectus. A financial
intermediary may impose account charges, such as asset allocation fees, account
maintenance fees, and other charges that will reduce the net return on an
investment in a Portfolio. If a Customer has agreed to maintain a minimum
balance with a particular financial intermediary and the balance falls below
this minimum, the Customer may be required to redeem all or a portion of the
Customer's investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation by a
financial intermediary in connection with the investment of fiduciary funds in
Shares of a Portfolio. Financial intermediaries, including banks regulated by
the Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel.
State securities laws regarding the registration of dealers may differ from
federal law. As a result, financial intermediaries investing in the Portfolios
on behalf of their Customers may be required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Trust's fiscal year on November 30, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses, proxy
statements or information statements to all shareholders who share the same
mailing address with your account, you may revoke your consent at any time by
contacting the Northern Institutional Funds Center by phone at 800/637-1380 or
by mail at the Northern Institutional Funds, P.O. Box 75986, Chicago, IL
60675-5986.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
30
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from net income are declared daily and paid monthly by each Portfolio
to its shareholders. Net income includes the interest accrued on a Portfolio's
assets less estimated expenses. Each Portfolio's net realized short-term
capital gains, if any, are distributed at least annually. The Portfolios do not
expect to realize net long-term capital gains.
Dividends are paid as soon as practicable following the end of each month,
except in the case of a total redemption of shares in an account that is not
subject to a standing order for the purchase of additional shares.
In that event, dividends will be paid promptly along with the redemption
proceeds.
All distributions are reinvested automatically (without any sales charge) in
additional shares of the same Portfolio, unless you elect to receive
distributions in cash by notifying the Transfer Agent in writing. You may make
arrangements to credit these distributions to your account with Northern Trust,
its affiliates or its correspondent banks.
There are no fees or sales charges on reinvestments.
TAXES
Each Portfolio intends to qualify as a regulated investment company for federal
tax purposes, and to distribute substantially all of its net income to
shareholders each year. Except for exempt-interest dividends paid by the
Tax-Exempt and Municipal Portfolios, dividends derived from interest income and
short-term capital gains will be taxable as ordinary income, and distributions,
if any, derived from net long-term capital gains generally will be taxable as
long-term capital gains, unless you have a tax-advantaged account. This is true
whether dividends and distributions are received in cash or reinvested in
shares.
The Tax-Exempt and Municipal Portfolios intend to pay substantially all of
their dividends as "exempt-interest dividends," which are exempt from federal
income tax. Shareholders who are recipients of Social Security Act or Railroad
Retirement Act benefits should note that exempt-interest dividends will be
taken into account in determining the taxability of their benefit payments.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of either the Tax-Exempt or Municipal Portfolios generally will not be
deductible for federal income tax purposes.
In certain instances, dividends paid by the Tax-Exempt and Municipal
Portfolios, while exempt from regular federal income tax, may be subject to the
alternative minimum tax. In addition, the Tax-Exempt and Municipal Portfolios
may invest a portion of their assets in securities that generate income that is
not exempt from federal tax. Any dividends paid by the Tax-Exempt or Municipal
Portfolios that are derived from taxable interest or from capital gains will be
subject to federal income tax.
The Tax-Exempt and Municipal Portfolios will each determine annually the
percentages of its net investment income which are exempt from the regular
federal income tax, which constitute an item of tax preference for purposes of
the federal alternative minimum tax, and which are fully taxable. The
Tax-Exempt and Municipal Portfolios will apply these percentages uniformly to
all distributions declared from net investment income during that year.
Except as stated below, you may be subject to state and local taxes on
Portfolio distributions and redemptions. State income taxes may not apply,
however, to the portions of a Portfolio'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.
MONEY MARKET PORTFOLIOS
31
OTHER TAX INFORMATION
Dividends and distributions from each Portfolio will generally be reportable by
you in the tax year in which they are paid with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of
ordinary income and capital gains distributed to your account for the previous
year.
Your investment in the Portfolios could have additional tax consequences.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States federal
income tax treatment. You should consult your tax professional for information
regarding all the tax consequences applicable to your investments in the
Portfolios. More information is provided in the Additional Statement. This
short summary is not intended as a substitute for careful tax planning.
In particular, although the Government Select Portfolio intends to invest
primarily in U.S. government securities, the interest on which is generally
exempt from state income taxation, you should consult your own tax professional
to determine whether this is true in your own situation. Similarly, dividends
paid by the Portfolios (including the Tax-Exempt and Municipal Portfolios) may
be taxable under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
32
RISKS, SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE TYPES OF SECURITIES IN WHICH
THE PORTFOLIOS MAY INVEST AND THEIR RELATED RISKS. It also explores the
various investment techniques that the investment management team may use.
The Portfolios may invest in other securities and are subject to further
restrictions and risks which are described in the Additional Statement.
Additionally, the Portfolios may purchase other types of securities or
instruments similar to those described in this section if otherwise
consistent with the Portfolios' investment objectives and policies.
--------------------------------------------------------------------------------
Investment Objectives. The investment objective of the Municipal Portfolio may
be changed by the Trust's Board of Trustees without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in the Portfolio having an investment objective different from the
objective that the shareholder considered appropriate at the time of investment
in the Portfolio. The investment objectives of the other Portfolios may not be
changed without shareholder approval.
Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, motor vehicle
installment sale contracts, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements, municipal securities and other financial assets.
Such asset pools are securitized through the use of privately-formed trusts or
special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pooled insurance policy issued by a financial
institution, or by other credit enhancements.
Investment Strategy. The Diversified Assets Portfolio, Tax-Exempt Portfolio and
Municipal Portfolio may purchase various types of asset-backed securities that
are "Eligible Securities" as defined by the SEC. The Government Portfolio and
Government Select Portfolio may purchase asset-backed securities (such as
mortgage-backed securities) that are issued and guaranteed by the U.S.
government, its agencies, instrumentalities or sponsored enterprises.
Special Risks. In addition to credit and market risk, asset-backed securities
usually involve prepayment risk because the underlying assets (loans) usually
may be prepaid at any time. The value of these securities also may 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 generally are 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.
MONEY MARKET PORTFOLIOS
33
Borrowings and Reverse Repurchase Agreements. The Portfolios may borrow money
from banks and may enter into reverse repurchase agreements with banks and
other financial institutions. Reverse repurchase agreements involve the sale of
money market securities held by a Portfolio subject to the Portfolio's
agreement to repurchase them at a mutually agreed upon date and price
(including interest).
Investment Strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of its total assets
(including the amount borrowed). Each Portfolio also may borrow up to an
additional 5% of its total assets for temporary purposes. The Portfolios may
enter into reverse repurchase agreements when the investment management team
expects that the interest income to be earned from the investment of the
transaction proceeds will be greater than the related interest expense.
Special Risks. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Portfolios decline in value while these
transactions are outstanding, the net asset value of the Portfolios'
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 Portfolio (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 Portfolio will
decline below the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Portfolio.
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 Diversified Assets, Government, Tax-Exempt and Municipal
Portfolios may invest a portion of their assets in custodial receipts.
Investments by the Government Portfolio in custodial receipts, if any, are
expected to be minimal and in no event will exceed 20% of the value of the
Portfolio's net assets.
Special Risks. Like other stripped obligations (which are described below),
stripped 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.
Derivatives. Each Portfolio 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 rates, or other indices.
Derivatives include structured securities such as collateralized mortgage
obligations and other types of asset-backed securities, "stripped" securities
and various floating rate instruments.
Investment Strategy. A Portfolio may invest in derivatives when the Investment
Adviser believes the potential risks and rewards are consistent with the
Portfolio's objective, strategies and overall risk profile.
Special Risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio'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 Portfolio 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
recently have been developed and have not been tested over complete market
cycles. For these reasons, a Portfolio may suffer a loss whether or not the
analysis of the investment management team is accurate.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
34
Foreign Investments. The Diversified Assets Portfolio, and to the extent
permitted below, the Government Portfolio, may invest in U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, foreign commercial banks and foreign branches of U.S. banks.
The Diversified Assets Portfolio also may invest in U.S. dollar-denominated
commercial paper and other obligations of foreign issuers. Foreign government
obligations may include debt obligations of supranational entities, including
international organizations (such as the European Coal and Steel Community and
the International Bank for Reconstruction and Development (also known as the
World Bank)) and international banking institutions and related government
agencies.
Investment Strategy. Investments by the Diversified Assets Portfolio in foreign
issuer obligations will not exceed 50% of the Portfolio's total assets measured
at the time of purchase. The Government Portfolio may make limited investments
(but in no event more than 20% of its net assets) in debt obligations of
supranational entities.
Special Risks. Foreign securities involve special risks and costs, which are
considered by the Investment Adviser in evaluating creditworthiness of issuers
and making investment decisions for the Portfolios. 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 otherwise not
respect the integrity of their debt.
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 also
may 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 adversely might
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.
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), 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").
MONEY MARKET PORTFOLIOS
35
Investment Strategy. Each Portfolio may invest up to 10% of its net assets in
securities that are illiquid. A domestically traded security which is not
registered under the 1933 Act will not be considered illiquid if the Investment
Adviser determines that an adequate trading market exists for that security. If
otherwise consistent with their investment objectives and policies, the
Portfolios may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act ("Rule 144A Securities"). These securities will not be considered
illiquid so long as the Investment Adviser determines, under guidelines
approved by the Trust's Board of Trustees, that an adequate trading market
exists.
Special Risks. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Portfolio. The practice of investing in Rule 144A
Securities and commercial paper available to qualified institutional buyers
could increase the level of 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 Portfolio to make cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits interest to the Portfolio for a set time period.
Investment Strategy. The Diversified Assets Portfolio may invest in IFAs issued
by insurance companies that meet quality and credit standards established by
the Investment Adviser.
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, there may be no active secondary market for IFAs.
This means that it may be difficult to sell an IFA at an appropriate price.
Investment Companies. To the extent consistent with their respective investment
objectives and policies, the Portfolios may invest in securities issued by
other investment companies.
Investment Strategy. Investments by a Portfolio in other money market funds
will be subject to the limitations of the Investment Company Act of 1940 and
SEC orders. Although the Portfolios do not expect to do so in the foreseeable
future, each Portfolio is authorized to invest substantially all of its assets
in an open-end investment company or a series thereof that has substantially
the same investment objective, policies and fundamental restrictions as the
Portfolio.
Special Risks. As a shareholder of another investment company, a Portfolio
would be subject to the same risks as any other investor in that company. It
also would bear a proportionate share of any fees or expenses paid by that
company. These expenses would be in addition to the advisory fees and other
expenses the Portfolio bears directly in connection with its own operations.
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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
36
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 also
are 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 typically are payable by the private user of the
facilities financed by the bonds.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and asset-backed securities such as custodial
receipts. Moral obligation bonds 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 or
custodian.
The Tax-Exempt Portfolio and Municipal Portfolio may each acquire "stand-by
commitments" relating to the municipal instruments it holds. Under a stand-by
commitment, a dealer agrees to purchase, at the Portfolio'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. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights for
trading purposes.
Investment Strategy. Although it is not their current policy to do so on a
regular basis, each of the Tax-Exempt and Municipal Portfolios may invest more
than 25% of its total assets in municipal instruments the interest upon which
is paid solely from revenues of similar projects. However, neither the
Tax-Exempt Portfolio nor the Municipal Portfolio intends to invest more than
25% of the value of its 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.
Portfolios in addition to the Tax-Exempt and Municipal Portfolios 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 Portfolios on
such investments will be taxable to shareholders.
Special Risks. Municipal instruments purchased by the Tax-Exempt and Municipal
Portfolios 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 and financial institutions declines, a Portfolio could suffer a loss to
the extent that the Portfolio is relying upon this credit support. Foreign
institutions can present special risks relating to higher transaction and
custody costs, the imposition of additional taxes by foreign governments, less
complete financial information, less market liquidity, more market volatility
and political instability. Foreign banks, insurance companies and financial
institutions may be subject to less stringent reserve requirements, and to
different accounting, auditing and recordkeeping requirements than U.S. banks.
MONEY MARKET PORTFOLIOS
37
In addition, when a substantial portion of a Portfolio'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 otherwise are related,
there is a possibility that an economic, business or political development
affecting one instrument would likewise affect the related instrument.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment Strategy. Each Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement will never occur more than one year after a Portfolio acquires the
securities.
Special Risks. In the event of a default, a Portfolio 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 Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In addition,
in the event of bankruptcy, a Portfolio could suffer additional losses if a
court determines that the Portfolio's interest in the collateral is
unenforceable by the Portfolio.
Securities Lending. In order to generate additional income, the Diversified
Assets and Government Portfolios may lend securities to banks, brokers and
dealers or other qualified institutions. In exchange, the Portfolios 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 Portfolio's total assets (including the loan collateral). Any
cash collateral received by a Portfolio in connection with these loans may be
invested in short-term instruments, either directly or indirectly through other
money market portfolios. Such investments are not limited to U.S. government
securities and may include any instruments that may be purchased by the
Diversified Assets Portfolio. Loan collateral (including any investment of the
collateral) is not included in the calculation of the percentage limitations
described elsewhere in this Prospectus regarding a Portfolio's investments in
particular types of securities.
Special Risks. A principal risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligations to return
the securities. In this event, a Portfolio could experience delays in
recovering its securities and possibly may incur a capital loss. A Portfolio
will be responsible for any loss that might result from its investment of the
cash collateral it receives from a borrower. Additionally, the amount of income
to shareholders that is taxable at the state level may increase as a result of
a Portfolio's securities lending activities. Any state tax-exempt interest paid
on securities while on loan will not be deemed to have been received by a
Portfolio, and the equivalent amount paid by the borrower of the securities to
the Portfolio will not be deemed to be interest exempt from state taxes, but is
likely to be deemed taxable income to shareholders.
Stripped Obligations. These securities are issued by the U.S. government (or an
agency, instrumentality or a sponsored enterprise), 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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
38
Investment Strategy. To the extent consistent with their respective investment
objectives, each of the Portfolios 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
either interest rates or principal prepayments could depress the price of
stripped securities held by the Portfolios and adversely affect a Portfolio's
investment performance.
Taxable Investments. Taxable investments include U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and related custodial receipts; and repurchase agreements
relating to the above instruments.
Investment Strategy. The Tax-Exempt and Municipal Portfolios each may invest
from time to time, on a temporary basis or for temporary defensive purposes, in
short-term taxable instruments that are "Eligible Securities" as defined by the
SEC for money market funds.
Special Risks. Dividends paid by the Tax-Exempt and Municipal Portfolios that
are derived from interest paid on taxable investments generally will be taxable
to each Portfolio's shareholders as ordinary income for federal income tax
purposes. The Tax-Exempt and Municipal Portfolios may not achieve their
investment objectives when their assets are invested in taxable obligations.
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, its agencies, instrumentalities or
sponsored enterprises. Securities guaranteed as to principal and interest by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
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, an agency, instrumentality or sponsored enterprise thereof, and (b)
participations in loans made to foreign governments or their agencies that are
so guaranteed.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in a variety of U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
Special Risks. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("Ginnie Mae"), 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 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 or sponsored enterprise. No assurance can be
given that the U.S. government would provide financial support to its agencies,
instrumentalities or sponsored enterprises 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.
MONEY MARKET PORTFOLIOS
39
Variable and Floating Rate Instruments. Variable and floating rate instruments
have interest rates that periodically are adjusted either at set intervals or
that float at a margin tied to a specified index rate. These instruments
include variable amount master demand notes and long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where a Portfolio 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.
Investment Strategy. Each Portfolio may invest in variable and floating rate
instruments to the extent consistent with its investment objective.
Special Risks. Variable and floating rate instruments are subject to many of
the same risks as fixed rate instruments, particularly credit risk. 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 Portfolios are not entitled to
exercise their demand rights. As a result, the Portfolios could suffer a loss
with respect to these instruments.
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 Portfolio may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Portfolios generally would purchase securities in these transactions with the
intention of acquiring the securities, the Portfolios may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special Risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities may
decrease by the time they actually are issued or delivered. Conversely, selling
securities in these transactions involves the risk that the value of the
securities may increase by the time they actually are issued or delivered.
These transactions also involve the risk that the counterparty may fail to
deliver the security or cash on the settlement date.
Miscellaneous. TNTC is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
40
FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE
FINANCIAL PERFORMANCE OF A PORTFOLIO'S SHARES FOR THE PAST FIVE YEARS (OR, IF
SHORTER, THE PERIOD OF THE PORTFOLIO'S OPERATIONS). Certain information
reflects financial results for a single share. The total returns in the
tables represent the rate that an investor would have earned or lost on an
investment in shares of a Portfolio held for the entire period (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolios'
financial statements, is included in the Portfolios' annual report, which is
available upon request and without charge.
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MONEY MARKET PORTFOLIOS
41
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
DIVERSIFIED ASSETS PORTFOLIO
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SHARES
Selected per share data 2003 2002 2001 2000 1999
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Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.02 0.04 0.06 0.05
Total income from investment operations 0.01 0.02 0.04 0.06 0.05
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Less distributions paid:
From net investment income (0.01) (0.02) (0.04) (0.06) (0.05)
Total Distributions Paid (0.01) (0.02) (0.04) (0.06) (0.05)
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Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
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Total return/(1)/ 0.96% 1.76% 4.52% 6.20% 4.99%
Supplemental data and ratios:
Net assets, in thousands, end of year $10,211,783 $10,861,104 $9,620,568 $7,526,789 $7,475,275
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.35% 0.35% 0.35% 0.35% 0.35%
Expenses, before waivers and reimbursements 0.37% 0.37% 0.36% 0.38% 0.38%
Net investment income, net of waivers and
reimbursements 0.97% 1.76% 4.35% 6.05% 4.89%
Net investment income, before waivers and
reimbursements 0.95% 1.74% 4.34% 6.02% 4.86%
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(1)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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
42
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
GOVERNMENT PORTFOLIO
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SHARES
Selected per share data 2003 2002 2001 2000 1999
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Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.02 0.04 0.06 0.05
Total income from investment operations 0.01 0.02 0.04 0.06 0.05
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Less distributions paid:
From net investment income (0.01) (0.02) (0.04) (0.06) (0.05)
Total distributions paid (0.01) (0.02) (0.04) (0.06) (0.05)
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Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
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Total return/(1)/ 0.92% 1.59% 4.30% 6.10% 5.08%
Supplemental data and ratios:
Net assets, in thousands, end of year $3,081,385 $2,638,730 $2,747,048 $2,062,597 $1,565,743
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.35% 0.35% 0.35% 0.35% 0.35%
Expenses, before waivers and reimbursements 0.37% 0.38% 0.38% 0.38% 0.38%
Net investment income, net of waivers and
reimbursements 0.91% 1.58% 4.07% 5.95% 4.75%
Net investment income, before waivers and
reimbursements 0.89% 1.55% 4.04% 5.92% 4.72%
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(1)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.
MONEY MARKET PORTFOLIOS
43
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
GOVERNMENT SELECT PORTFOLIO
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SHARES
Selected per share data 2003 2002 2001 2000 1999
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Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.02 0.04 0.06 0.05
Total income from investment operations 0.01 0.02 0.04 0.06 0.05
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Less distributions paid:
From net investment income (0.01) (0.02) (0.04) (0.06) (0.05)
Total distributions paid (0.01) (0.02) (0.04) (0.06) (0.05)
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Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
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Total return/(1)/ 0.98% 1.67% 4.39% 6.18% 4.94%
Supplemental data and ratios:
Net assets, in thousands, end of year $5,390,753 $4,068,010 $4,280,572 $2,576,552 $2,150,263
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.20% 0.20% 0.20% 0.20% 0.20%
Expenses, before waivers and reimbursements 0.32% 0.33% 0.37% 0.38% 0.38%
Net investment income, net of waivers and
reimbursements 0.98% 1.66% 4.14% 6.03% 4.85%
Net investment income, before waivers and
reimbursements 0.86% 1.53% 3.97% 5.85% 4.67%
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(1)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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
44
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
TAX-EXEMPT PORTFOLIO
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SHARES
Selected per share data 2003 2002 2001 2000 1999
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Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.03 0.04 0.03
Total income from investment operations 0.01 0.01 0.03 0.04 0.03
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Less distributions paid:
From net investment income (0.01) (0.01) (0.03) (0.04) (0.03)
Total distributions paid (0.01) (0.01) (0.03) (0.04) (0.03)
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Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
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Total return/(1)/ 0.82% 1.31% 2.84% 3.88% 3.03%
Supplemental data and ratios:
Net assets, in thousands, end of year $576,067 $906,147 $683,912 $663,641 $555,692
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.35% 0.35% 0.35% 0.35% 0.35%
Expenses, before waivers and reimbursements 0.38% 0.37% 0.38% 0.40% 0.39%
Net investment income, net of waivers and reimbursements 0.83% 1.31% 2.79% 3.83% 2.89%
Net investment income, before waivers and reimbursements 0.80% 1.29% 2.76% 3.78% 2.85%
------------------------------------------------------------------------------------------------------------
(1)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.
MONEY MARKET PORTFOLIOS
45
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
MUNICIPAL PORTFOLIO
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------
SHARES
Selected per share data 2003 2002 2001 2000/(3)/
----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.03 0.04
Total income from investment operations 0.01 0.01 0.03 0.04
----------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.03) (0.04)
Total distributions paid (0.01) (0.01) (0.03) (0.04)
----------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------------------------------------------------
Total return/(1)/ 0.93% 1.41% 2.93% 3.99%
Supplemental data and ratios:
Net assets, in thousands, end of period $666,525 $413,098 $141,721 $78,621
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements 0.20% 0.21% 0.21% 0.21%
Expenses, before waivers and reimbursements 0.33% 0.36% 0.43% 0.53%
Net investment income, net of waivers and reimbursements 0.90% 1.40% 2.82% 3.98%
Net investment income, before waivers and reimbursements 0.77% 1.25% 2.60% 3.66%
----------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)For the period December 1, 1999 (commencement of operations) through
November 30, 2000.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
46
THIS PAGE INTENTIONALLY LEFT BLANK
MONEY MARKET PORTFOLIOS
47
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORTS
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders.
In the Portfolios' annual reports, you will find a discussion of the market
conditions and investment strategies that significantly affected the
Portfolios' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolios and their policies also is
available in the Portfolios' Additional Statement. The Additional Statement is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports and the Additional Statement are
available free upon request by calling the Northern Institutional Funds Center
at 800/637-1380.
To obtain other information and for shareholder inquiries:
BY TELEPHONE
Call 800/637-1380
BY MAIL
Northern Institutional Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Portfolios' documents are available online and may be
downloaded from:
.. The SEC's Web site at sec.gov
.. Northern Institutional Funds' Web site at northerninstitutionalfunds.com
You may review and obtain copies of Northern Institutional Funds documents by
visiting the SEC's Public Reference Room in Washington, D.C. You also may
obtain copies of Northern Institutional Funds documents by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-0102 or by electronic request at publicinfo@sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202/942-8090.
811-3605
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
48
NORTHERN INSTITUTIONAL FUNDS
MONEY MARKET PORTFOLIOS--SERVICE & PREMIER SHARES
.. DIVERSIFIED ASSETS PORTFOLIO
.. GOVERNMENT PORTFOLIO
.. GOVERNMENT SELECT PORTFOLIO
.. TAX-EXEMPT PORTFOLIO
.. MUNICIPAL PORTFOLIO
Prospectus dated April 1, 2004
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other
government agency. An investment in a Portfolio involves investment risks
including possible loss of principal.
Although each of the Portfolios seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in the Portfolios.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
OVERVIEW
RISK/RETURN SUMMARY
Information about the objectives, principal strategies and risk characteristics
of each Portfolio.
[Download Table]
4 Portfolios
4
Diversified Assets Portfolio
5
Government Portfolio
5
Government Select Portfolio
6
Tax-Exempt Portfolio
7
Municipal Portfolio
8 Principal Investment Risks
10
Portfolio Performance
11
Diversified Assets Portfolio
12
Government Portfolio
13
Government Select Portfolio
14
Tax-Exempt Portfolio
15
Municipal Portfolio
16
Portfolio Fees and Expenses
MANAGEMENT OF THE PORTFOLIOS
Details that apply to the Portfolios as a group.
21
Investment Adviser
22
Advisory Fees
23
Other Portfolio Services
ABOUT YOUR ACCOUNT
How to open, maintain and close an account.
24
Purchasing and Selling Service Shares and Premier
Shares
24
Investors
24
Share Classes
24
Opening an Account
25
Selling Service Shares and Premier Shares
[Download Table]
26
Account Policies and Other Information
26
Automatic Investment Arrangements
26
Purchase and Redemption Minimums
26
Calculating Share Price
26
Timing of Purchase Requests
26
In-Kind Purchases and Redemptions
27
Miscellaneous Purchase Information
27
Timing of Redemption and Exchange Requests
27
Payment of Redemption Proceeds
27
Miscellaneous Redemption Information
28
Exchange Privileges
28
Telephone Transactions
28
Advance Notification of Large Transactions
28
Making Changes to Your Account Information
28
Business Day
28
Good Order
28
Customer Identification Program
29
Early Closings
29
Emergency Events
29
Financial Intermediaries
30
Shareholder Communications
31
Distributions and Taxes
31
Distributions
31
Taxes
32
Other Tax Information
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL
INFORMATION
33
Risks, Securities and Techniques
41
Financial Information
42
Financial Highlights
FOR MORE INFORMATION
52
Annual/Semiannual Reports
52
Statement of Additional Information
OVERVIEW
NORTHERN INSTITUTIONAL FUNDS (THE "TRUST") OFFERS FIVE MONEY MARKET
PORTFOLIOS (EACH A "PORTFOLIO") TO INSTITUTIONAL INVESTORS. EACH PORTFOLIO IS
AUTHORIZED TO OFFER THREE CLASSES OF SHARES: SHARES, SERVICE SHARES AND
PREMIER SHARES. SHARES ARE DESCRIBED IN A SEPARATE PROSPECTUS.
--------------------------------------------------------------------------------
The descriptions on the following pages may help you choose the Portfolio or
Portfolios that best fit your investment needs. Keep in mind, however, that no
Portfolio can guarantee it will meet its investment objective and no Portfolio
should be relied upon as a complete investment program. The Trust also offers
other money market, fixed income, balanced and equity portfolios, which are
described in separate prospectuses.
The Portfolios seek to maintain a stable net asset value ("NAV") of $1.00 per
share. Consistent with this policy, each of the Portfolios:
.. 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 Portfolio limits its investments to "Eligible Securities" as
defined by the 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 Portfolio 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 they are determined to be of comparable quality by the Investment Adviser
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
Portfolio may continue to hold the issue if the Investment Adviser believes it
is in the best interest of the Portfolio and its shareholders. Securities that
are in the highest short-term rating category (and comparable unrated
securities) are called "First Tier Securities." Under normal circumstances, the
Diversified Assets, Government and Government Select Portfolios intend to limit
purchases of securities to First Tier Securities. Securities in which the
Portfolios may invest may not earn as high a level of income as long-term or
lower quality securities, which generally have greater market risk and more
fluctuation in market value.
In accordance with current SEC regulations, each Portfolio generally 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. The Portfolios may, however, 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 ("Additional Statement").
In addition to the instruments described above and on the following pages, each
Portfolio may use various investment techniques in seeking its investment
objective. You can learn more about these techniques and related risks by
reading "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus and in the Additional Statement.
MONEY MARKET PORTFOLIOS
3
PORTFOLIOS
DIVERSIFIED ASSETS PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve 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 (such as credit card and automobile receivables);
.. Securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies, instrumentalities or sponsored enterprises 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;
.. Municipal securities issued or guaranteed by state or local governmental
bodies; and
.. Repurchase agreements relating to the above instruments.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), counterparty failure, guarantor (or credit
enhancement), management, liquidity, prepayment (or call), debt extension and
foreign securities risks. See page 8 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
4
GOVERNMENT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve its objective by
investing, under normal circumstances, substantially all (and at least 80%) of
its net assets in securities issued or guaranteed as to principal and interest
by the U.S. government, its agencies, instrumentalities or sponsored
enterprises, and repurchase agreements backed by such securities.
The Portfolio may make significant investments in securities issued by U.S.
government-sponsored entities. Such securities are neither issued nor
guaranteed by the U.S. Treasury.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, prepayment (or call), debt extension, U.S. government
securities, counterparty failure, guarantor (or credit enhancement), management
risk and liquidity risks. See page 8 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
GOVERNMENT SELECT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve its investment objective
by investing, under normal circumstances, substantially all (and at least 80%)
of its net assets in securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies, instrumentalities or sponsored
enterprises. Under normal circumstances, the Portfolio will seek to acquire
only those U.S. government securities the interest upon which generally is
exempt from state income taxation. These securities include obligations issued
by the U.S. Treasury and certain U.S. government agencies, instrumentalities
and sponsored enterprises, such as the Federal Home Loan Bank and the Federal
Farm Credit Banks Funding Corp.
Under unusual circumstances, as when appropriate securities which are exempt
from state taxes are unavailable, the Portfolio also may 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 hold uninvested
cash.
The Portfolio may make significant investments in securities issued by U.S.
government-sponsored entities. Such securities are neither issued nor
guaranteed by the U.S. Treasury.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, prepayment (or call), debt extension, counterparty failure, U.S.
government securities, guarantor (or credit enhancement), management and
liquidity risks. See page 8 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
MONEY MARKET PORTFOLIOS
5
TAX-EXEMPT PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide its shareholders, to the extent consistent with
the preservation of capital and prescribed portfolio standards, with a high
level of income exempt from federal income tax by investing primarily in
municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio seeks to achieve its objective by
investing primarily in high-quality short-term municipal instruments, the
interest on which is exempt from regular federal income tax. The high level of
income sought by the Portfolio is relative to yields currently available in the
tax-exempt marketplace. Municipal instruments may include:
.. Fixed, variable and floating rate notes and similar debt instruments;
.. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
.. 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, instrumentalities or
sponsored enterprises.
Except in extraordinary circumstances, at least 80% of the Portfolio's net
assets will be invested in debt instruments, the interest on which is exempt
from regular federal income tax. Alternative Minimum Tax ("AMT") obligations,
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
be eligible debt instruments for the purposes of determining whether the
Portfolio meets this policy. For shareholders subject to AMT, a limited portion
of the Portfolio's dividends may be subject to federal income tax.
During temporary defensive periods, all or any portion of the Portfolio's
assets may be held uninvested or invested in AMT obligations and taxable
instruments. Taxable investments may consist of those instruments that may be
purchased by the Diversified Assets Portfolio. The Portfolio may not achieve
its investment objective when this temporary defensive strategy is used.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), guarantor (or credit enhancement),
counterparty failure, management, liquidity, prepayment (or call), debt
extension, project/industrial development bond and tax risks. See page 8 for a
discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
6
MUNICIPAL PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks to provide, to the extent consistent with the preservation
of capital, a high level of income exempt from regular federal income tax by
investing primarily in municipal instruments. This objective may be changed
without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. The Portfolio seeks to achieve its objective by
investing primarily in high-quality short-term municipal instruments, the
interest on which is exempt from regular federal income tax. The high level of
income sought by the Portfolio is relative to yields currently available in the
tax-exempt marketplace. Municipal instruments may include:
.. Fixed, variable and floating rate notes and similar debt instruments;
.. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
.. 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, instrumentalities or
sponsored enterprises.
Except in extraordinary circumstances, at least 80% of the Portfolio's net
assets will be invested in debt instruments that pay interest which is exempt
from regular federal income tax. AMT obligations, which pay interest that may
be treated as an item of tax preference to shareholders under the federal
alternative minimum tax, will be deemed eligible investments for the purposes
of determining whether the portfolio meets this policy. To the extent that the
Portfolio invests in AMT obligations, a significant portion of the Portfolio's
dividends may be subject to federal income tax for shareholders subject to AMT.
Although the Portfolio is not limited in the amount of its assets that may be
invested in AMT obligations, the Portfolio does not currently intend to invest
in AMT obligations.
During temporary defensive periods, all or any portion of the Portfolio's
assets may be held uninvested or invested in taxable instruments. Taxable
investments may consist of those instruments that may be purchased by the
Diversified Assets Portfolio. The Portfolio may not achieve its investment
objective when this temporary defensive strategy is used.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), guarantor (or credit enhancement),
counterparty failure, management, liquidity, prepayment (or call), debt
extension, project/industrial development bond and tax risks. See page 8 for a
discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33 of this
Prospectus.
MONEY MARKET PORTFOLIOS
7
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Portfolio, its yield and investment performance, and the price of its shares.
AN INVESTMENT IN EACH OF THE PORTFOLIOS IS NOT A DEPOSIT OF ANY BANK AND IS
NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH EACH OF THE PORTFOLIOS SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE PORTFOLIOS.
The following summarizes the principal risks that may affect the Portfolios.
--------------------------------------------------------------------------------
RISKS THAT APPLY TO ALL PORTFOLIOS
Stable NAV risk is the risk that a Portfolio will not be able to maintain a net
asset value per share of $1.00 at all times.
Interest rate risk is the risk that during periods of rising interest rates, a
Portfolio'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
Portfolio's yield (and the market value of its securities) will tend to be
higher.
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 Portfolio'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.
Counterparty failure risk is the risk that a bank or other financial
institution that has entered into a repurchase agreement or other transaction
may default on its payment obligations.
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 Portfolio 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.
RISK THAT APPLIES PRIMARILY TO THE GOVERNMENT AND GOVERNMENT SELECT PORTFOLIOS
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. Although many
U.S. government securities purchased by the Portfolios, such as those issued by
the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan
Mortgage Corporation ("Freddie Mac") and Federal Home Loan Banks may be
chartered or sponsored by Acts of Congress, their securities are neither issued
nor guaranteed by the United States Treasury and, therefore, are not backed by
the full faith and credit of the United States. The maximum potential liability
of the issuers of some U.S. government securities held by a Portfolio may
greatly exceed their current resources, including their legal right to support
from the U.S. Treasury. It is possible that these issuers will not have the
funds to meet their payment obligations in the future.
RISKS THAT APPLY PRIMARILY TO THE DIVERSIFIED ASSETS, TAX-EXEMPT AND MUNICIPAL
PORTFOLIOS
Credit (or default) risk is the risk that an issuer of fixed income securities
held by a Portfolio 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 securities generally are believed to have relatively low degrees of
credit risk.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
8
Prepayment (or call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as an asset-backed
security) sooner than expected. This may happen during a period of falling
interest rates. Accordingly, a Portfolio's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Portfolio (such as an asset-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
RISKS THAT APPLY TO THE TAX-EXEMPT AND MUNICIPAL PORTFOLIOS
Project/industrial development bond risk is the risk that a Portfolio may be
more sensitive to an adverse economic, business or political development if it
invests more than 25% of its assets 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 materially may affect the ability of a Portfolio to pay tax-exempt
dividends or the value of municipal instruments.
RISK THAT APPLIES TO THE DIVERSIFIED ASSETS PORTFOLIO
Foreign securities risk is the risk that a foreign security, even if it is a
U.S. dollar-denominated foreign security, could lose value as a result of
political, financial and economic events in foreign countries, less stringent
foreign securities regulations and accounting and disclosure standards, or
other factors.
More information about the Portfolios' investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 33. You should
consider carefully the risks discussed in this section and "Risks, Securities
and Techniques" before investing in a Portfolio.
MONEY MARKET PORTFOLIOS
9
PORTFOLIO PERFORMANCE
THE BAR CHARTS AND TABLES THAT FOLLOW PROVIDE AN INDICATION OF THE RISKS OF
INVESTING IN A PORTFOLIO BY SHOWING CHANGES IN THE PERFORMANCE OF A PORTFOLIO
FROM YEAR TO YEAR.
The bar charts and tables assume reinvestment of dividends and distributions.
A Portfolio's past performance is not necessarily an indication of how the
Portfolio will perform in the future. Performance reflects certain expense
limitations that were in effect during the periods presented. If expense
limitations were not in place, a Portfolio's performance would have been
reduced.
Premier Shares for the Municipal Portfolio have not yet been issued and there
are no Premier Shares currently outstanding for the Tax-Exempt Portfolio.*
For this reason, the performance information shown below for the Municipal
Portfolio and Tax-Exempt Portfolio is only for Service Shares. Service
Shares, Premier Shares and Shares are all invested in the same portfolio of
securities. IN REVIEWING THIS PERFORMANCE INFORMATION, HOWEVER, YOU SHOULD BE
AWARE THAT SERVICE SHARES HAVE ANNUALIZED SERVICING AGENT FEES OF 0.25% AND A
0.01% ANNUALIZED TRANSFER AGENCY FEE, PREMIER SHARES HAVE ANNUALIZED
SERVICING AGENT FEES OF 0.50% AND A 0.02% ANNUALIZED TRANSFER AGENCY FEE, AND
SHARES HAVE NO SERVICING AGENT FEES AND A LESS THAN 0.01% ANNUALIZED TRANSFER
AGENCY FEE.
*Premier Shares for the Tax-Exempt Portfolio were initially issued on July 11,
2001 and all Premier Shares for this Portfolio were redeemed on September 26,
2001.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
10
DIVERSIFIED ASSETS PORTFOLIO
CALENDAR YEAR TOTAL RETURN: SERVICE SHARES
[CHART]
1999 2000 2001 2002 2003
----- ------ ------ ------ ------
4.68% 5.92% 3.89% 1.41% 0.67%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 2000 1.53%
Worst Quarter Return Q4 2003 0.13%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
---------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
---------------------------------------------------------------------------------------
Diversified Assets Portfolio
---------------------------------------------------------------------------------------
Service Shares 7/1/98 0.67% 3.29% 3.45%
---------------------------------------------------------------------------------------
Premier Shares 4/1/99 0.41% N/A 2.96%
---------------------------------------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31, 2003: 0.54%.
The 7-day yield for Premier Shares of the Portfolio as of December 31, 2003: 0.28%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
MONEY MARKET PORTFOLIOS
11
GOVERNMENT PORTFOLIO
CALENDAR YEAR TOTAL RETURN: PREMIER SHARES
[CHART]
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
4.28% 5.55% 3.37% 1.00% 0.36%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 2000 1.44%
Worst Quarter Return Q4 2003 0.06%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
---------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
---------------------------------------------------------------------------------------
Government Portfolio
---------------------------------------------------------------------------------------
Service Shares 4/1/99 0.63% N/A 3.10%
---------------------------------------------------------------------------------------
Premier Shares 12/15/98 0.36% 2.89% 2.91%
---------------------------------------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31, 2003: 0.49%.
The 7-day yield for Premier Shares of the Portfolio as of December 31, 2003: 0.23%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
12
GOVERNMENT SELECT PORTFOLIO
CALENDAR YEAR TOTAL RETURN: PREMIER SHARES
[CHART]
1999 2000 2001 2002 2003
----- ------ ------ ------ ------
4.40% 5.64% 3.46% 1.08% 0.43%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 2000 1.46%
Worst Quarter Return Q4 2003 0.08%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
----------------------------------------------------------------------------------------------
Inception Since
Date 1-Year 5-Year Inception
----------------------------------------------------------------------------------------------
Government Select Portfolio
----------------------------------------------------------------------------------------------
Service Shares 5/28/99 0.69% N/A 3.14%
----------------------------------------------------------------------------------------------
Premier Shares* 11/23/98 0.43% 2.98% 3.01%
----------------------------------------------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31, 2003: 0.56%.
The 7-day yield for Premier Shares of the Portfolio as of December 31, 2003: 0.30%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
*For the Portfolio's Premier Shares, performance from July 21, 1999 through September 29, 1999
is that of the Portfolio's Shares class, as no Premier Shares were outstanding during such period.
Because the fees and expenses of Premier Shares are higher than those of Shares, actual
performance would have been lower if these higher fees and expenses had been taken into account.
MONEY MARKET PORTFOLIOS
13
TAX-EXEMPT PORTFOLIO
CALENDAR YEAR TOTAL RETURN: SERVICE SHARES
[CHART]
2000 2001 2002 2003
---- ---- ---- ----
3.57% 2.35% 1.01% 0.55%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q4 2000 0.93%
Worst Quarter Return Q3 2003 0.09%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
---------------------------------------------------------------------------------------
Inception Since
Date 1-Year Inception
---------------------------------------------------------------------------------------
Tax-Exempt Portfolio
---------------------------------------------------------------------------------------
Service Shares 5/13/99 0.55% 1.98%
---------------------------------------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31, 2003: 0.64%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
14
MUNICIPAL PORTFOLIO
CALENDAR YEAR TOTAL RETURN: SERVICE SHARES
[CHART]
2001 2002 2003
---- ---- ----
2.45% 1.12% 0.65%
BEST AND WORST QUARTERLY PERFORMANCE
(for the periods ended December 31, 2003)
Best Quarter Return Q1 2001 0.74%
Worst Quarter Return Q3 2003 0.12%
[Enlarge/Download Table]
AVERAGE ANNUAL TOTAL RETURN
(for the periods ended December 31, 2003)
---------------------------------------------------------------------------------------
Inception Since
Date 1-Year Inception
---------------------------------------------------------------------------------------
Municipal Portfolio
---------------------------------------------------------------------------------------
Service Shares 2/11/00 0.65% 1.94%
---------------------------------------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31, 2003: 0.76%.
For the current 7-day yield, call 800/637-1380 or visit northerninstitutionalfunds.com.
MONEY MARKET PORTFOLIOS
15
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Service Shares and Premier Shares of the Portfolios. Please note that the
following information does not reflect any charges that may be imposed by The
Northern Trust Company ("TNTC"), its affiliates, correspondent banks and other
institutions on their Customers (as defined on page 24). (For more information,
please see "Account Policies and Other Information" on page 26.)
[Enlarge/Download Table]
------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
------------------------------------------------------------------
Sales Charge
Sales Charge (Load) Imposed
(Load) Imposed Deferred Sales on Reinvested Redemption Exchange
Portfolio on Purchases Charge (Load) Distributions Fees Fees
-------------------------------------------------------------------------------------
Diversified Assets
Service Shares None None None None None
Premier Shares None None None None None
-------------------------------------------------------------------------------------
Government
Service Shares None None None None None
Premier Shares None None None None None
-------------------------------------------------------------------------------------
Government Select
Service Shares None None None None None
Premier Shares None None None None None
-------------------------------------------------------------------------------------
Tax-Exempt
Service Shares None None None None None
Premier Shares* None None None None None
-------------------------------------------------------------------------------------
Municipal
Service Shares None None None None None
Premier Shares* None None None None None
-------------------------------------------------------------------------------------
------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
16
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)
---------------------------------------------------------------------------------------------------
Total Annual
Management Distribution Other Service Agent Transfer Agent Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees Fees/(1)/ Expenses/(2)/
---------------------------------------------------------------------------------------------------
0.25% None 0.38% 0.25% 0.01% 0.12% 0.63%
0.25% None 0.64% 0.50% 0.02% 0.12% 0.89%
---------------------------------------------------------------------------------------------------
0.25% None 0.38% 0.25% 0.01% 0.12% 0.63%
0.25% None 0.64% 0.50% 0.02% 0.12% 0.89%
---------------------------------------------------------------------------------------------------
0.20% None 0.38% 0.25% 0.01% 0.12% 0.58%
0.20% None 0.64% 0.50% 0.02% 0.12% 0.84%
---------------------------------------------------------------------------------------------------
0.25% None 0.39% 0.25% 0.01% 0.13% 0.64%
0.25% None 0.65% 0.50% 0.02% 0.13% 0.90%
---------------------------------------------------------------------------------------------------
0.20% None 0.39% 0.25% 0.01% 0.13% 0.59%
0.20% None 0.65% 0.50% 0.02% 0.13% 0.85%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIOS
17
FOOTNOTES
/1/"OtherOperating Expenses" along with "Servicing Agent Fees" and "Transfer
Agency Fees" is a subcategory of "Other Expenses" and includes
co-administration fees and all other ordinary operating expenses of
the Portfolios not listed above. The Co-Administrators are entitled to
a co-administration fee from the Portfolios at an annual rate of 0.10%
of the average daily net assets of each Portfolio. Under the
Co-Administration Agreement with the Trust, which may be amended
without shareholder approval, the Co-Administrators have agreed to
reimburse expenses (including fees payable to the Co-Administrators,
but excluding management fees, transfer agency fees, servicing agent
fees, taxes, interest and other extraordinary expenses), which exceed
on an annualized basis 0.10% of each Portfolio's average daily net
assets.
/2/For certain Portfolios, the Investment Adviser has voluntarily agreed to
waive a portion of its management fee, as shown below. Also set forth below
are the distribution (12b-1) fees, other expenses and total annual portfolio
operating expenses that actually are incurred by the Portfolios as a result
of these voluntary fee waivers and the expense reimbursements discussed in
footnote 1. Voluntary fee reductions may be modified, terminated or
implemented at any time at the option of the Investment Adviser or other
service providers to the Portfolios. If this occurs, "Total Annual Portfolio
Operating Expenses" may increase (or decrease) without shareholder approval.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
18
[Download Table]
-------------------------------------------------------------------------
Total Annual
Management Distribution Other Portfolio Operating
Portfolio Fees (12b-1) Fees Expenses Expenses
-------------------------------------------------------------------------
Diversified Assets
Service Shares 0.25% None 0.36% 0.61%
Premier Shares 0.25% None 0.62% 0.87%
-------------------------------------------------------------------------
Government
Service Shares 0.25% None 0.36% 0.61%
Premier Shares 0.25% None 0.62% 0.87%
-------------------------------------------------------------------------
Government Select
Service Shares 0.10% None 0.36% 0.46%
Premier Shares 0.10% None 0.62% 0.72%
-------------------------------------------------------------------------
Tax-Exempt
Service Shares 0.25% None 0.36% 0.61%
Premier Shares* 0.25% None 0.62% 0.87%
-------------------------------------------------------------------------
Municipal
Service Shares 0.10% None 0.36% 0.46%
Premier Shares* 0.10% None 0.62% 0.72%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
*As of the date of the Prospectus, no shares of this class are issued and
outstanding.
MONEY MARKET PORTFOLIOS
19
EXAMPLE
The following Example is intended to help you compare the cost of investing in
Service Shares or Premier Shares of a Portfolio (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 Portfolio 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 Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
[Download Table]
--------------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------
Diversified Assets
Service Shares $64 $202 $351 $786
Premier Shares $91 $284 $493 $1,096
--------------------------------------------------
Government
Service Shares $64 $202 $351 $786
Premier Shares $91 $284 $493 $1,096
--------------------------------------------------
Government Select
Service Shares $59 $186 $324 $726
Premier Shares $86 $268 $466 $1,037
--------------------------------------------------
Tax-Exempt
Service Shares $65 $205 $357 $798
Premier Shares $92 $287 $498 $1,108
--------------------------------------------------
Municipal
Service Shares $60 $189 $329 $738
Premier Shares $87 $271 $471 $1,049
--------------------------------------------------
--------------------------------------------------
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
20
INVESTMENT ADVISER
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser," formerly
known and conducting business as Northern Trust Investments, Inc.), a
subsidiary of TNTC, serves as the Investment Adviser of each of the Portfolios.
NTI is located at 50 South LaSalle Street, Chicago, IL 60675. Unless otherwise
indicated, NTI and TNTC are referred to collectively in this Prospectus as
"Northern Trust."
NTI is an investment adviser registered under the Investment Advisers Act of
1940. It primarily manages assets for defined contribution and benefit plans,
investment companies and other institutional investors.
TNTC is an Illinois state chartered banking organization and a member of the
Federal Reserve System. Formed in 1889, it administers and manages assets for
individuals, personal trusts, defined contribution and benefit plans and other
institutional and corporate clients. It is the principal subsidiary of Northern
Trust Corporation, a bank holding company.
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors, and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
Under its Advisory Agreement with the Trust, the Investment Adviser, subject to
the general supervision of the Trust's Board of Trustees, is responsible for
making investment decisions for the Portfolios and for placing purchase and
sale orders for portfolio securities.
MONEY MARKET PORTFOLIOS
21
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, the Investment Adviser is entitled to an advisory fee from the
Portfolios, computed daily and payable monthly, at annual rates set forth in
the table below (expressed as a percentage of each Portfolio's respective
average daily net assets). The table also reflects the advisory fees (after
voluntary fee waivers) paid by the
Portfolios as a percentage of net assets for the fiscal year
ended November 30, 2003.
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Portfolios reflects that the Investment Adviser did
not charge the full amount of the advisory fees to which it was entitled. The
Investment Adviser may discontinue or modify its voluntary limitations in the
future at its discretion.
[Download Table]
---------------------------------------------------
Advisory Fee
Contractual Paid for Fiscal Year
Portfolio Rate Ended 11/30/03
---------------------------------------------------
Diversified Assets 0.25% 0.25%
---------------------------------------------------
Government 0.25% 0.25%
---------------------------------------------------
Government Select 0.20% 0.10%
---------------------------------------------------
Tax-Exempt 0.25% 0.25%
---------------------------------------------------
Municipal 0.20% 0.10%
---------------------------------------------------
---------------------------------------------------
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
22
OTHER PORTFOLIO SERVICES
TNTC serves as Transfer Agent and Custodian for each Portfolio. The Transfer
Agent performs various shareholder servicing functions, and any shareholder
inquiries should be directed to it. In addition, NTI and PFPC Inc. ("PFPC")
serve as Co-Administrators for each Portfolio. The fees that TNTC, NTI and PFPC
receive for their services in these capacities are described under "Portfolio
Fees and Expenses" and in the Additional Statement.
Pursuant to an exemptive order issued by the SEC concerning such arrangements,
TNTC also may render securities lending services to the Portfolios. For such
services, TNTC may receive a fee of up to 35% of the net revenue earned by a
Portfolio on each securities loan. In addition, cash collateral received by a
Portfolio in connection with a securities loan may be invested in shares of
other registered or unregistered funds that pay investment advisory or other
fees to NTI, TNTC or an affiliate.
TNTC, NTI and other Northern Trust affiliates may provide other services to the
Portfolios and receive compensation for such services if consistent with the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules,
exemptive orders and no-action letters issued by the SEC thereunder. Unless
required, investors in a Portfolio may or may not receive specific notice of
such additional services and fees.
MONEY MARKET PORTFOLIOS
23
PURCHASING AND SELLING SERVICE SHARES AND PREMIER SHARES
INVESTORS
Institutional investors, acting on their own behalf or on behalf of customers
and other beneficial owners ("Customers") and entering into servicing
agreements with the Trust ("Servicing Agreement"), may invest in the Service
Shares and Premier Shares of each Portfolio through their institutional
accounts at Northern Trust or an affiliate. They also may establish accounts
directly with the Trust.
There is no sales charge imposed on investments. Institutional investors
("Institutions") include:
.. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
.. Corporations, partnerships, business trusts and other institutions and
organizations.
SHARE CLASSES
Each Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares. The Shares class is described in a separate prospectus.
.. Shares do not provide for payments by the Portfolio to Institutions for
administrative support or shareholder liaison services.
.. Service Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support services to
Customers.
.. Premier Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support and
shareholder liaison services to Customers.
Shares of each class bear their pro rata portion of all operating expenses paid
by the Portfolio, except amounts payable under the Service Plan that has been
adopted for the Portfolio's Service Shares and Premier Shares and transfer
agency fees. The Service Plan provides for payments at an annual rate of up to
0.25% and 0.50% of the average daily net asset value of Service Shares and
Premier Shares, respectively. Because of these class-specific expenses, the
performance of the Shares of a Portfolio is expected to be higher than the
performance of both the Service Shares and Premier Shares of the same Portfolio
and the performance of a Portfolio's Service Shares is expected to be higher
than the performance of the same Portfolio's Premier Shares.
OPENING AN ACCOUNT
You may purchase Service Shares and Premier Shares of each Portfolio through
your institutional account at Northern Trust (or an affiliate) or you may open
an account directly with the Trust with a minimum initial investment of $5
million in one or more portfolios of the Trust. This minimum does not apply,
however, to Service Shares and Premier Shares purchased through a Northern
Trust cash sweep program. There is no minimum for subsequent investments.
Through an Institutional Account. If you are opening an institutional account
at Northern Trust, a Northern Trust representative can assist you with all
phases of your investment. To purchase Service Shares or Premier Shares through
your account, contact your Northern Trust representative for further
information.
Directly from the Trust. An Institution may open a shareholder account and
purchase Service Shares and Premier Shares directly from the Trust as described
in this Prospectus.
BY MAIL
.. Read this Prospectus carefully.
.. Complete and sign the New Account Application.
.. Include a certified corporate resolution (or other acceptable evidence of
authority).
.. Enclose a check or Federal Reserve draft payable to Northern Institutional
Funds.
.. Mail your check, corporate resolution and completed New Account Application
to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
24
BY TELEPHONE
.. Read this Prospectus carefully.
.. Call the Northern Institutional Funds Center at 800/637-1380.
To open a new account please provide:
.. The name of the Portfolio in which you would like to invest
.. The number of Service Shares or Premier Shares or dollar amount to be invested
.. The method of payment
To add to an existing account, please provide:
.. The Institution's name
.. Your Account Number
BY WIRE OR AUTOMATED CLEARING HOUSE TRANSFER ("ACH TRANSFER")
To open a new account:
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. For more information about the purchase of Service Shares or Premier Shares,
call the Northern Institutional Funds Center at 800/637-1380.
To add to an existing account:
.. Have your bank wire federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10-Digit Portfolio Account Number)
(Reference Shareholder's Name)
SELLING SERVICE SHARES AND PREMIER SHARES
Through an Institutional Account. Institutions may sell (redeem) Service Shares
and Premier Shares through their institutional account by contacting their
Northern Trust account representative.
Directly through the Trust. Institutions that purchase Service Shares and
Premier Shares directly from the Trust may redeem their Service Shares and
Premier Shares through the Transfer Agent in one of the following ways:
BY MAIL
Send a written request to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
The letter of instruction must include:
.. The signature of a duly authorized person
.. Your Account Number
.. The name of the Portfolio
.. The number of Service Shares or Premier Shares or the dollar amount to be
redeemed.
BY TELEPHONE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. 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 Service Shares and Premier
Shares--By Mail."
BY WIRE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. You must have given prior authorization for expedited wire redemption.
.. The minimum amount that may be redeemed by this method is $10,000.
MONEY MARKET PORTFOLIOS
25
ACCOUNT POLICIES AND OTHER INFORMATION
Automatic Investment Arrangements. Institutions may purchase Service Shares and
Premier Shares through their institutional accounts at Northern Trust either by
directing automatic investment of cash balances in excess of certain agreed
upon amounts or by directing investments from time to time on a non-automatic
basis. Northern Trust will place a purchase order generated under an automatic
investment direction either on the Business Day that funds are available in the
account or on the next Business Day, depending upon the terms of the automatic
investment arrangement. Similarly, Northern Trust will place a redemption order
generated under an automatic investment direction either on the Business Day
Northern Trust calculates the redemption amount needed to bring the account
balance up to the agreed upon amount or on the next Business Day, depending
upon the terms of the automatic investment arrangement. If a redemption order
is placed on the next Business Day, Northern Trust normally will provide funds
by provisionally crediting the Institution's account on the day the calculation
is made. Institutions should contact Northern Trust for more information about
their automatic investment arrangements.
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in a Portfolio and one or more other investment portfolios of the
Trust. This minimum does not apply, however, to Service Shares or Premier
Shares purchased through a Northern Trust cash sweep program. There is no
minimum for subsequent investments. A $10,000 minimum applies for redemptions
by wire. The Trust reserves the right to waive purchase and redemption minimums
and to determine the manner in which a minimum is satisfied.
Calculating Share Price. The Trust issues and redeems Service Shares and
Premier Shares at net asset value ("NAV"). The NAV for each class of shares of
a Portfolio is calculated by dividing the value of net assets attributed to
that class by the number of outstanding shares of the class. For each class of
shares of the Government Select, Tax-Exempt and Municipal Portfolios, the NAV
is calculated as of 1:00 p.m., Central time, on each Business Day. For each
class of shares of the Diversified Assets and Government Portfolios, the NAV is
calculated as of 2:00 p.m., Central time, on each Business Day. The NAV used in
determining
the price of your shares is the one calculated after your purchase order is
received and accepted and after your exchange or redemption order is received
in good order as described below.
Each Portfolio seeks to maintain an NAV of $1.00 per share by valuing the
obligations held by it at amortized cost in accordance with SEC regulations.
Amortized cost normally will approximate market value.
Timing of Purchase Requests. Purchase requests received in good order and
accepted by the Transfer Agent or other authorized intermediary on any Business
Day by 1:00 p.m., Central time, with respect to the Government Select,
Tax-Exempt and Municipal Portfolios, and by 2:00 p.m., Central time, with
respect to the Diversified Assets and Government Portfolios, will be executed
on the same day they are received by the Transfer Agent or other authorized
intermediary, provided that either:
.. The Transfer Agent receives payment in federal or other immediately available
funds on the same Business Day by 1:00 p.m., Central time, with respect to
the Government Select, Tax-Exempt and Municipal Portfolios, and by 2:00 p.m.,
Central time, with respect to the Diversified Assets and Government
Portfolios;
.. The request is placed by a financial or authorized intermediary and payment
in federal or other immediately available funds is received by the Transfer
Agent by the close of the same Business Day in accordance with the terms of
the Trust's agreement with the intermediary; or
.. Payment in federal or other immediately available funds is received by the
close of the same Business Day in an institutional account maintained with
Northern Trust or an affiliate.
Purchase requests received in good order by the Transfer Agent or other
authorized intermediary on a non-Business Day or after the deadlines described
above on a Business Day will be executed on the next Business Day, provided
that payment is made as noted above.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for Service Shares and Premier Shares in the form of securities that
are permissible
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
26
investments for a Portfolio. The Trust also reserves the right to pay
redemptions by a distribution "in-kind" of securities (instead of cash) from a
Portfolio. See the Additional Statement for further information about the terms
of these purchases and redemptions.
Miscellaneous Purchase Information.
.. Institutions are responsible for transmitting purchase orders and delivering
required funds on a timely basis.
.. Institutions are responsible for all losses and expenses of a Portfolio, and
purchase orders may be cancelled, in the event of any failure to make payment
according to the procedures outlined in this Prospectus. In addition, a $20
charge will be imposed if a check does not clear.
.. Service Shares and Premier Shares of a Portfolio are entitled to the
dividends declared by the Portfolio beginning on the Business Day the
purchase order is executed, provided payment in federal or other immediately
available funds is received by the Transfer Agent by the time designated
above.
.. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
.. In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 29.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary
on any Business Day by 1:00 p.m., Central time, with respect to the Government
Select, Tax-Exempt and Municipal Portfolios, and by 2:00 p.m., Central time,
with respect to the Diversified Assets and Government Portfolios, will be
executed on the same day, at that day's closing share price.
Redemption and exchange requests received in good order by the Transfer Agent
or other authorized intermediary on a non-Business Day or after the deadline
described above on a Business Day will be executed the next Business Day, at
that day's closing share price.
Payment of Redemption Proceeds. Redemption proceeds normally will be sent or
credited on the next Business Day following the Business Day on which the
redemption request is received in good order by the deadline noted above,
unless payment in immediately available funds on the same Business Day is
requested.
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds also
may be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed New Account Application,
including a corporate resolution or other acceptable evidence of authority.
.. The Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to 7 days (or such longer period permitted by the SEC) after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect a Portfolio.
.. If you are redeeming recently purchased Service Shares or Premier Shares,
your redemption request may not be honored until your check or electronic
transaction has cleared. This may delay your transaction for up to 15 days.
.. Institutions are responsible for transmitting redemption orders and crediting
their Customers' accounts with redemption proceeds on a timely basis.
.. Redemption requests made to the Transfer Agent by mail must be signed by a
person authorized by acceptable documentation on file with the Transfer Agent.
.. Dividends on Service Shares and Premier Shares are earned through and
including the day prior to the day on which they are redeemed.
.. The Trust and the Transfer Agent reserve the right to redeem Service Shares
and Premier Shares held by any shareholder in circumstances deemed to be in
the best interests of the Portfolios.
.. The Trust may require any information reasonably necessary to ensure that a
redemption request has been duly authorized.
MONEY MARKET PORTFOLIOS
27
.. The Trust reserves the right to change or discontinue any of its redemption
procedures.
.. In certain circumstances, the Trust may advance the time by which redemption
and exchange orders must be received. See "Early Closings" on page 29.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of a Portfolio for shares of
other investment portfolios of the Trust. The registration of both accounts
involved must be identical. Both accounts must have the same owner's name and
title, if applicable. A $1,000 minimum applies to exchanges. An exchange is a
redemption of shares you own and the purchase of shares you are acquiring. It
is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days' written notice to shareholders and to reject any
exchange request. Exchanges only are available in states where an exchange
legally can be made. Before making an exchange you should read the prospectus
for the shares you are acquiring.
Telephone Transactions. Telephone requests are recorded. 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, the Trust 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.
The Trust reserves the right to refuse a telephone redemption.
Advance Notification of Large Transactions. The Trust requests that an
Institution give advance notice to the Transfer Agent by 11:00 a.m., Central
time, if it intends to place a purchase or redemption order of $5 million or
more on a Business Day.
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 certified corporate resolution,
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
Trust and Transfer Agent may charge a shareholder reasonable costs in locating
a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the Transfer
Agent or the New York Stock Exchange (the "Exchange") is open for business. For
the period April 1, 2004 through March 31, 2005, the Portfolios will be closed
on the following holidays: Martin Luther King, Jr. Day, Presidents' Day,
Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed).
Good Order. A purchase, redemption or exchange request is considered to be "in
good order" when all necessary information is provided and all required
documents are properly completed, signed and delivered, including a certified
resolution or other acceptable evidence of authority. Additionally, a purchase
order initiating the opening of an account will not be considered to be "in
good order" unless the investor has provided all information required by the
Trust's "Customer Identification Program" described below.
Customer Identification Program. Federal law requires the Trust to obtain,
verify and record identifying information, which may include the name, business
street address, taxpayer identification number or other identifying information
for each investor who opens or reopens an account with the Trust. Applications
without this information, or without an indication that a taxpayer
identification number has been applied for, may not be
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28
accepted. After acceptance, to the extent permitted by applicable law or the
Trust's customer identification program, the Trust reserves the right to: (a)
place limits on account transactions until an Institution's identity is
verified; (b) refuse an investment in the Trust; or (c) involuntarily redeem an
investor's shares and close an account in the event that an investor's identity
is not verified. The Trust and its agents will not be responsible for any loss
in an investor's delay in providing all required identifying information or
from closing an account and redeeming an investor's shares when an investor's
identity cannot be verified.
Early Closings. The Portfolios reserve the right to advance the time for
accepting purchase, redemption or exchange orders for same Business Day credit
when the Exchange closes or closes early, trading on the Exchange is
restricted, an emergency arises or as otherwise permitted by the SEC. In
addition, the Board of Trustees of the Portfolios may, for any Business Day,
decide to change the time as of which a Portfolio's NAV is calculated in
response to new developments such as altered trading hours, or as otherwise
permitted by the SEC.
Emergency Events. In the event the Exchange does not open for business because
of an emergency, the Trust may, but is not required to, open one or more
Portfolios for purchase, redemption and exchange transactions if the Federal
Reserve wire payment system is open. To learn whether a Portfolio is open for
business during an emergency situation, please call 800/637-1380 or visit
northerninstitutionalfunds.com.
Financial Intermediaries. The Trust may authorize certain Institutions acting
as financial intermediaries (including banks, trust companies, brokers and
investment advisers) to
accept purchase, redemption and exchange orders from their Customers on behalf
of the Trust. These authorized intermediaries also may designate other
intermediaries to accept such orders, if approved by the Trust. A Portfolio
will be deemed to have received an order when the order is accepted by the
authorized intermediary, and the order will be priced at the Portfolio's per
share NAV next determined, provided that the authorized intermediary forwards
the order (and payment for any purchase order) to the Transfer Agent on behalf
of the Trust within agreed-upon time periods. If the order (or payment for any
purchase order) is not received by the Transfer Agent within such time periods,
the authorized intermediary may be liable for fees and losses and the
transaction may be cancelled.
Certain financial intermediaries, including affiliates of Northern Trust, may
perform (or arrange to have performed) various administrative support services
for Customers who are the beneficial owners of either Service Shares or Premier
Shares through Servicing Agreements with the Trust ("Service Organizations").
In addition, Service Organizations perform (or arrange to have performed)
personal and account maintenance services under their Servicing Agreements for
Premier Shares. These Servicing Agreements are permitted under the Trust's
Service Plan ("Service Plan"). For both Service Shares and Premier Shares,
administrative support services may include:
.. acting, directly or through another, as shareholder of record;
.. establishing and maintaining individual accounts and records;
.. processing purchase, redemption and exchange orders; and
.. placing net purchase and redemption orders with the Trust's Transfer Agent.
Service Organizations will receive fees from the Portfolios for these services
at an annual rate of up to 0.25% of the average daily net asset value of the
Service Shares and Premier Shares beneficially owned by their Customers.
Personal and account maintenance services provided under the Service Plan for
Premier Shares may include:
.. providing information to investors regarding the Portfolios or relating to
the status of their accounts; and
.. acting as liaison between investors and the Trust.
Service Organizations will receive additional fees from the Portfolios for
these services at an annual rate of up to
MONEY MARKET PORTFOLIOS
29
0.25% of the average daily net asset value of Premier Shares beneficially owned
by their Customers. All fees payable under the Service Plan are borne solely by
the classes of shares to which the services are provided and not by the
Portfolios' other classes of shares.
Northern Trust also may provide compensation to certain dealers and other
financial intermediaries, including affiliates of Northern Trust, that provide
services to their Customers who invest in the Trust or whose Customers purchase
significant amounts of Service Shares or Premier Shares of a Portfolio. 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 the Investment
Adviser (after adjustments). This additional compensation will be paid by
Northern Trust or its affiliates and will not represent an additional expense
to the Trust or its shareholders.
Customers purchasing Service Shares or Premier Shares of a Portfolio through a
financial intermediary should read their account agreements carefully. A
financial intermediary's requirements may differ from those listed in this
Prospectus. A financial intermediary may impose account charges, such as asset
allocation fees, account maintenance fees, and other charges that will reduce
the net return on an investment in a Portfolio. If a Customer has agreed to
maintain a minimum balance with a particular financial intermediary and the
balance falls below this minimum, the Customer may be required to redeem all or
a portion of the Customer's investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation by a
Service Organization or other financial intermediary in connection with the
investment of fiduciary funds in Service Shares or Premier Shares of a
Portfolio. Financial intermediaries, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel.
State securities laws regarding the registration of dealers may differ from
federal law. As a result, Service Organizations and other financial
intermediaries investing in the Portfolios on behalf of their Customers may be
required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Trust's fiscal year on November 30, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses, proxy
statements or information statements to all shareholders who share the same
mailing address with your account, you may revoke your consent at any time by
contacting the Northern Institutional Funds Center by phone at 800/637-1380 or
by mail at Northern Institutional Funds, P.O. Box 75986, Chicago, IL 60675-5986.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
30
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from net income are declared daily and paid monthly by each Portfolio
to its shareholders. Net income includes the interest accrued on a Portfolio's
assets less estimated expenses. Each Portfolio's net realized short-term
capital gains, if any, are distributed at least annually. The Portfolios do not
expect to realize net long-term capital gains.
Dividends are paid as soon as practicable following the end of each month,
except in the case of a total redemption of Service Shares or Premier Shares in
an account that is not subject to a standing order for the purchase of
additional shares of the same class. In that event, dividends will be paid
promptly along with the redemption proceeds.
All distributions are reinvested automatically (without any sales charge) in
additional Service Shares or Premier Shares of the same Portfolio, unless you
elect to receive distributions in cash by notifying the Transfer Agent in
writing. You may make arrangements to credit these distributions to your
account with Northern Trust, its affiliates or its correspondent banks.
There are no fees or sales charges on reinvestments.
TAXES
Each Portfolio intends to qualify as a regulated investment company for federal
tax purposes, and to distribute substantially all of its net income to
shareholders each year. Except for exempt-interest dividends paid by the
Tax-Exempt and Municipal Portfolios, dividends derived from interest income and
short-term capital gains will be taxable as ordinary income, and distributions,
if any, derived from net long-term capital gains generally will be taxable as
long-term capital gains, unless you have a tax-advantaged account. This is true
whether dividends and distributions are received in cash or reinvested in
Service Shares or Premier Shares.
The Tax-Exempt and Municipal Portfolios intend to pay substantially all of
their dividends as "exempt-interest dividends," which are exempt from federal
income taxes. Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should note that exempt-interest dividends
will be taken into account in determining the taxability of their benefit
payments.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of either the Tax-Exempt or Municipal Portfolios generally will not be
deductible for federal income tax purposes.
In certain instances, dividends paid by the Tax-Exempt and Municipal
Portfolios, while exempt from regular federal income tax, may be subject to the
alternative minimum tax. In addition, the Tax-Exempt and Municipal Portfolios
may invest a portion of their assets in securities that generate income that is
not exempt from federal tax. Any dividends paid by the Tax-Exempt or Municipal
Portfolios that are derived from taxable interest or from capital gains will be
subject to federal income tax.
The Tax-Exempt and Municipal Portfolios will each determine annually the
percentages of its net investment income which are exempt from the regular
federal income tax, which constitute an item of tax preference for purposes of
the federal alternative minimum tax, and which are fully taxable. The
Tax-Exempt and Municipal Portfolios will apply these percentages uniformly to
all distributions declared from net investment income during that year.
Except as stated below, you may be subject to state and local taxes on
Portfolio distributions and redemptions. State income taxes may not apply,
however, to the portions of a Portfolio'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.
MONEY MARKET PORTFOLIOS
31
OTHER TAX INFORMATION
Dividends and distributions from each Portfolio will generally be reportable by
you in the tax year in which they are paid with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of
ordinary income and capital gains distributed to your account for the previous
year.
Your investment in the Portfolios could have additional tax consequences.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States federal
income tax treatment. You should consult your tax professional for information
regarding all the tax consequences applicable to your investments in the
Portfolios. More information is provided in the Additional Statement. This
short summary is not intended as a substitute for careful tax planning.
In particular, although the Government Select Portfolio intends to invest
primarily in U.S. government securities, the interest on which is generally
exempt from state income taxation, you should consult your own tax professional
to determine whether this is true in your own situation. Similarly, dividends
paid by the Portfolios (including the Tax-Exempt and Municipal Portfolios) may
be taxable under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
32
RISKS, SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE TYPES OF SECURITIES IN WHICH
THE PORTFOLIOS MAY INVEST AND THEIR RELATED RISKS. It also explores the
various investment techniques that the investment management team may use.
The Portfolios may invest in other securities and are subject to further
restrictions and risks which are described in the Additional Statement.
Additionally, the Portfolios may purchase other types of securities or
instruments similar to those described in this section if otherwise
consistent with the Portfolios' investment objectives and policies.
--------------------------------------------------------------------------------
Investment Objectives. The investment objective of the Municipal Portfolio may
be changed by the Trust's Board of Trustees without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in the Portfolio having an investment objective different from the
objective that the shareholder considered appropriate at the time of investment
in the Portfolio. The investment objectives of the other Portfolios may not be
changed without shareholder approval.
Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, motor vehicle
installment sale contracts, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements, municipal securities and other financial assets.
Such asset pools are securitized through the use of privately-formed trusts or
special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pooled insurance policy issued by a financial
institution, or by other credit enhancements.
Investment Strategy. The Diversified Assets Portfolio, Tax-Exempt Portfolio and
Municipal Portfolio may purchase various types of asset-backed securities that
are "Eligible Securities" as defined by the SEC. The Government Portfolio and
Government Select Portfolio may purchase asset-backed securities (such as
mortgage-backed securities) that are issued and guaranteed by the U.S.
government, its agencies, instrumentalities or sponsored enterprises.
Special Risks. In addition to credit and market risk, asset-backed securities
usually involve prepayment risk because the underlying assets (loans) usually
may be prepaid at any time. The value of these securities also may 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 generally are 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 Portfolios may borrow money
from banks and may enter into reverse repurchase agreements with banks and
other financial institutions. Reverse repurchase agreements involve the sale of
money market securities held by a Portfolio subject to the Portfolio's
agreement to repurchase them at a mutually agreed upon date and price
(including interest).
MONEY MARKET PORTFOLIOS
33
Investment Strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of its total assets
(including the amount borrowed). Each Portfolio also may borrow up to an
additional 5% of its total assets for temporary purposes. The Portfolios may
enter into reverse repurchase agreements when the investment management team
expects that the interest income to be earned from the investment of the
transaction proceeds will be greater than the related interest expense.
Special Risks. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Portfolios decline in value while these
transactions are outstanding, the net asset value of the Portfolios'
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 Portfolio (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 Portfolio will
decline below the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Portfolio.
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 Diversified Assets, Government, Tax-Exempt and Municipal
Portfolios may invest a portion of their assets in custodial receipts.
Investments by the Government Portfolio in custodial receipts, if any, are
expected to be minimal, and in no event will exceed 20% of the value of the
Portfolio's net assets.
Special Risks. Like other stripped obligations (which are described below),
stripped 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.
Derivatives. Each Portfolio 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 rates, or other indices.
Derivatives include structured securities such as collateralized mortgage
obligations and other types of asset-backed securities, "stripped" securities
and various floating rate instruments.
Investment Strategy. A Portfolio may invest in derivatives when the Investment
Adviser believes the potential risks and rewards are consistent with the
Portfolio's objective, strategies and overall risk profile.
Special Risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio'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 Portfolio 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
recently have been developed and have not been tested over complete market
cycles. For these reasons, a Portfolio may suffer a loss whether or not the
analysis of the investment management team is accurate.
Foreign Investments. The Diversified Assets Portfolio, and to the extent
permitted below, the Government Portfolio, may invest in U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities, foreign commercial banks and foreign branches of U.S. banks.
The Diversified Assets Portfolio also may invest in U.S. dollar-denominated
commercial paper and other obligations of foreign issuers. Foreign government
obligations may include debt obligations of supranational entities, including
international organizations (such as the European Coal and Steel Community and
the International Bank for Reconstruction and Development (also known as the
World Bank)) and international banking institutions and related government
agencies.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
34
Investment Strategy. Investments by the Diversified Assets Portfolio in foreign
issuer obligations will not exceed 50% of the Portfolio's total assets measured
at the time of purchase. The Government Portfolio may make limited investments
(but in no event more than 20% of its net assets) in debt obligations of
supranational entities.
Special Risks. Foreign securities involve special risks and costs, which are
considered by the Investment Adviser in evaluating creditworthiness of issuers
and making investment decisions for the Portfolios. 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.
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 also
may 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 adversely might
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.
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), 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 Portfolio may invest up to 10% of its net assets in
securities that are illiquid. A domestically traded security which is not
registered under the 1933 Act will not be considered illiquid if the Investment
Adviser determines that an adequate trading market exists for that security. If
otherwise consistent with their investment objectives and policies, the
Portfolios may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act ("Rule 144A Securities"). These securities will not be considered
illiquid so long as the Investment Adviser determines, under guidelines
approved by the Trust's Board of Trustees, that an adequate trading market
exists.
Special Risks. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to a Portfolio. The practice of investing in Rule 144A
Securities and commercial paper available to qualified institutional buyers
could increase the level of 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 Portfolio to make cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits interest to the Portfolio for a set time period.
Investment Strategy. The Diversified Assets Portfolio may invest in IFAs issued
by insurance companies that meet quality and credit standards established by
the Investment Adviser.
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, there may be no active secondary market for IFAs.
This means that it may be difficult to sell an IFA at an appropriate price.
MONEY MARKET PORTFOLIOS
35
Investment Companies. To the extent consistent with their respective investment
objectives and policies, the Portfolios may invest in securities issued by
other investment companies.
Investment Strategy. Investments by a Portfolio in other money market funds
will be subject to the limitations of the Investment Company Act of 1940 and
SEC orders. Although the Portfolios do not expect to do so in the foreseeable
future, each Portfolio is authorized to invest substantially all of its assets
in an open-end investment company or series thereof that has substantially the
same investment objective, policies and fundamental restrictions as the
Portfolio.
Special Risks. As a shareholder of another investment company, a Portfolio
would be subject to the same risks as any other investor in that company. It
also would bear a proportionate share of any fees or expenses paid by that
company. These expenses would be in addition to the advisory fees and other
expenses the Portfolio bears directly in connection with its own operations.
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 also
are 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 typically are payable by the private user of the
facilities financed by the bonds.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and asset-backed securities such as custodial
receipts. Moral obligation bonds 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 or
custodian.
The Tax-Exempt Portfolio and Municipal Portfolio each may acquire "stand-by
commitments" relating to the municipal instruments it holds. Under a stand-by
commitment, a dealer agrees to purchase, at the Portfolio'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. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights for
trading purposes.
Investment Strategy. Although it is not their current policy to do so on a
regular basis, each of the Tax-Exempt and Municipal Portfolios may invest more
than 25% of its total assets in municipal instruments the interest upon which
is paid solely from revenues of similar projects. However, neither the
Tax-Exempt Portfolio nor the Municipal Portfolio intends to invest more than
25% of the value of its 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.
Portfolios in addition to the Tax-Exempt and Municipal Portfolios 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 Portfolios on
such investments will be taxable to shareholders.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
36
Special Risks. Municipal instruments purchased by the Tax-Exempt and Municipal
Portfolios 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 and financial institutions declines, a Portfolio could suffer a loss to
the extent that the Portfolio is relying upon this credit support. Foreign
institutions can present special risks relating to higher transaction and
custody costs, the imposition of additional taxes by foreign governments, less
complete financial information, less market liquidity, more market volatility
and political instability. Foreign banks, insurance companies and financial
institutions may be subject to less stringent reserve requirements, and to
different accounting, auditing and recordkeeping requirements than U.S banks.
In addition, when a substantial portion of a Portfolio'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 otherwise are related,
there is a possibility that an economic, business or political development
affecting one instrument would likewise affect the related instrument.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment Strategy. Each Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement will never occur more than one year after a Portfolio acquires the
securities.
Special Risks. In the event of a default, a Portfolio 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 Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In addition,
in the event of bankruptcy, a Portfolio could suffer additional losses if a
court determines that the Portfolio's interest in the collateral is
unenforceable by the Portfolio.
Securities Lending. In order to generate additional income, the Diversified
Assets and Government Portfolios may lend securities to banks, brokers and
dealers or other qualified institutions. In exchange, the Portfolios 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 Portfolio's total assets (including the loan collateral). Any
cash collateral received by a Portfolio in connection with these loans may be
invested in short-term instruments, either directly or indirectly through other
money market portfolios. Such investments are not limited to U.S. government
securities and may include any instruments that may be purchased by the
Diversified Assets Portfolio. Loan collateral (including any investment of the
collateral) is not included in the calculation of the percentage limitations
described elsewhere in this Prospectus regarding a Portfolio's investments in
particular types of securities.
Special Risks. A principal risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligations to return
the securities. In this event, a Portfolio could experience delays in
recovering its securities and possibly may incur a capital loss. A Portfolio
will be responsible for any loss that might result from its investment of the
cash collateral it receives from a borrower. Additionally, the amount of income
to shareholders that is taxable at the state level may increase as a result of
a Portfolio's securities lending activities. Any state tax-exempt interest paid
on securities while on loan will not be deemed to have been received by a
Portfolio, and the equivalent amount paid by the borrower of the securities to
the Portfolio will not be deemed to be interest exempt from state taxes, but is
likely to be deemed taxable income to shareholders.
Stripped Obligations. These securities are issued by the U.S. government (or an
agency, instrumentality or a sponsored enterprise), foreign governments, banks
and other
MONEY MARKET PORTFOLIOS
37
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, each of the Portfolios 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
either interest rates or principal prepayments could depress the price of
stripped securities held by the Portfolios and adversely affect a Portfolio's
investment performance.
Taxable Investments. Taxable investments include U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and related custodial receipts; and repurchase agreements
relating to the above instruments.
Investment Strategy. The Tax-Exempt and Municipal Portfolios each may invest
from time to time, on a temporary basis or for temporary defensive purposes, in
short-term taxable instruments that are "Eligible Securities" as defined by the
SEC for money market funds.
Special Risks. Dividends paid by the Tax-Exempt and Municipal Portfolios that
are derived from interest paid on taxable investments generally will be taxable
to each Portfolio's shareholders as ordinary income for federal income tax
purposes. The Tax-Exempt and Municipal Portfolios may not achieve their
investment objectives when their assets are invested in taxable obligations.
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, its agencies, instrumentalities or
sponsored enterprises. Securities guaranteed as to principal and interest by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
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, an agency, instrumentality or sponsored enterprise thereof, and (b)
participations in loans made to foreign governments or their agencies that are
so guaranteed.
Investment Strategy. To the extent consistent with its investment objective,
each Portfolio may invest in a variety of U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
Special Risks. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("Ginnie Mae"), 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 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 or sponsored enterprise. No assurance can be
given that the U.S. government would provide financial support to its agencies,
instrumentalities or sponsored enterprises 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 periodically are adjusted either at set intervals or
that float at a margin tied to a specified index rate. These instruments
include variable amount master demand notes and long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where a Portfolio 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.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
38
Investment Strategy. Each Portfolio may invest in variable and floating rate
instruments to the extent consistent with its investment objective.
Special Risks. Variable and floating rate instruments are subject to many of
the same risks as fixed rate instruments, particularly credit risk. 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 Portfolios are not entitled to
exercise their demand rights. As a result, the Portfolios could suffer a loss
with respect to these instruments.
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 Portfolio may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Portfolios generally would purchase securities in these transactions with the
intention of acquiring the securities, the Portfolios may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special Risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities may
decrease by the time they actually are issued or delivered. Conversely, selling
securities in these transactions involves the risk that the value of the
securities may increase by the time they actually are issued or delivered.
These transactions also involve the risk that the counterparty may fail to
deliver the security or cash on the settlement date.
Miscellaneous. TNTC is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
MONEY MARKET PORTFOLIOS
39
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
40
FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE
FINANCIAL PERFORMANCE OF A PORTFOLIO'S SERVICE SHARES AND PREMIER SHARES FOR
THE PAST FIVE YEARS (OR, IF SHORTER, THE PERIOD OF THE PORTFOLIO'S
OPERATIONS). Certain information reflects financial results for a single
Service Share or Premier Share. The total returns in the tables represent the
rate that an investor would have earned or lost on an investment in Service
Shares or Premier Shares of a Portfolio held for the entire period (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolios'
financial statements, is included in the Portfolios' annual report which is
available upon request and without charge. As of November 30, 2003, no
Premier Shares of the Tax-Exempt Portfolio were outstanding and no Premier
Shares of the Municipal Portfolio had been issued to the public.
--------------------------------------------------------------------------------
MONEY MARKET PORTFOLIOS
41
FINANCIAL HIGHLIGHTS
DIVERSIFIED ASSETS PORTFOLIO
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------
SERVICE
Selected per share data 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.04 0.06 0.05
Total income from investment operations 0.01 0.01 0.04 0.06 0.05
------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.04) (0.06) (0.05)
Total distributions paid (0.01) (0.01) (0.04) (0.06) (0.05)
------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------------------------------------------------
Total return/(1)/ 0.70% 1.50% 4.24% 5.85% 4.68%
Supplemental data and ratios:
Net assets, in thousands, end of period $82,872 $104,157 $74,165 $57,184 $59,815
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements/(3)/ 0.61% 0.61% 0.63% 0.69% 0.69%
Expenses, before waivers and reimbursements/(3)/ 0.63% 0.63% 0.64% 0.72% 0.72%
Net investment income, net of waivers and reimbursements 0.71% 1.50% 4.07% 5.71% 4.55%
Net investment income, before waivers and reimbursements 0.69% 1.48% 4.06% 5.68% 4.52%
------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Prior to February 1, 2001, expenses included an additional fee equal to
0.08% of average net assets of the Service and Premier Class paid to
Northern Trust or other institutions for systems support and related
services. Payment of this fee has been eliminated.
(4)Per share amounts from net investment income and distributions from net
investment income were less than $0.01 per share.
(5)For the period April 1, 1999 (commencement of operations) through November
30, 1999.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
42
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL INFORMATION
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
---------------------------------------------
PREMIER
2003/(4)/ 2002 2001 2000 1999/(5)/
---------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
-- 0.01 0.04 0.05 0.03
-- 0.01 0.04 0.05 0.03
---------------------------------------------
-- (0.01) (0.04) (0.05) (0.03)
-- (0.01) (0.04) (0.05) (0.03)
---------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------
0.44% 1.24% 3.97% 5.57% 2.57%
$20,392 $21,752 $54,876 $29,883 $4,552
0.87% 0.87% 0.89% 0.95% 0.95%
0.89% 0.89% 0.90% 0.98% 0.98%
0.45% 1.24% 3.81% 5.45% 4.29%
0.43% 1.22% 3.80% 5.42% 4.26%
---------------------------------------------
MONEY MARKET PORTFOLIOS
43
FINANCIAL HIGHLIGHTS
GOVERNMENT PORTFOLIO
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------
SERVICE
Selected per share data 2003 2002 2001 2000 1999/(4)/
-------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.04 0.06 0.03
Total income from investment operations 0.01 0.01 0.04 0.06 0.03
-------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.04) (0.06) (0.03)
Total distributions paid (0.01) (0.01) (0.04) (0.06) (0.03)
-------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------------------
Total return/(1)/ 0.66% 1.33% 4.02% 5.74% 3.03%
Supplemental data and ratios:
Net assets, in thousands, end of period $26,684 $54,924 $37,349 $32,352 $32,555
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements/(3)/ 0.61% 0.61% 0.62% 0.69% 0.69%
Expenses, before waivers and reimbursements/(3)/ 0.63% 0.64% 0.65% 0.72% 0.72%
Net investment income, net of waivers and reimbursements 0.65% 1.32% 3.80% 5.61% 4.41%
Net investment income, before waivers and reimbursements 0.63% 1.29% 3.77% 5.58% 4.38%
-------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Prior to February 1, 2001, expenses included an additional fee equal to
0.08% of average net assets of the Service and Premier Class paid to
Northern Trust or other institutions for systems support and related
services. Payment of this fee has been eliminated.
(4)For the period April 1, 1999 (commencement of operations) through November
30, 1999.
(5)Per share amounts from net investment income and distributions from net
investment income were less than $0.01 per share.
(6)For the period December 15, 1998 (commencement of operations) through
November 30, 1999.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
44
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL INFORMATION
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
-----------------------------------------------
PREMIER
2003/(5)/ 2002 2001 2000 1999/(6)/
-----------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
-- 0.01 0.04 0.05 0.04
-- 0.01 0.04 0.05 0.04
-----------------------------------------------
-- (0.01) (0.04) (0.05) (0.04)
-- (0.01) (0.04) (0.05) (0.04)
-----------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------
0.40% 1.06% 3.75% 5.47% 4.56%
$101,104 $111,828 $118,965 $76,529 $44,575
0.87% 0.87% 0.88% 0.95% 0.95%
0.89% 0.90% 0.91% 0.98% 0.98%
0.39% 1.06% 3.54% 5.35% 4.15%
0.37% 1.03% 3.51% 5.32% 4.12%
-----------------------------------------------
..
MONEY MARKET PORTFOLIOS
45
FINANCIAL HIGHLIGHTS
GOVERNMENT SELECT PORTFOLIO
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------
SERVICE
Selected per share data 2003 2002 2001 2000 1999/(4)/
-----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.04 0.06 0.03
Total income from investment operations 0.01 0.01 0.04 0.06 0.03
-----------------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.04) (0.06) (0.03)
Total distributions paid (0.01) (0.01) (0.04) (0.06) (0.03)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------------------------
Total return/(1)/ 0.72% 1.41% 4.11% 5.82% 2.72%
Supplemental data and ratios:
Net assets, in thousands, end of period $181,912 $119,239 $128,761 $116,640 $11,846
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements/(3)/ 0.46% 0.46% 0.48% 0.54% 0.54%
Expenses, before waivers and reimbursements/(3)/ 0.58% 0.59% 0.65% 0.72% 0.72%
Net investment income, net of waivers and reimbursements 0.72% 1.40% 3.87% 5.69% 4.51%
Net investment income, before waivers and reimbursements 0.60% 1.27% 3.70% 5.51% 4.33%
-----------------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Prior to February 1, 2001, expenses included an additional fee equal to
0.08% of average net assets of the Service and Premier Class paid to
Northern Trust or other institutions for systems support and related
services. Payment of this fee has been eliminated.
(4)For the period May 28, 1999 (commencement of operations) through November
30, 1999.
(5)Per share amounts from net investment income and distributions from net
investment income were less than $0.01 per share.
(6)Premier Shares were fully redeemed as of July 20, 1999. No Premier Shares
were outstanding for the period July 21, 1999 through September 29, 1999.
Premier Shares were reintroduced on September 30, 1999.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
46
RISKS, SECURITIES AND TECHNIQUES AND FINANCIAL INFORMATION
FOR THE FISCAL YEARS ENDED NOVEMBER 30
[Download Table]
------------------------------------------------
PREMIER
2003/(5)/ 2002 2001 2000 1999/(6)/
------------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
-- 0.01 0.04 0.05 0.03
-- 0.01 0.04 0.05 0.03
------------------------------------------------
-- (0.01) (0.04) (0.05) (0.03)
-- (0.01) (0.04) (0.05) (0.03)
------------------------------------------------
$1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------
0.46% 1.15% 3.84% 5.55% 3.30%
$217,688 $126,645 $9,916 $15,403 $7,417
0.72% 0.72% 0.74% 0.80% 0.80%
0.84% 0.85% 0.91% 0.98% 0.98%
0.46% 1.14% 3.60% 5.43% 4.25%
0.34% 1.01% 3.43% 5.25% 4.07%
------------------------------------------------
MONEY MARKET PORTFOLIOS
47
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
TAX-EXEMPT PORTFOLIO
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------
SERVICE
Selected per share data 2003 2002 2001 2000 1999/(4)/
-------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.03 0.03 0.02
Total income from investment operations 0.01 0.01 0.03 0.03 0.02
-------------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.03) (0.03) (0.02)
Total distributions paid (0.01) (0.01) (0.03) (0.03) (0.02)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------------
Total return/(1)/ 0.57% 1.05% 2.56% 3.53% 1.58%
Supplemental data and ratios:
Net assets, in thousands, end of period $9,714 $9,346 $14,697 $16,926 $35,536
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements/(3)/ 0.61% 0.61% 0.63% 0.69% 0.69%
Expenses, before waivers and reimbursements/(3)/ 0.64% 0.63% 0.66% 0.74% 0.73%
Net investment income, net of waivers and reimbursements 0.57% 1.05% 2.51% 3.49% 2.71%
Net investment income, before waivers and reimbursements 0.54% 1.03% 2.48% 3.44% 2.67%
-------------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Prior to February 1, 2001, expenses included an additional fee equal to
0.08% of average net assets of the Service Class paid to Northern Trust or
other institutions for systems support and related services. Payment of this
fee has been eliminated.
(4)For the period May 13, 1999 (commencement of operations) through November
30, 1999.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
48
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
MUNICIPAL PORTFOLIO
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------
SERVICE
Selected per share data 2003 2002 2001 2000/(4)/
-------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.01 0.01 0.03 0.03
Total income from investment operations 0.01 0.01 0.03 0.03
-------------------------------------------------------------------------------------------------
Less distributions paid:
From net investment income (0.01) (0.01) (0.03) (0.03)
Total distributions paid (0.01) (0.01) (0.03) (0.03)
-------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------
Total return/(1)/ 0.67% 1.16% 2.66% 3.01%
Supplemental data and ratios:
Net assets, in thousands, end of period $30,399 $45,642 $39,638 $36,320
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements/(3)/ 0.46% 0.46% 0.47% 0.54%
Expenses, before waivers and reimbursements/(3)/ 0.59% 0.61% 0.69% 0.86%
Net investment income, net of waivers and reimbursements 0.64% 1.15% 2.56% 3.65%
Net investment income, before waivers and reimbursements 0.51% 1.00% 2.34% 3.33%
-------------------------------------------------------------------------------------------------
(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)Prior to February 1, 2001, expenses included an additional fee equal to
0.08% of average net assets of the Service Class paid to Northern Trust or
other institutions for systems support and related services. Payment of this
fee has been eliminated.
(4)For the period February 11, 2000 (commencement of operations) through
November 30, 2000.
MONEY MARKET PORTFOLIOS
49
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
50
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MONEY MARKET PORTFOLIOS
51
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORTS
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolios and their policies also is
available in the Portfolios' Additional Statement. The Additional Statement is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports and the Additional Statement are
available free upon request by calling the Northern Institutional Funds Center
at 800/637-1380.
To obtain other information and for shareholder inquiries:
BY TELEPHONE
Call 800/637-1380
BY MAIL
Northern Institutional Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Portfolios' documents are available online and may be
downloaded, from:
.. The SEC's Web site at sec.gov
.. Northern Institutional Funds' Web site at northerninstitutionalfunds.com
You may review and obtain copies of Northern Institutional Funds documents by
visiting the SEC's Public Reference Room in Washington, D.C. You also may
obtain copies of Northern Institutional Funds documents by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009 or by electronic request at publicinfo@sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202/942-8090.
811-3605
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
52
NORTHERN INSTITUTIONAL FUNDS
PRIME OBLIGATIONS PORTFOLIO
.. PRIME OBLIGATIONS PORTFOLIO
. SHARES
. SERVICE SHARES
. PREMIER SHARES
Prospectus dated April 1, 2004
An investment in the Portfolio is not a deposit of any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any
other government agency. An investment in the Portfolio involves investment
risks, including possible loss of principal.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Portfolio.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
OVERVIEW
RISK/RETURN SUMMARY
[Download Table]
Information about the objective, principal strategies and
risk characteristics of the Portfolio.
4 Prime Obligations Portfolio
5 Principal Investment Risks
7 Portfolio Performance
8 Portfolio Fees and Expenses
MANAGEMENT OF THE PORTFOLIO
Details that apply to the Portfolio.
12 Investment Adviser
13 Advisory Fees
14 Other Portfolio Services
ABOUT YOUR ACCOUNT
How to open, maintain and close an account.
15 Purchasing and Selling Shares
15 Investors
15 Share Classes
15 Opening an Account
17 Selling Shares, Service Shares and Premier Shares
[Download Table]
18 Account Policies and Other Information
18 Purchase and Redemption Minimums
18 Calculating Share Price
18 Timing of Purchase Requests
18 In-Kind Purchases and Redemptions
18 Miscellaneous Purchase Information
18 Timing of Redemption and Exchange Requests
19 Payment of Redemption Proceeds
19 Miscellaneous Redemption Information
19 Exchange Privileges
19 Telephone Transactions
20 Advance Notification of Large Transactions
20 Making Changes to Your Account Information
20 Business Day
20 Good Order
20 Customer Identification Program
20 Early Closings
20 Emergency Events
20 Financial Intermediaries
22 Shareholder Communications
23 Distributions and Taxes
23 Distributions
23 Taxes
23 Other Tax Information
RISKS, SECURITIES, TECHNIQUES AND FINANCIAL
INFORMATION
24 Risks, Securities and Techniques
30 Financial Information
31 Financial Highlights
FOR MORE INFORMATION
32 Annual/Semiannual Reports
32 Statement of Additional Information
OVERVIEW
NORTHERN INSTITUTIONAL FUNDS (THE "TRUST") OFFERS THE PRIME OBLIGATIONS
PORTFOLIO (THE "PORTFOLIO") TO INSTITUTIONAL INVESTORS. THE PORTFOLIO IS
AUTHORIZED TO OFFER THREE CLASSES OF SHARES: SHARES, SERVICE SHARES AND
PREMIER SHARES.
--------------------------------------------------------------------------------
The descriptions on the following pages may help you determine whether the
Portfolio fits your investment needs. Keep in mind, however, that no guarantee
can be made that the Portfolio will meet its investment objective and the
Portfolio should not be relied upon as a complete investment program.
This Prospectus describes one money market portfolio currently offered by the
Trust. The Trust also offers other money market, balanced, fixed income and
equity portfolios, which are described in separate prospectuses.
The Portfolio seeks to maintain a stable net asset value ("NAV") of $1.00 per
share. Consistent with this policy, the Portfolio:
.. 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, the Portfolio limits its investments to "Eligible Securities" as
defined by the 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 the Portfolio 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 they are
determined to be of comparable quality by the Investment Adviser 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, the
Portfolio may continue to hold the issue if the Investment Adviser believes it
is in the best interest of the Portfolio and its shareholders. Securities that
are in the highest short-term rating category (and comparable unrated
securities) are called "First Tier Securities." Under normal circumstances, the
Portfolio intends to limit purchases of securities to First Tier Securities.
Securities in which the Portfolio may invest may not earn as high a level of
income as long-term or lower quality securities, which generally have greater
market risk and more fluctuation in market value.
In accordance with current SEC regulations, the Portfolio generally 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. The Portfolio may, however, invest up to
25% of its 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 ("Additional Statement").
In addition to the instruments described above and on the following pages, the
Portfolio may use various investment techniques in seeking its investment
objective. You can learn more about these techniques and related risks by
reading "Risks, Securities and Techniques" beginning on page 24 of this
Prospectus and in the Additional Statement.
PRIME OBLIGATIONS PORTFOLIO
3
PRIME OBLIGATIONS PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio 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 Portfolio seeks to achieve 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 (such as credit card and automobile receivables);
.. Securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies, instrumentalities or sponsored enterprises 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;
.. Municipal securities issued or guaranteed by state or local governmental
bodies; and
.. Repurchase agreements relating to the above instruments.
Risks. These principal investment risks apply to the Portfolio: stable NAV,
interest rate, credit (or default), counterparty failure, guarantor (or credit
enhancement), management, liquidity, prepayment (or call), debt extension and
foreign securities risks. See page 5 for a discussion of these risks.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 24 of this
Prospectus.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
4
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk, which will affect the value of the
Portfolio, its yield and investment performance, and the price of its shares.
AN INVESTMENT IN THE PORTFOLIO IS NOT A DEPOSIT OF ANY BANK AND IS NOT
INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH
THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER
SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO.
The following summarizes the principal risks that may affect the Portfolio.
--------------------------------------------------------------------------------
RISKS THAT APPLY TO THE PORTFOLIO
Stable NAV risk is the risk that the Portfolio will not be able to maintain a
net asset value per share of $1.00 at all times.
Interest rate risk is the risk that during periods of rising interest rates,
the Portfolio's yield (and the market value of its securities) will tend to be
lower than prevailing market rates; in periods of falling interest rates, the
Portfolio's yield (and the market value of its securities) will tend to be
higher.
Credit (or default) risk is the risk that an issuer of fixed income securities
held by the Portfolio 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 securities are generally believed to have relatively low degrees of
credit risk.
Counterparty failure risk is the risk that a bank or other financial
institution that has entered into a repurchase agreement or other transaction
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 the Portfolio'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.
Management risk is the risk that a strategy used by the investment management
team may fail to produce the intended results.
Liquidity risk is the risk that the Portfolio 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.
Prepayment (or call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by the Portfolio (such as an asset-backed
security) sooner than expected. This may happen during a period of falling
interest rates. Accordingly, the Portfolio's ability to maintain positions in
such securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by the Portfolio (such as an asset-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
Foreign securities risk is the risk that a foreign security, even if it is a
U.S. dollar-denominated foreign security, could lose value as a result of
political, financial and economic events in foreign countries, less stringent
foreign securities regulations and accounting and disclosure standards or other
factors.
More information about the risks of investing in the Portfolio is provided in
"Risks, Securities and Techniques" beginning on page 24. You should consider
carefully the risks discussed in this section and "Risks, Securities and
Techniques" before investing in the Portfolio.
PRIME OBLIGATIONS PORTFOLIO
5
THIS PAGE INTENTIONALLY LEFT BLANK
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
6
PORTFOLIO PERFORMANCE
The bar chart and performance table have been omitted because the Portfolio
has been in operation for less than one calendar year.
PRIME OBLIGATIONS PORTFOLIO
7
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares, Service Shares and Premier Shares of the Portfolio. Please note that
the following information does not reflect any charges that may be imposed by
The Northern Trust Company ("TNTC"), its affiliates, correspondent banks and
other institutions on their Customers (as defined on page 15). (For more
information, please see "Account Policies and Other Information" on page 18.)
[Enlarge/Download Table]
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SHAREHOLDER FEES
(fees paid directly from your investment)
----------------------------------------------------------------
Sales Charge
Sales Charge (Load) Imposed
(Load) Imposed Deferred Sales on Reinvested Redemption Exchange
Prime Obligations Portfolio on Purchases Charge (Load) Distributions Fees Fees
--------------------------------------------------------------------------------------------
Shares None None None None None
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Service Shares None None None None None
--------------------------------------------------------------------------------------------
Premier Shares* None None None None None
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----------------------------------------------------------------
* As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
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[Enlarge/Download Table]
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Total Annual
Management Distribution Other Service Agent Transfer Agent Other Operating Portfolio Operating
Fees (12b-1) Fees Expenses Fees Fees/(1)/ Expenses/(2)/ Expenses/(3)/
-------------------------------------------------------------------------------------------------
0.15% None 0.22% 0.00% 0.00% 0.22% 0.37%
-------------------------------------------------------------------------------------------------
0.15% None 0.48% 0.25% 0.01% 0.22% 0.63%
-------------------------------------------------------------------------------------------------
0.15% None 0.74% 0.50% 0.02% 0.22% 0.89%
-------------------------------------------------------------------------------------------------
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PRIME OBLIGATIONS PORTFOLIO
9
FOOTNOTES
/1/TNTC is entitled to transfer agency fees, calculated daily and payable
monthly, at the following annual rates: (a) $18 for each subaccount relating
to the Shares class of the Portfolio; (b) 0.01% of the average daily net
asset value of the outstanding Service Shares Class of the Portfolio; and
(c) 0.02% of the average daily net asset value of the outstanding Premier
Shares Class of the Portfolio.
/2/"Other Operating Expenses" along with "Service Agent Fees" and "Transfer
Agent Fees" is a subcategory of "Other Expenses" and includes
co-administration fees and all other ordinary operating expenses of the
Portfolio not listed above. The Co-Administrators are entitled to a
co-administration fee from the Portfolio at the annual rate of 0.10% of the
average daily net assets of the Portfolio. Under the Co-Administration
Agreement with the Trust, which may be amended without shareholder approval,
the Co-Administrators have agreed to reimburse expenses (including fees
payable to the Co-Administrators, but excluding management fees, transfer
agent fees, service agent fees, taxes, interest and other extraordinary
expenses) which exceed on an annualized basis 0.10% of the Portfolio's
average daily net assets. The Portfolio commenced operation on August 21,
2003. As a result, "Other Operating Expenses" for the Portfolio is based on
estimated amounts the Portfolio expects to pay during the current fiscal year.
/3/The Investment Adviser has voluntarily agreed to waive a portion of its
management fee, as shown below. Also set forth below are the distribution
(12b-1) fees, other expenses and total annual portfolio operating expenses
that are expected to be incurred by the Portfolio during the current fiscal
year as a result of this voluntary fee waiver and the expense reimbursements
discussed in footnote 2. Voluntary fee reductions may be modified, terminated
or implemented at any time at the option of the Investment Adviser or other
service providers to the Portfolio. If this occurs, "Total Annual Portfolio
Operating Expenses" may increase (or decrease) without shareholder approval.
[Download Table]
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Total
Annual
Prime Portfolio
Obligations Management Distribution Other Operating
Portfolio Fees (12-1) Fees Expenses Expenses
-----------------------------------------------------------
Shares 0.10% None 0.10% 0.20%
-----------------------------------------------------------
Service Shares 0.10% None 0.36% 0.46%
-----------------------------------------------------------
Premier Shares* 0.10% None 0.62% 0.72%
-----------------------------------------------------------
-----------------------------------------------------------
* As of the date of the Prospectus, no shares of this class are issued and
outstanding.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
10
EXAMPLE
The following Example is intended to help you compare the cost of investing in
Shares, Service Shares or Premier Shares of the Portfolio (without fee waivers
and expense reimbursements) with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated (with reinvestment of all dividends and distributions) and
then redeem all of your shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year and that the Portfolio's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
[Download Table]
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Prime Obligations
Portfolio 1 Year 3 Years
----------------------------------
Shares $38 $119
----------------------------------
Service Shares $64 $202
----------------------------------
Premier Shares $91 $284
----------------------------------
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PRIME OBLIGATIONS PORTFOLIO
11
INVESTMENT ADVISER
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser," formerly
known and conducting business as Northern Trust Investments, Inc.), a
subsidiary of TNTC, serves as the Investment Adviser of the Portfolio. NTI is
located at 50 South LaSalle Street, Chicago, Illinois 60675. Unless otherwise
indicated, NTI and TNTC are referred to collectively in this Prospectus as
"Northern Trust."
NTI is an investment adviser registered under the Investment Advisers Act of
1940. It primarily manages assets for defined contribution and benefit plans,
investment companies and other institutional investors.
TNTC is an Illinois state chartered banking organization and a member of the
Federal Reserve System. Formed in 1889, it administers and manages assets for
individuals, personal trusts, defined contribution and benefit plans and other
institutional and corporate clients. It is the principal subsidiary of Northern
Trust Corporation, a bank holding company.
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors, and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
Under its Advisory Agreement with the Trust, the Investment Adviser, subject to
the general supervision of the Trust's Board of Trustees, is responsible for
making investment decisions for the Portfolio and for placing purchase and sale
orders for portfolio securities.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
12
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, the Investment Adviser is entitled to an advisory fee from the
Portfolio, computed daily and payable monthly, at an annual rate of 0.15%
(expressed as a percentage of the Portfolio's average daily net assets).
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Portfolio reflects that the Investment Adviser did
not charge the full amount of the advisory fees to which it was entitled. The
Investment Adviser may discontinue or modify its voluntary limitations in the
future at its discretion.
[Download Table]
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Advisory Fee Paid
Contractual for Fiscal Period
Portfolio Rate Ended 11/30/2003
---------------------------------------------------------
Prime Obligations Portfolio 0.15% 0.10%
---------------------------------------------------------
PRIME OBLIGATIONS PORTFOLIO
13
OTHER PORTFOLIO SERVICES
TNTC serves as Transfer Agent and Custodian for the Portfolio. The Transfer
Agent performs various shareholder servicing functions, and any shareholder
inquiries should be directed to it. In addition, NTI and PFPC Inc. ("PFPC")
serve as Co-Administrators for the Portfolio. The fees that TNTC, NTI and PFPC
receive for their services in these capacities are described under "Portfolio
Fees and Expenses" and in the Additional Statement.
Pursuant to an exemptive order issued by the SEC concerning such arrangements,
TNTC may also render securities lending services to the Portfolio. For such
services, TNTC may receive a fee of up to 35% of the net revenue earned by the
Portfolio on each securities loan. In addition, cash collateral received by the
Portfolio in connection with a securities loan may be invested in shares of
other registered or unregistered funds that pay investment advisory or other
fees to NTI, TNTC or an affiliate.
TNTC, NTI and other Northern Trust affiliates may provide other services to the
Portfolio and receive compensation for such services if consistent with the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules,
exemptive orders and no-action letters issued by the SEC thereunder. Unless
required, investors in the Portfolio may or may not receive specific notice of
such additional services and fees.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
14
PURCHASING AND SELLING SHARES
INVESTORS
Institutional investors, acting on their own behalf or on behalf of customers
and other beneficial owners ("Customers"), may invest in the Shares, Service
Shares and Premier Shares of the Portfolio through their institutional accounts
at Northern Trust or an affiliate. They also may establish accounts directly
with the Trust.
There is no sales charge imposed on investments. Institutional investors
("Institutions") include:
.. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
.. Corporations, partnerships, business trusts and other institutions and
organizations.
SHARE CLASSES
The Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares.
.. Shares do not provide for payments by the Portfolio to Institutions for
administrative support or shareholder liaison services.
.. Service Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support services to
Customers.
.. Premier Shares are designed for Institutions that agree with the Portfolio to
provide (or arrange for the provision of) administrative support and
shareholder liaison services to Customers.
Shares of each class bear their pro rata portion of all operating expenses paid
by the Portfolio, except amounts payable under the Service Plan that has been
adopted for the Portfolio's Service Shares and Premier Shares and transfer
agency fees. The Service Plan provides for payments at an annual rate of up to
0.25% and 0.50% of the average daily net asset value of Service Shares and
Premier Shares, respectively. Because of these class-specific expenses, the
performance of Shares of the Portfolio is expected to be higher than the
performance of both Service Shares and Premier Shares of the Portfolio and the
performance of the Portfolio's Service Shares is expected to be higher than the
performance of the Portfolio's Premier Shares.
OPENING AN ACCOUNT
You may purchase Shares, Service Shares and Premier Shares of the Portfolio
through your institutional account at Northern Trust (or an affiliate) or you
may open an account directly with the Trust. The minimum initial investment is
$20 million. There is no minimum for subsequent investments.
Through an Institutional Account. If you are opening an institutional account
at Northern Trust, a Northern Trust representative can assist you with all
phases of your investment. To purchase Shares, Service Shares and Premier
Shares through your account, contact your Northern Trust representative for
further information.
Directly from the Trust. An Institution may open a shareholder account and
purchase Shares, Service Shares and Premier Shares directly from the Trust as
described in this Prospectus.
BY MAIL
.. Read this Prospectus carefully.
.. Complete and sign the New Account Application.
.. Include a certified corporate resolution (or other acceptable evidence of
authority).
.. Enclose a check or Federal Reserve draft payable to Northern Institutional
Funds.
.. Mail your check, corporate resolution and completed New Account Application
to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
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.
PRIME OBLIGATIONS PORTFOLIO
15
BY TELEPHONE
.. Read this Prospectus carefully.
.. Call the Northern Institutional Funds Center at 800/637-1380.
To open a new account please provide:
.. The name of the Portfolio
.. The number of Shares, Service Shares or Premier Shares or dollar amount to be
invested
.. The method of payment
To add to an existing account, please provide:
.. The Institution's name
.. Your Account Number
BY WIRE OR AUTOMATED CLEARING HOUSE TRANSFER ("ACH TRANSFER")
To open a new account:
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. For more information about the purchase of Shares, Service Shares or Premier
Shares call the Northern Institutional Funds Center at 800/637-1380.
To add to an existing account:
.. Have your bank wire federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10-Digit Portfolio Account Number) (Reference Shareholder's Name)
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
16
SELLING SHARES, SERVICE SHARES AND PREMIER SHARES
Through an Institutional Account. Institutions may sell (redeem) Shares,
Service Shares and Premier Shares through their institutional account by
contacting their Northern Trust account representative.
Directly through the Trust. Institutions that purchase Shares, Service Shares
and Premier Shares directly from the Trust may redeem their Shares through the
Transfer Agent in one of the following ways:
BY MAIL
Send a written request to:
Northern Institutional Funds
P.O. Box 75986
Chicago, Illinois 60675-5986
The letter of instruction must include:
.. The signature of a duly authorized person
.. Your Account Number
.. The name of the Portfolio
.. The number of Shares, Service Shares or Premier Shares or the dollar amount
to be redeemed
BY TELEPHONE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. 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, Service Shares and Premier
Shares--By Mail."
BY WIRE
.. Call the Northern Institutional Funds Center at 800/637-1380 for instructions.
.. You must have given authorization for expedited wire redemption.
.. The minimum amount that may be redeemed by this method is $10,000.
PRIME OBLIGATIONS PORTFOLIO
17
ACCOUNT POLICIES AND OTHER INFORMATION
Purchase and Redemption Minimums. There is a minimum initial investment of $20
million in the Portfolio. There is no minimum for subsequent investments. A
$10,000 minimum applies for redemptions by wire. The Trust reserves the right
to waive purchase and redemption minimums and to determine the manner in which
a minimum is satisfied.
Calculating Share Price. The Trust issues and redeems Shares, Service Shares
and Premier Shares at net asset value ("NAV"). The NAV for each class of shares
of the Portfolio is calculated by dividing the value of net assets attributed
to that class by the number of outstanding shares of the class. For each class
of shares of the Portfolio, the NAV is calculated as of 2:00 p.m., Central
time, on each Business Day. The NAV used in determining the price of your
shares is the one calculated after your purchase order is received and accepted
and after your exchange or redemption order is received in good order as
described below.
The Portfolio seeks to maintain an NAV of $1.00 per share by valuing the
obligations held by it at amortized cost in accordance with SEC regulations.
Amortized cost normally will approximate market value.
Timing of Purchase Requests. Purchase requests received in good order and
accepted by the Transfer Agent or other authorized intermediary on any Business
Day by 2:00 p.m., Central time, will be executed on the same day they are
received by the Transfer Agent or other authorized intermediary, provided that
either:
.. The Transfer Agent receives payment in federal or other immediately available
funds by 2:00 p.m., Central time, on the same Business Day;
.. The request is placed by a financial or authorized intermediary and payment
in federal or other immediately available funds is received by the Transfer
Agent by the close of the same Business Day in accordance with the terms of
the Trust's agreement with the intermediary; or
.. Payment in federal or other immediately available funds is received by the
close of the same Business Day in an institutional account maintained with
Northern Trust or an affiliate.
Purchase requests received in good order by the Transfer Agent or other
authorized intermediary on a non-Business Day or after the deadlines described
above on a Business Day will be executed on the next Business Day, provided
that payment is made as noted above.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for Shares, Service Shares and Premier Shares in the form of securities
that are permissible investments for the Portfolio. The Trust also reserves the
right to pay redemptions by a distribution "in-kind" of securities (instead of
cash) from the Portfolio. See the Additional Statement for further information
about the terms of these purchases and redemptions.
Miscellaneous Purchase Information.
.. Institutions are responsible for transmitting purchase orders and delivering
required funds on a timely basis.
.. Institutions are responsible for all losses and expenses of the Portfolio,
and purchase orders may be cancelled, in the event of any failure to make
payment according to the procedures outlined in this Prospectus. In addition,
a $20 charge will be imposed if a check does not clear.
.. Shares, Service Shares and Premier Shares of the Portfolio are entitled to
the dividends declared by the Portfolio beginning on the Business Day the
purchase order is executed, provided payment in federal or other immediately
available funds is received by the Transfer Agent by the time designated
above.
.. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
.. The Trust reserves the right, on 30 days' written notice, to redeem the
shares held in any account if, at the time of redemption, the net asset value
of the shares in the account falls below $20 million.
.. In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 20.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary on
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
18
any Business Day by 2:00 p.m., Central time, will be executed on the same day,
at that day's closing share price.
Redemption and exchange requests received in good order by the Transfer Agent
or other authorized intermediary on a non-Business Day or after the deadline
described above on a Business Day will be executed the next Business Day, at
that day's closing share price.
Payment of Redemption Proceeds. Redemption proceeds will normally be sent or
credited on the Business Day following the Business Day on which the redemption
request is received in good order by the deadline noted above, unless payment
in immediately available funds on the same Business Day is requested.
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds also
may be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed New Account Application,
including a corporate resolution or other acceptable evidence of authority.
.. The Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to 7 days (or such longer period permitted by the SEC) after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect the Portfolio.
.. If you are redeeming recently purchased Shares, Service Shares and Premier
Shares, your redemption request may not be honored until your check or
electronic transaction has cleared. This may delay your transaction for up to
15 days.
.. Institutions are responsible for transmitting redemption orders and crediting
their Customers' accounts with redemption proceeds on a timely basis.
.. Redemption requests made to the Transfer Agent by mail must be signed by a
person authorized by acceptable documentation on file with the Transfer Agent.
.. Dividends on Shares, Service Shares and Premier Shares are earned through and
including the day prior to the day on which they are redeemed.
.. The Trust and the Transfer Agent reserve the right to redeem Shares, Service
Shares and Premier Shares held by any shareholder in other circumstances
deemed to be in the best interests of the Portfolio.
.. The Trust may require any information reasonably necessary to ensure that a
redemption request has been duly authorized.
.. The Trust reserves the right to change or discontinue any of its redemption
procedures.
.. In certain circumstances, the Trust may advance the time by which redemption
and exchange orders must be received. See "Early Closings" on page 20.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of the Portfolio for shares of
other investment portfolios of the Trust. The registration of both accounts
involved must be identical. Both accounts must have the same owner's name and
title, if applicable. A $1,000 minimum applies to exchanges. An exchange is a
redemption of shares you own and the purchase of shares you are acquiring. It
is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days' written notice to shareholders and to reject any
exchange request. Exchanges only are available in states where an exchange
legally can be made. Before making an exchange you should read the prospectus
for the shares you are acquiring.
Telephone Transactions. Telephone requests are recorded. 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, the Trust 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.
PRIME OBLIGATIONS PORTFOLIO
19
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.
The Trust reserves the right to refuse a telephone redemption.
Advance Notification of Large Transactions. The Trust requests than an
Institution give advance notice to the Transfer Agent by 11:00 a.m., Central
Time, if it intends to place a purchase or redemption order of $5 million or
more on a Business Day.
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 certified corporate resolution,
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
Trust and Transfer Agent may charge a shareholder reasonable costs in locating
a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the Transfer
Agent or the New York Stock Exchange (the "Exchange") is open for business. For
the period April 1, 2004 through March 31, 2005, the Portfolio will be closed
on the following holidays: Martin Luther King, Jr. Day, Presidents' Day,
Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed).
Good Order. A purchase, redemption or exchange request is considered to be "in
good order" when all necessary information is provided and all required
documents are properly completed, signed and delivered. Additionally, a
purchase order initiating the opening of an account will not be considered to
be "in good order" unless the investor has provided all information required by
the Trust's "Customer Identification Program" described below.
Customer Identification Program. Federal law requires the Trust to obtain,
verify and record identifying information, which may include the name, business
street address, taxpayer identification number or other identifying information
for each investor who opens or reopens an account with the Trust. Applications
without this information, or without an indication that a taxpayer
identification number has been applied for, may not be accepted. After
acceptance, to the extent permitted by applicable law or the Trust's customer
identification program, the Trust reserves the right to: (a) place limits on
transactions in any account until the identity of the investor is verified; (b)
refuse an investment in the Trust; or (c) involuntarily redeem an investor's
shares and close an account in the event that an investor's identity is not
verified. The Trust and its agents will not be responsible for any loss in an
investor's account resulting from the invest or's delay in providing all
required identifying information or from closing an account and redeeming an
investor's shares when an investor's identity cannot be verified.
Early Closings. The Portfolio reserves the right to advance the time for
accepting purchase, redemption or exchange orders for same Business Day credit
when the Exchange closes or closes early, trading on the Exchange is
restricted, an emergency arises or as otherwise permitted by the SEC. In
addition, the Board of Trustees of the Portfolio may, for any Business Day,
decide to change the time as of which the Portfolio's NAV is calculated in
response to new developments such as altered trading hours, or as otherwise
permitted by the SEC.
Emergency Events. In the event the Exchange does not open for business because
of an emergency, the Trust may, but is not required to, open one or more
Portfolios for purchase, redemption and exchange transactions if the Federal
Reserve wire payment system is open. To learn whether a Portfolio is open for
business during an emergency situation, please call 800/637-1380 or visit
northerninstitutionalfunds.com.
Financial Intermediaries. The Trust may authorize certain Institutions acting
as financial intermediaries (including
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
20
banks, trust companies, brokers and investment advisers) to accept purchase,
redemption and exchange orders from their Customers on behalf of the Trust.
These authorized intermediaries may also designate other intermediaries to
accept such orders, if approved by the Trust. The Portfolio will be deemed to
have received an order when the order is accepted by the authorized
intermediary, and the order will be priced at the Portfolio's per share NAV
next determined, provided that the authorized intermediary forwards the order
(and payment for any purchase order) to the Transfer Agent on behalf of the
Trust within agreed-upon time periods. If the order (or payment for any
purchase order) is not received by the Transfer Agent within such time periods,
the authorized intermediary may be liable for fees and losses and the
transaction may be cancelled.
Certain financial intermediaries, including affiliates of Northern Trust, may
perform (or arrange to have performed) various administrative support services
for Customers who are the beneficial owners of either Service Shares or Premier
Shares through Servicing Agreements with the Trust ("Service Organizations").
In addition, Service Organizations perform (or arrange to have performed)
personal and account maintenance services under their Servicing Agreements for
Premier Shares. These Servicing Agreements are permitted under the Trust's
Service Plan ("Service Plan"). For both Service Shares and Premier Shares,
administrative support services may include:
.. acting, directly or through another, as shareholder of record;
.. establishing and maintaining individual accounts and records;
.. processing purchase, redemption and exchange orders; and
.. placing net purchase and redemption orders with the Trust's Transfer Agent.
Service Organizations will receive fees from the Portfolio for these services
at an annual rate of up to 0.25% of the average daily net asset value of the
Service Shares and Premier Shares beneficially owned by their Customers.
Personal and account maintenance services provided under the Service Plan for
Premier Shares may include:
.. providing information to investors regarding the Portfolio or relating to the
status of their accounts; and
.. acting as liaison between investors and the Trust.
Service Organizations will receive additional fees from the Portfolio for these
services at an annual rate of up to 0.25% of the average daily net asset value
of Premier Shares beneficially owned by their Customers. All fees payable under
the Service Plan are borne solely by the classes of shares to which the
services are provided and not by the Portfolio's other classes of shares.
Northern Trust may provide compensation to certain dealers and other financial
intermediaries, including affiliates of Northern Trust, that provide services
to their Customers who invest in the Trust or whose Customers purchase
significant amounts of Shares, Service Shares and Premier Shares of the
Portfolio. 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
the Investment Adviser (after adjustments). This additional compensation will
be paid by Northern Trust or its affiliates and will not represent an
additional expense to the Trust or its shareholders.
Customers purchasing Shares, Service Shares and Premier Shares of the Portfolio
through a financial intermediary should read their account agreements
carefully. A financial intermediary's requirements may differ from those listed
in this Prospectus. A financial intermediary may impose account charges, such
as asset allocation fees, account maintenance fees, and other charges that will
reduce the net return on an investment in the Portfolio. If a Customer has
agreed to maintain a minimum balance with a particular financial intermediary
and the balance falls below this minimum, the Customer may be required to
redeem all or a portion of the Customer's investment in the Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation by a
Service Organization or other financial intermediary in connection with the
investment of fiduciary funds in Shares, Service Shares and Premier Shares of
the Portfolio. Financial intermediaries, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
PRIME OBLIGATIONS PORTFOLIO
21
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel.
State securities laws regarding the registration of dealers may differ from
federal law. As a result, Service Organizations and other financial
intermediaries investing in the Portfolio on behalf of their Customers may be
required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Trust's fiscal year on November 30, with
an annual report containing audited financial statements. If you have consented
to the delivery of a single copy of shareholder reports, prospectuses, proxy
statements or information statements to all shareholders who share the same
mailing address with your account, you may revoke your consent at any time by
contacting the Northern Institutional Funds Center by phone at 800/637-1380 or
by mail at Northern Institutional Funds, P.O. Box 75986, Chicago, IL 60675-5986.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
22
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from net income are declared daily and paid monthly by the Portfolio
to its shareholders. Net income includes the interest accrued on the
Portfolio's assets less estimated expenses. The Portfolio's net realized
short-term capital gains, if any, are distributed at least annually. The
Portfolio does not expect to realize net long-term capital gains.
Dividends are paid as soon as practicable following the end of each month,
except in the case of a total redemption of Shares, Service Shares or Premier
Shares in an account that is not subject to a standing order for the purchase
of additional shares.
In that event, dividends will be paid promptly along with the redemption
proceeds.
All distributions are reinvested automatically (without any sales charge) in
additional shares of the same class of the Portfolio, unless you elect to
receive distributions in cash by notifying the Transfer Agent in writing. You
may make arrangements to credit these distributions to your account with
Northern Trust, its affiliates or its correspondent banks.
There are no fees or sales charges on reinvestments.
TAXES
The Portfolio intends to qualify as a regulated investment company for federal
tax purposes, and to distribute substantially all of its net income to
shareholders each year. Dividends derived from interest income and short-term
capital gains will be taxable as ordinary income, and distributions, if any,
derived from net long-term capital gains generally will be taxable as long-term
capital gains, unless you have a tax-advantaged account. This is true whether
dividends and distributions are received in cash or reinvested in Shares,
Service Shares or Premier Shares.
You should note that the Portfolio does not expect to pay dividends that are
eligible for the recently enacted reduced tax rates on corporate dividends.
This is because the Portfolio will generally be invested in debt instruments
and not in shares of stock on which dividend income will be received.
Except as stated below, you may be subject to state and local taxes on
Portfolio distributions and redemptions. State income taxes may not apply,
however, to the portions of the Portfolio'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.
OTHER TAX INFORMATION
Dividends and distributions from the Portfolio will generally be reportable by
you in the tax year in which they are paid with one exception. Dividends and
distributions declared by the Portfolio in October, November or December and
paid in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of
ordinary income and capital gains distributed to your account for the previous
year.
Your investment in the Portfolio could have additional tax consequences.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships may be subject to different United States federal
income tax treatment. You should consult your tax professional for information
regarding all the tax consequences applicable to your investments in the
Portfolio. More information is provided in the Additional Statement. This short
summary is not intended as a substitute for careful tax planning.
PRIME OBLIGATIONS PORTFOLIO
23
RISKS, SECURITIES AND TECHNIQUES
THIS SECTION TAKES A CLOSER LOOK AT SOME OF THE TYPES OF SECURITIES IN WHICH
THE PORTFOLIO MAY INVEST AND THEIR RELATED RISKS. It also explores the
various investment techniques that the investment management team may use.
The Portfolio may invest in other securities and is subject to further
restrictions and risks which are described in the Additional Statement.
Additionally, the Portfolio may purchase other types of securities or
instruments similar to those described in this section if otherwise
consistent with the Portfolio's investment objective and policies.
--------------------------------------------------------------------------------
Investment Objective. The investment objective of the Portfolio may be changed
by the Trust's Board of Trustees without shareholder approval. Shareholders
will, however, be notified of any changes. Any such change may result in the
Portfolio having an investment objective different from the objective that the
shareholder considered appropriate at the time of investment in the Portfolio.
Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, motor vehicle
installment sale contracts, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements, municipal securities and other financial assets.
Such asset pools are securitized through the use of privately-formed trusts or
special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pooled insurance policy issued by a financial
institution, or by other credit enhancements.
Investment Strategy. The Portfolio may purchase various types of asset-backed
securities that are "Eligible Securities" as defined by the SEC.
Special Risks. In addition to credit and market risk, asset-backed securities
usually involve prepayment risk because the underlying assets (loans) usually
may be prepaid at any time. The value of these securities also may 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 generally are 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 Portfolio may borrow money
from banks and may enter into reverse repurchase agreements with banks and
other financial institutions. Reverse repurchase agreements involve the sale of
money market securities held by the Portfolio subject to the Portfolio's
agreement to repurchase them at a mutually agreed upon date and price
(including interest).
Investment Strategy. The Portfolio may borrow and enter into reverse repurchase
agreements in amounts not exceeding one-third of its total assets (including
the amount borrowed). The Portfolio also may borrow up to an additional 5% of
its total assets for temporary purposes. The Portfolio may enter into reverse
repurchase agreements when the investment management team expects that the
interest income to be earned from the investment of the
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
24
transaction proceeds will be greater than the related interest expense.
Special Risks. Borrowings and reverse repurchase agreements involve leveraging.
If the securities held by the Portfolio decline in value while these
transactions are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the
decline in value of the securities. In addition, reverse repurchase agreements
involve the risks that the interest income earned by the Portfolio (from the
investment of the proceeds) will be less than the interest expense of the
transaction, that the market value of the securities sold by the Portfolio will
decline below the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the Portfolio.
Custodial Receipts for Treasury Securities. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
Investment Strategy. To the extent consistent with its investment objective,
the Portfolio may invest a portion of its assets in custodial receipts.
Special Risks. Like other stripped obligations (which are described below),
stripped 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.
Derivatives. The Portfolio 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 rates, or other indices.
Derivatives include structured securities such as collateralized mortgage
obligations and other types of asset-backed securities, "stripped" securities
and various floating rate instruments.
Investment Strategy. The Portfolio may invest in derivatives when the
Investment Adviser believes the potential risks and rewards are consistent with
the Portfolio's objective, strategies and overall risk profile.
Special Risks. Engaging in derivative transactions involves special risks,
including: (a) market risk that the Portfolio's derivatives position will lose
value; (b) credit risk that the counterparty to the transaction will default;
(c) leveraging risk that the value of the derivative instrument will decline
more than the value of the assets on which it is based; (d) illiquidity risk
that the Portfolio 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 recently have been developed and have not been tested over complete
market cycles. For these reasons, the Portfolio may suffer a loss whether or
not the analysis of the investment management team is accurate.
Foreign Investments. The Portfolio may invest in U.S. dollar-denominated
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities, foreign commercial
banks and foreign branches of U.S. banks. The Portfolio also may invest in U.S.
dollar-denominated commercial paper and other obligations of foreign issuers.
Foreign government obligations may include debt obligations of supranational
entities, including international organizations (such as the European Coal and
Steel Community and the International Bank for Reconstruction and Development
(also known as the World Bank)) and international banking institutions and
related government agencies.
Investment Strategy. Investments by the Portfolio in foreign issuer obligations
will not exceed 50% of the Portfolio's total assets measured at the time of
purchase.
Special Risks. Foreign securities involve special risks and costs, which are
considered by the Investment Adviser in evaluating creditworthiness of issuers
and making investment decisions for the Portfolio. 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 otherwise may
not respect the integrity of their debt.
PRIME OBLIGATIONS PORTFOLIO
25
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 also
may 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 adversely might
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.
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), and other
securities that are traded in the U.S. but are subject to trading restrictions
because they are not registered under the Securities Act of 1933, as amended
(the "1933 Act").
Investment Strategy. The Portfolio may invest up to 10% of its net assets in
securities that are illiquid. A domestically traded security which is not
registered under the 1933 Act will not be considered illiquid if the Investment
Adviser determines that an adequate trading market exists for that security. If
otherwise consistent with its investment objective and policies, the Portfolio
may purchase commercial paper issued pursuant to Section 4(2) of the 1933 Act
and securities that are not registered under the 1933 Act but can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act ("Rule 144A Securities"). These securities will not be considered illiquid
so long as the Investment Adviser determines, under guidelines approved by the
Trust's Board of Trustees, that an adequate trading market exists.
Special Risks. Because illiquid and restricted securities may be difficult to
sell at an acceptable price, they may be subject to greater volatility and may
result in a loss to the Portfolio. The practice of investing in Rule 144A
Securities and commercial paper available to qualified institutional buyers
could increase the level of 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 the Portfolio to make cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits interest to the Portfolio for a set time period.
Investment Strategy. The Portfolio may invest in IFAs issued by insurance
companies that meet quality and credit standards established by the Investment
Adviser.
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, there may be no active secondary market for IFAs.
This means that it may be difficult to sell an IFA at an appropriate price.
Investment Companies. To the extent consistent with its investment objective
and policies, the Portfolio may invest in securities issued by other investment
companies.
Investment Strategy. Investments by the Portfolio in other money market funds
will be subject to the limitations of the 1940 Act and SEC orders. Although the
Portfolio does not expect to do so in the foreseeable future, the Portfolio is
authorized to invest substantially all of its assets in an open-end investment
company or series thereof that has substantially the same investment objective,
policies and fundamental restrictions as the Portfolio.
Special Risks. As a shareholder of another investment company, the Portfolio
would be subject to the same risks as any other investor in that company. It
also would bear a proportionate share of any fees or expenses paid by that
company. These expenses would be in addition to the advisory fees and other
expenses the Portfolio bears directly in connection with its own operations.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
26
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 also
are 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 typically are payable by the private user of the
facilities financed by the bonds.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and asset-backed securities such as custodial
receipts. Moral obligation bonds 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 or
custodian.
Investment Strategy. The Portfolio may invest 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 Portfolio on such investments will be taxable to shareholders.
Special Risks. Municipal instruments purchased by the Portfolio 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 and financial institutions
declines, the Portfolio could suffer a loss to the extent that the Portfolio is
relying upon this credit support.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by the Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment Strategy. The Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of the
agreement will never occur more than one year after the Portfolio acquires the
securities.
Special Risks. In the event of a default, the Portfolio 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 Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In addition,
in the event of bankruptcy, the Portfolio could suffer additional losses if a
court determines that the Portfolio's interest in the collateral is
unenforceable by the Portfolio.
Securities Lending. In order to generate additional income, the Portfolio may
lend securities to banks, brokers and dealers or other qualified institutions.
In exchange, the Portfolio will receive collateral equal to at least 100% of
the value of the securities loaned.
Investment Strategy. Securities lending may represent no more than one-third
the value of the Portfolio's total assets (including the loan collateral). Any
cash collateral received by the Portfolio in connection with these loans may be
invested in short-term instruments, either directly or indirectly through other
money market portfolios. Such investments are not limited to U.S. government
securities and may include any instruments that may be purchased by the
Portfolio. Loan collateral (including any investment of the collateral) is not
included in the calculation of the percentage limitations described elsewhere
in this Prospectus regarding the Portfolio's investments in particular types of
securities.
PRIME OBLIGATIONS PORTFOLIO
27
Special Risks. A principal risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligations to return
the securities. In this event, the Portfolio could experience delays in
recovering its securities and possibly may incur a capital loss. The Portfolio
will be responsible for any loss that might result from its investment of the
cash collateral it receives from a borrower. Additionally, the amount of income
to shareholders that is taxable at the state level may increase as a result of
the Portfolio's securities lending activities. Any state tax-exempt interest
paid on securities while on loan will not be deemed to have been received by
the Portfolio, and the equivalent amount paid by the borrower of the securities
to the Portfolio will not be deemed to be interest exempt from state taxes, but
is likely to be deemed taxable income to shareholders.
Stripped Obligations. These securities are issued by the U.S. government (or an
agency, instrumentality or a sponsored enterprise), foreign governments, banks
and other issuers. They entitle the holder to receive either interest payments
or principal payments that have been "stripped" from a debt obligation. These
obligations include stripped mortgage-backed securities, which are derivative
multi-class mortgage securities.
Investment Strategy. To the extent consistent with its investment objective,
the Portfolio 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
either interest rates or principal prepayments could depress the price of
stripped securities held by the Portfolio and adversely affect the Portfolio's
investment performance.
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, its agencies, instrumentalities or
sponsored enterprises. Securities guaranteed as to principal and interest by
the U.S. government, its agencies, instrumentalities or sponsored enterprises
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, an agency, instrumentality or sponsored enterprise thereof, and (b)
participations in loans made to foreign governments or their agencies that are
so guaranteed.
Investment Strategy. To the extent consistent with its investment objective,
the Portfolio may invest in a variety of U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises.
Special Risks. Not all U.S. government obligations carry the same credit
support. Some, such as those of the Government National Mortgage Association
("Ginnie Mae"), 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 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 or sponsored enterprise. No assurance can be
given that the U.S. government would provide financial support to its agencies,
instrumentalities or sponsored enterprises 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 periodically are adjusted either at set intervals or
that float at a margin tied to a specified index rate. These instruments
include variable amount master demand notes and long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where the Portfolio 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.
Investment Strategy. The Portfolio may invest in variable and floating rate
instruments to the extent consistent with its investment objective.
Special Risks. Variable and floating rate instruments are subject to many of
the same risks as fixed rate instruments, particularly credit risk. Because
there is no active secondary
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
28
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 Portfolio is not entitled to exercise its demand rights. As a
result, the Portfolio could suffer a loss with respect to these instruments.
When-Issued Securities, Delayed Delivery Transactions and Forward Commitments.
A purchase of "when-issued" securities refers to a transaction made
conditionally because the securities, although authorized, have not yet been
issued. A delayed delivery or forward commitment transaction involves a
contract to purchase or sell securities for a fixed price at a future date
beyond the customary settlement period.
Investment Strategy. The Portfolio may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Portfolio generally would purchase securities in these transactions with the
intention of acquiring the securities, the Portfolio may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special Risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities may
decrease by the time they actually are issued or delivered. Conversely, selling
securities in these transactions involves the risk that the value of the
securities may increase by the time they actually are issued or delivered.
These transactions also involve the risk that the counterparty may fail to
deliver the security or cash on the settlement date.
Miscellaneous. TNTC is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
PRIME OBLIGATIONS PORTFOLIO
29
FINANCIAL INFORMATION
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE
PORTFOLIO'S FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS (OR, IF SHORTER,
THE PERIOD OF THE PORTFOLIO'S OPERATIONS).
Certain information reflects financial results for a single share. The total
returns in the table represents the rate that an investor would have earned
or lost on an investment in the Portfolio for a share held for the entire
period (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report, along with
the Portfolio's financial statements, is included in the Portfolio's annual
report, which is available upon request and without charge. As of November
30, 2003, no Premier Shares of the Portfolio were outstanding.
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NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
30
FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED NOVEMBER 30
PRIME OBLIGATIONS PORTFOLIO
[Enlarge/Download Table]
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SHARES SERVICE
Selected per share data 2003/(3)/ 2003/(4)/
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Net asset value, beginning of period $1.00 $1.00
Income from investment operations:
Net investment income -- --
Total income from investment operations -- --
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Less distributions paid:
From net investment income -- --
Total distributions paid -- --
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Net asset value, end of period $1.00 $1.00
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Total return/(1)/ 0.26% 0.16%
Supplemental data and ratios:
Net assets, in thousands, end of period $398,281 $16,601
Ratio to average net assets of:/(2)/
Expenses, net of waivers and reimbursements 0.20% 0.46%
Expenses, before waivers and reimbursements 0.37% 0.63%
Net investment income, net of waivers and reimbursements 0.91% 0.65%
Net investment income, before waivers and reimbursements 0.74% 0.48%
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(1)Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(2)Annualized for periods less than one year.
(3)For the period August 21, 2003 (commencement of operations) through November
30, 2003. Per share amounts from net investment income and distributions
from net investment income were less than $0.01 per share.
(4)For the period September 2, 2003 (commencement of operations) through
November 30, 2003. Per share amounts from net investment income and
distributions from net investment income were less than $0.01 per share.
PRIME OBLIGATIONS PORTFOLIO
31
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORTS
Additional information about the Portfolio's investments is available in the
Portfolio's annual report and will be available in its semiannual report to
shareholders when it is prepared.
In the Portfolio's annual reports, you will find a discussion of the market
conditions and investment strategies that significantly affected the
Portfolio's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolio and its policies also is available
in the Portfolio's Additional Statement. The Additional Statement is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolio's annual and semiannual reports and the Additional Statement are
available free upon request by calling the Northern Institutional Funds Center
at 800/637-1380.
To obtain other information and for shareholder inquiries:
BY TELEPHONE
Call 800/637-1380
BY MAIL
Northern Institutional Funds
P.O. Box 75986
Chicago, IL 60675-5986
ON THE INTERNET
Text-only versions of the Portfolio's documents are available online and may be
downloaded from:
.. The SEC's Web site at sec.gov
.. Northern Institutional Funds' Web site at northerninstitutionalfunds.com
You may review and obtain copies of Northern Institutional Funds documents by
visiting the SEC's Public Reference Room in Washington, D.C. You also may
obtain copies of Northern Institutional Funds documents by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-0102 or by electronic request at publicinfo@sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202/942-8090.
NORTHERN INSTITUTIONAL FUNDS PROSPECTUS
32
PART B
STATEMENT OF ADDITIONAL INFORMATION
NORTHERN INSTITUTIONAL FUNDS
BALANCED PORTFOLIO
BOND PORTFOLIO
CORE BOND PORTFOLIO
DIVERSIFIED ASSETS PORTFOLIO
DIVERSIFIED GROWTH PORTFOLIO
EQUITY INDEX PORTFOLIO
FOCUSED GROWTH PORTFOLIO
GOVERNMENT PORTFOLIO
GOVERNMENT SELECT PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
INTERNATIONAL EQUITY INDEX PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
MID CAP GROWTH PORTFOLIO
MUNICIPAL PORTFOLIO
SHORT-INTERMEDIATE BOND PORTFOLIO
SMALL COMPANY GROWTH PORTFOLIO
SMALL COMPANY INDEX PORTFOLIO
TAX-EXEMPT PORTFOLIO
U.S. GOVERNMENT SECURITIES PORTFOLIO
U.S. TREASURY INDEX PORTFOLIO
This Statement of Additional Information dated April 1, 2004, (the
"Additional Statement") is not a prospectus. Copies of the prospectuses dated
April 1, 2004 for the Diversified Assets Portfolio, Government Portfolio,
Government Select Portfolio, Municipal Portfolio, Tax-Exempt Portfolio
(collectively, the "Money Market Portfolios"), Bond Portfolio, Core Bond
Portfolio, Intermediate Bond Portfolio, International Bond Portfolio,
Short-Intermediate Bond Portfolio, U.S. Government Securities Portfolio, U.S.
Treasury Index Portfolio (collectively, the "Fixed Income Portfolios"), Balanced
Portfolio, Diversified Growth Portfolio, Equity Index Portfolio, Focused Growth
Portfolio, Mid Cap Growth Portfolio, Small Company Growth Portfolio, Small
Company Index Portfolio, International Equity Index Portfolio and International
Growth Portfolio (collectively, the "Equity Portfolios"), (each a "Portfolio"
and collectively, the "Portfolios") of Northern Institutional Funds (the
"Prospectuses") may be obtained without charge by calling 800/637-1380
(toll-free). Capitalized terms not otherwise defined have the same meaning as in
the Prospectuses.
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 2003 are incorporated herein
by reference in the section "Financial Statements." No other parts of the annual
report are incorporated by reference. Copies of the annual report may be
obtained upon request and without charge by calling 800/637-1380 (toll-free).
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE
PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THE PROSPECTUSES DO NOT
CONSTITUTE AN OFFERING BY THE TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
An investment in a Portfolio is not a deposit of any bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or
any other government agency. An investment in a Portfolio involves investment
risks, including possible loss of principal. Although the Diversified Assets,
Government, Government Select, Municipal and Tax-Exempt Portfolios seek to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Portfolios.
2
INDEX
Page
ADDITIONAL INVESTMENT INFORMATION..............................................4
Classification and History................................................4
Investment Objectives and Policies........................................4
Investment Restrictions..................................................27
ADDITIONAL TRUST INFORMATION..................................................31
Trustees and Officers....................................................31
Standing Board Committees................................................36
Trustee Ownership of Portfolio Shares....................................37
Trustee and Officer Compensation.........................................38
Code of Ethics...........................................................39
Investment Advisers, Transfer Agent and Custodian........................39
Proxy Voting.............................................................50
Co-Administrators and Distributor........................................51
Shareholder Servicing Plan for Fixed Income and Equity Portfolios........54
Counsel and Auditors.....................................................55
In-Kind Purchases and Redemptions........................................55
Third-Party Fees and Requirements........................................56
Expenses.................................................................56
PERFORMANCE INFORMATION.......................................................56
Money Market Portfolios..................................................56
Equity and Fixed Income Portfolios.......................................59
NET ASSET VALUE...............................................................79
TAXES.........................................................................81
Federal - General Information............................................81
State and Local Taxes....................................................82
Taxation of Certain Financial Instruments................................82
Special Tax Considerations Pertaining to the Tax-Exempt and Municipal
Portfolios...............................................................83
Foreign Investors........................................................83
DESCRIPTION OF SHARES.........................................................84
SERVICE PLAN FOR MONEY MARKET PORTFOLIOS......................................92
FINANCIAL STATEMENTS..........................................................94
OTHER INFORMATION.............................................................94
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
3
ADDITIONAL INVESTMENT INFORMATION
CLASSIFICATION AND HISTORY
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act"), except for the
International Bond Portfolio which is classified as non-diversified under the
1940 Act.
Each Portfolio is a series of the Trust, which was formed as a Delaware
statutory trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust is the result of a reorganization of a
Massachusetts business trust formerly known as The Benchmark Funds on March 31,
1998. The Trust's name was changed from The Benchmark Funds to Northern
Institutional Funds on July 15, 1998.
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives, strategies and risks
of the Portfolios as set forth in the Prospectus. The investment objectives of
the Core Bond, Intermediate Bond, Mid Cap Growth, Municipal and Small Company
Growth Portfolios may be changed without shareholder approval. The investment
objective of each other Portfolio may not be changed without the vote of the
majority of the Portfolio's outstanding shares. Except as expressly noted below,
however, each Portfolio's investment policies may be changed without shareholder
approval.
With respect to the Bond, Core Bond, Equity Index, Government, Government
Select, Intermediate Bond, International Bond, International Equity Index, Mid
Cap Growth, Short-Intermediate Bond, Small Company Index, Small Company Growth,
U.S. Government Securities and U.S. Treasury Index Portfolios, to the extent
required by the Securities and Exchange Commission ("SEC") regulations,
shareholders will be provided with sixty days' notice in the manner prescribed
by the SEC before any change in a Portfolio's policy stated in the Prospectuses
to invest at least 80% of its net assets in the particular type of investment
suggested by its name. As described further below, the Tax-Exempt Portfolio and
Municipal Portfolio have policies that may not be changed without shareholder
approval to invest at least 80% of their respective net assets in debt
instruments, the interest on which is exempt from regular federal income tax.
For these purposes, "net assets" include the amount of any borrowings for
investment purposes and the amount of "net assets" is measured at the time of
purchase.
MONEY MARKET PORTFOLIOS
Diversified Assets Portfolio seeks to achieve its objective by investing in a
broad range of government, bank and commercial obligations that are available in
the money markets.
Government Portfolio seeks to achieve its objective by investing, under normal
circumstances, substantially all (and at least 80%) of its net assets in
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies, instrumentalities and sponsored enterprises and
repurchase agreements backed by such securities.
Government Select Portfolio seeks to achieve its objective by investing, under
normal circumstances, substantially all (and at least 80%) of its net assets in
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies, instrumentalities or sponsored enterprises. Under
normal circumstances, the Portfolio will seek to acquire only those U.S.
government securities the interest upon which generally is exempt from state
income taxation. These securities include obligations issued by the U.S.
Treasury and certain U.S. government agencies, instrumentalities or sponsored
enterprises, such as the Federal Home Loan Bank and the Federal Farm Credit
Banks Funding Corp.
Municipal Portfolio seeks to achieve its objective by investing primarily in
high-quality short-term municipal instruments the interest on which is exempt
from regular federal income tax. The high level of income sought by the
Portfolio is relative to yields currently available in the tax-exempt
marketplace.
Tax-Exempt Portfolio seeks to achieve its objective by investing primarily in
high-quality short-term municipal instruments, the interest on which is exempt
from regular federal income tax. The high level of income sought by the
Portfolio is relative to yields currently available in the tax-exempt
marketplace. Except in extraordinary circumstances, at least 80% of the
Portfolio's net assets will be invested in debt instruments, the interest on
which is exempt from regular federal income tax. Alternative Minimum Tax ("AMT")
obligations, the interest on which may be treated as an item of tax preference
to
4
shareholders under the federal alternative minimum tax, will not be deemed to be
eligible debt instruments for the purposes of determining whether the Portfolio
meets this policy. For shareholders subject to AMT, a limited portion of the
Portfolio's dividends may be subject to federal income tax.
FIXED INCOME PORTFOLIOS
Bond Portfolio seeks capital appreciation and current income in its attempt to
maximize total return. In doing so, the Portfolio will invest, under normal
circumstances, at least 80% of its net assets in bonds and other fixed income
securities.
Core Bond Portfolio seeks capital appreciation and current income in its attempt
to maximize total return. In doing so, the Portfolio will invest, under normal
circumstances, at least 80% of its net assets in bonds and other fixed income
securities.
Intermediate Bond Portfolio seeks capital appreciation and current income in its
attempt to maximize total return. In doing so, the Portfolio will invest, under
normal circumstances, at least 80% of its net assets in bonds and other fixed
income securities.
International Bond Portfolio seeks capital appreciation and current income in
its attempt to maximize total return. In doing so, the Portfolio will invest,
under normal circumstances, at least 80% of its net assets in bonds and other
fixed income securities. The Portfolio intends to invest in the securities of
issuers located in a number of countries throughout the world.
Short-Intermediate Bond Portfolio seeks capital appreciation and current income
in its attempt to maximize total return. In doing so, the Portfolio will invest,
under normal circumstances, at least 80% of its net assets in bonds and other
fixed income securities.
U.S. Government Securities Portfolio seeks capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal circumstances, at least 80% of its net assets in securities
issued or guaranteed by the U.S. government, its agencies, instrumentalities or
sponsored enterprises and repurchase agreements relating to such securities.
U.S. Treasury Index Portfolio, under normal circumstances, will invest
substantially all (and at least 80%) of its net assets in a representative
sample of the U.S. Treasury obligations included in the Lehman Index. The
Portfolio will buy and sell securities with the goal of achieving an overall
duration and total return similar to that of the Lehman Index.
EQUITY PORTFOLIOS
Balanced Portfolio seeks long-term capital appreciation and current income. The
Portfolio will, under normal circumstances, invest up to 75% of its net assets
in equity securities and at least 25% in fixed income securities. Within these
limitations, the actual mix of assets will vary depending on the investment
management team's analysis of market and economic conditions, including expected
earnings, growth in earnings, long-term interest rates and risk premiums. When,
for example, this analysis indicates that the equity market is overvalued
relative to the fixed income market, the investment management team would
allocate a greater percentage of the Portfolio's assets to fixed income
securities.
Diversified Growth Portfolio seeks long-term capital appreciation. The Portfolio
will, under normal circumstances, invest at least 65% of its net assets in
equity securities. The companies in which the Portfolio invests generally have
market capitalizations in excess of $1 billion. Although the Portfolio primarily
invests in the securities of U.S. companies, it may invest to a limited extent
in the securities of foreign issuers.
Equity Index Portfolio, under normal circumstances, will invest substantially
all (and at least 80%) of its net assets in the equity securities of the
companies that make up the Standard and Poor's 500(R) Composite Index ("S&P 500
Index"), in weightings that approximate the relative composition of the
securities contained in the S&P 500 Index.
Focused Growth Portfolio seeks long-term capital appreciation. The Portfolio
will, under normal circumstances, invest at least 65% of its net assets in
equity securities. Companies in which the Portfolio invests are selected by the
investment management team for their growth potential and generally will have
market capitalizations in excess of $1 billion.
5
International Equity Index Portfolio will, under normal circumstances, invest
substantially all (and at least 80%) of its net assets in the equity securities
included in the Morgan Stanley Capital International Index for Europe, Australia
and Far East Index ("MSCI EAFE(R) Index"), in weightings that approximate the
relative composition of the securities contained in the Index.
International Growth Portfolio seeks long-term capital appreciation. The
Portfolio will, under normal circumstances, invest at least 65% of its net
assets in equity securities. The Portfolio intends to invest in the securities
of companies located in a number of countries throughout the world. These
companies will generally have market capitalizations in excess of $1 billion.
Mid Cap Growth Portfolio seeks long-term capital appreciation. The Portfolio
will invest, under normal circumstances, at least 80% of its net assets in
equity securities of medium capitalization companies. Medium capitalization
companies are generally are considered to be those whose market capitalization
is, at the time the Portfolio makes an investment, similar to the market
capitalization of companies in the Russell Midcap(R) Index. Companies whose
capitalization no longer meets this definition after purchase may continue to be
considered medium capitalization companies.
Small Company Growth Portfolio seeks long-term capital appreciation. The
Portfolio will invest, under normal circumstances, at least 80% of its net
assets in the equity securities of small capitalization companies. Small
capitalization companies generally are considered to be those whose market
capitalization is, at the time the Portfolio makes an investment, similar to the
market capitalization of companies in the Russell 2000(R) Index. Companies whose
capitalization no longer meets this definition after purchase may continue to be
considered small capitalization companies.
Small Company Index Portfolio will, under normal circumstances, invest
substantially all (and at least 80%) of its net assets in the equity securities
included in the Russell 2000 Index, in weightings that approximate the relative
composition of securities contained in the Index.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). To the extent consistent with their
respective investment objectives, the Equity and Fixed Income Portfolios may
invest in ADRs. ADRs are receipts that are traded in the United States
evidencing ownership of the underlying foreign securities and are denominated in
U.S. dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder information
that a sponsored depository is required to provide under its contractual
arrangement with the issuer.
ASSET-BACKED (INCLUDING MORTGAGE-BACKED) SECURITIES. To the extent
described in the Prospectuses, the Portfolios may purchase asset-backed
securities, which are securities backed by mortgages, installment contracts,
credit card receivables, municipal securities or other financial assets. The
investment characteristics of asset-backed securities differ from those of
traditional fixed-income securities. Asset-backed securities represent interests
in "pools" of assets in which payments of both interest and principal on the
securities are made periodically, thus in effect "passing through" such payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security is normally subject to both
call risk and extension risk, and an asset-backed security's stated maturity may
be shortened. In addition, the security's total return may be difficult to
predict precisely.
These differences can result in significantly greater price and yield
volatility than is the case with traditional fixed-income securities.
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 Fixed
Income Portfolio'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
6
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 certain Portfolios may include
collateralized mortgage obligations ("CMOs"). 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, and
normally are considered derivative securities. In some cases CMOs may be highly
leveraged and very speculative. The Portfolios will not purchase "residual" CMO
interests, which normally exhibit greater price volatility.
There are a number of important differences among the agencies,
instrumentalities and sponsored enterprises of the U.S. government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("Ginnie Mae") include Ginnie Mae Mortgage Pass-Through
Certificates, which are guaranteed as to the timely payment of principal and
interest by Ginnie Mae and backed by the full faith and credit of the United
States, which means that the U.S. government guarantees that the interest and
principal will be paid when due. Ginnie Mae is a wholly-owned U.S. government
corporation within the Department of Housing and Urban Development. Ginnie Mae
certificates also are supported by the authority of Ginnie Mae to borrow funds
from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by the Federal National Mortgage
Association ("Fannie Mae") include Fannie Mae Guaranteed Mortgage Pass-Through
Certificates, which are solely the obligations of Fannie Mae 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 U.S. Treasury. Fannie
Mae is a government-sponsored enterprise owned by private stockholders. Fannie
Mae certificates are guaranteed as to timely payment of the principal and
interest by Fannie Mae. Mortgage-related securities issued by Federal Home Loan
Mortgage Corporation ("Freddie Mac") include Freddie Mac Mortgage Participation
Certificates. Freddie Mac is a corporate instrumentality of the United States,
created pursuant to an Act of Congress. Freddie Mac certificates are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Mac certificates entitle the holder to timely payment of interest,
which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When Freddie Mac does not guarantee timely payment of principal,
Freddie Mac may remit the amount due on account of its guarantee of ultimate
payment of principal after default. While Fannie Mae and Freddie Mac securities
are not backed by the full faith and credit of the U.S. government, they have
generally been viewed by the market as high quality securities with low credit
risks because of their ability to borrow from the U.S. Treasury.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating federal sponsorship of Fannie Mae and
Freddie Mac. The Trust cannot predict what legislation, if any, may be proposed
in the future in Congress as regards to such sponsorship or which proposals, if
any, might be enacted. Such proposals, if enacted, might materially and
adversely affect the availability of government guaranteed mortgage-backed
securities and the Portfolios' liquidity and value.
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.
In addition, privately issued mortgage-backed securities (as well as other
types of asset-backed securities) do not have the backing of any U.S. government
agency, instrumentality or sponsored enterprise. The seller or servicer of the
underlying mortgage obligations will generally make representations and
warranties to certificate-holders as to certain
7
characteristics of the mortgage loans and as to the accuracy of certain
information furnished to the trustee in respect of each such mortgage loan. Upon
a breach of any representation or warranty that materially and adversely affects
the interests of the related certificate-holders in a mortgage loan, the seller
or servicer generally will be obligated either to cure the breach in all
material respects, to repurchase the mortgage loan or, if the related agreement
so provides, to substitute in its place a mortgage loan pursuant to the
conditions set forth therein. Such a repurchase or substitution obligation may
constitute the sole remedy available to the related certificate-holders or the
trustee for the material breach of any such representation or warranty by the
seller or servicer. To provide additional investor protection, some
mortgage-backed securities may have various types of credit enhancements,
reserve funds, subordination provisions or other features.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the
Portfolios 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 cash requirements for redemption of shares and by requirements which
enable the Portfolios to receive favorable tax treatment.
The Portfolios are not restricted by policy with regard to portfolio
turnover and will make changes in their investment portfolio from time to time
as business and economic conditions as well as market prices may dictate. For
the fiscal year ended November 30, 2003, the turnover rates for the Portfolios
(except for the Money Market Portfolios) are as follows:
-----------------------------------------------------
PORTFOLIO: Portfolio Turnover Rate
-----------------------------------------------------
Balanced 147.53%
Bond 325.90%
Core Bond 380.92%
Diversified Growth 104.96%
Equity Index 16.04%
Focused Growth 202.69%
Intermediate Bond 336.00%
International Bond 62.15%
International Equity Index 54.71%
International Growth 87.13%
Mid Cap Growth 236.64%
Short-Intermediate Bond 257.17%
Small Company Growth 263.21%
Small Company Index 24.61%
U.S. Government Securities 250.94%
U.S. Treasury Index 65.88%
-----------------------------------------------------
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 rank junior to deposit liabilities of banks 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 FDIC or any other insurer. Deposit notes are insured by the FDIC only to
the extent of $100,000 per depositor per bank.
8
Each Portfolio, including the Core Bond Portfolio and the Money Market
Portfolios to the extent such obligations are U.S. dollar-denominated, may
invest a portion of its 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.
Commercial paper purchased by certain Portfolios may include asset-backed
commercial paper. Asset-backed commercial paper is issued by a special purpose
entity that is organized to issue the commercial paper and to purchase trade
receivables or other financial assets. The credit quality of asset-backed
commercial paper depends primarily on the quality of these assets and the level
of any additional credit support.
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 management team may
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 portfolio securities as to issuers; and whether
the securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Portfolios may result from an improvement in
the credit standing of an issuer whose securities are held in the Portfolio or
from a general lowering of interest rates, or a combination of both. Conversely,
a reduction in the credit standing of an issuer whose securities are held by the
Portfolio or a general increase in interest rates may be expected to result in
capital depreciation to the Portfolio.
In general, investments in lower quality convertible securities are subject
to a significant risk of a change in the credit rating or financial condition of
the issuing entity. Investments in convertible securities of medium or lower
quality are also likely to be subject to greater market fluctuation and to
greater risk of loss of income and principal due to default than investments of
higher quality fixed-income securities. Such lower quality securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher quality securities, which react more to fluctuations in the general
level of interest rates. A Portfolio that invests in convertible securities 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 Portfolio of any
single investment, it does not reduce the overall risk of investing in lower
quality securities.
9
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. The Portfolios (other than the
Government Select Portfolio) may acquire U.S. government obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. government obligations for federal tax
purposes. The Trust is unaware of any binding legislative, judicial or
administrative authority on this issue.
EQUITY SWAPS. The Equity Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio on the notional amount. In other cases, the counterparty and the
Portfolio 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 Portfolio will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Portfolio 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 Portfolio is contractually
obligated to make. If the other party to an equity swap defaults, a Portfolio's
risk of loss consists of the net amount of payments that such Portfolio 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 Portfolio's obligations, the Portfolios and the Investment
Adviser believe that such transactions do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to a
Portfolio's borrowing restrictions.
The Portfolios will not enter into any 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 Rating Service
("S&P") or Fitch Ratings ("Fitch"), or A or Prime-1 or better by Moody's
Investor Services, Inc. ("Moody's"), or has received a comparable rating from
another organization that is recognized as a nationally recognized statistical
rating organization ("NRSRO"). If there is a default by the other party to such
a transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Adviser is incorrect in its
forecasts of market values, the investment performance of a Portfolio would be
less favorable than it would have been if this investment technique were not
used.
EUROPEAN DEPOSITARY RECEIPTS ("EDRS"). To the extent consistent with their
respective investment objectives and policies, the Portfolios may invest in EDRs
and Global Depositary Receipts ("GDRs"). EDRs and GDRs are receipts issued by a
non-U.S. financial institution evidencing ownership of underlying foreign or
U.S. securities and are usually denominated in foreign currencies. EDRs and GDRs
may not be denominated in the same currency as the securities
10
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 Portfolios (except the Core Bond, Diversified Assets,
Government, Government Select, Municipal and Tax-Exempt Portfolios) are
authorized to enter into forward foreign 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 allow a Portfolio 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
Portfolio 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.
When the investment management team anticipates that a particular foreign
currency may decline relative to the U.S. dollar or other leading currencies, in
order to reduce risk, a Portfolio 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 Portfolio's securities denominated in such foreign currency.
Similarly, when the securities held by a Portfolio create a short position in a
foreign currency, the Portfolio may enter into a forward contract to buy, for a
fixed amount, an amount of foreign currency approximating the short position.
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. In addition, 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 Portfolio may also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
In addition, to the extent consistent with its investment objectives, a
Portfolio may purchase or sell forward foreign currency exchange contracts to
seek to increase total return or for cross-hedging purposes and may engage in
cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
the investment management team believes that there is a pattern of correlation
between the two currencies.
Liquid assets equal to the amount of a Portfolio'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 Portfolio. A
forward contract to sell a foreign currency is "covered" if a Portfolio owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Portfolio to buy the
same currency at a price that is (i) no higher than the Portfolio's price to
sell the currency or (ii) greater than the Portfolio's price to sell the
currency provided the Portfolio segregates liquid assets in the amount of the
difference. A forward contract to buy a foreign currency is "covered" if a
Portfolio holds a forward contract (or call option) permitting the Portfolio to
sell the same currency at a price that is (i) as high as or higher than the
Portfolio's price to buy the currency or (ii) lower than the Portfolio's price
to buy the currency provided the Portfolio segregates liquid assets in the
amount of the difference.
FOREIGN INVESTMENTS. To the extent consistent with its investment policies,
each Portfolio may invest in bonds and other fixed income securities of foreign
issuers. Foreign bonds and fixed income securities purchased by the Core Bond
Portfolio and the Money Market Portfolios must be U.S. dollar-denominated.
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 on foreign exchanges or foreign over-the-counter markets 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 Portfolio to the extent that it invests in foreign stocks. The holdings of the
Portfolios, to the extent that they invest in fixed income securities, will be
sensitive to changes in interest rates and the interest rate environment. In
addition, the performance of investments in securities denominated in a foreign
currency will depend on the strength of the foreign currency against the U.S.
dollar and the interest rate environment in the country issuing the currency.
Absent other events which could otherwise affect the value of a foreign
11
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. Also, the legal remedies for investors may be
more limited than the remedies available in the U.S.
Additional risks are involved when a Portfolio invests its assets in
countries with emerging economies or securities markets. These countries are
located in the Asia and Pacific regions, the Middle East, Eastern Europe,
Central America, South America and Africa. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristics of more developed countries. In general, the
securities markets of these countries are less liquid, subject to greater price
volatility, have smaller market capitalization and have problems with securities
registration and custody. As a result, the risks presented by investments in
these countries are heightened. Additionally, settlement procedures in emerging
countries are frequently less developed and reliable than those in the United
States and may involve the Portfolio's delivery of securities before receipt of
payment for their sale. Settlement or registration problems may make it more
difficult for the Portfolio to value its portfolio securities and could cause
the Portfolio 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 Portfolio has delivered or the Portfolio's inability to
complete its contractual obligations.
Unanticipated political, economic or social developments may affect the
value of a Portfolio's investments in emerging market countries and the
availability to a Portfolio of additional investments in these countries. Some
of these countries may have in the past failed to recognize private property
rights and may have at times nationalized or expropriated the assets of private
companies. There have been occasional limitations on the movements of funds and
other assets between different countries. The small size and inexperience of the
securities markets in certain of such countries and the limited volume of
trading in securities in those countries may make a Portfolio's investments in
such countries illiquid and more volatile than investments in Japan or most
Western European countries, and a Portfolio may be required to establish special
custodial or other arrangements before making certain investments in those
countries. There may be little financial or accounting information available
with respect to issuers located in certain of such countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.
Although a Portfolio (other than the Core Bond and Money Market Portfolios)
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 Portfolio'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
Portfolio's total assets, adjusted to reflect a Portfolio's net position after
giving effect to currency transactions, are denominated in the currencies of
foreign countries, a Portfolio will be more susceptible to the risk of adverse
economic and political developments within those countries. A Portfolio is also
subject to the possible imposition of exchange control regulations or freezes on
the convertibility of currency.
A Portfolio is also subject to the possible imposition of exchange control
regulations or freezes on the convertibility of currency. In addition, through
the use of forward currency exchange contracts with other instruments, the
respective net currency positions of International Bond, International Equity
Index and International Growth Portfolios may expose them to risk independent of
their securities positions. Although the net long and short foreign currency
exposure of the International Bond, International Equity Index and International
Growth Portfolios will not exceed their respective total asset values, to the
extent that a Portfolio 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.
12
Dividends and interest payable on a Portfolio'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."
Investors should understand that the expense ratios of the International
Bond Portfolio, International Equity Index and International Growth Portfolios
can be expected to be higher than those 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 cost 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.
As noted in the Prospectus, the International Equity Index Portfolio
invests primarily in the equity securities included in the MSCI EAFE(R) Index.
As of November 30, 2003, sixteen European countries (Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland and the United Kingdom) constituted
approximately 71% of the MSCI EAFE(R) Index. Five Asian/Pacific countries
(Australia, Hong Kong, Japan, New Zealand and Singapore) accounted for the
remaining 29%.
Countries in which the Portfolios may invest (to the extent permitted by
their investment policies) include, but are not limited to: Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia,
Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands,
New Zealand, Norway, Peru, the Philippines, Poland, Portugal, Singapore, South
Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the
United Kingdom and Venezuela.
Certain Portfolios may invest a significant percentage of their assets in
the securities of issuers located in countries with securities markets that are
highly developed, liquid and subject to extensive regulation, including Japan.
Japan's economy grew substantially after World War II. More recently, however,
Japan's economic growth has been substantially below the level of earlier
decades, and its economy has experienced periods of recession. Currently, Japan
has been experiencing stagnant consumer demand and higher unemployment rates. In
response to these conditions, Japan has attempted to implement changes regarding
high wages and taxes, currency valuations, structural rigidities, political
reform and the deregulation of its economy. These initiatives have, however,
resulted in notable uncertainty and loss of public confidence. In recent years,
the credit rating of Japanese government debt has been downgraded as concern
increased regarding the slow progress in implementing effective structural
economic reform.
Japan's economy is heavily dependent upon international trade, and is
especially sensitive to trade barriers and disputes. In particular, Japan relies
on large imports of agricultural products, raw materials and fuels. A
substantial rise in world oil or commodity prices, or a fall off in Japan's
manufactured exports, could be expected to affect Japan's economy adversely. In
addition, Japan is vulnerable to earthquakes, volcanoes and other natural
disasters. Japan's banking industry has suffered from non-performing loans, low
real estate values and lower valuations of securities holdings. Many Japanese
banks have required public funds to avert insolvency. In addition, large amounts
of bad debt have prevented banks from expanding their loan portfolios despite
low discount rates.
The Japanese securities markets are less regulated than the U.S. markets.
Evidence has emerged from time to time of distortion of market prices to serve
political or other purposes. Shareholders' rights are also not always enforced.
For most of the 1990s, Japanese securities markets experienced significant
declines. Although the stock markets exhibited strength in 1999, they have again
declined since then.
The common stock of many Japanese companies has historically traded at high
price-earnings ratios. Differences in accounting methods, interest rates and
inflation have made it difficult to compare the earnings and price-earnings
ratios of Japanese companies with those of companies in other countries,
especially the United States. In addition, Japan's relatively high degree of
equity security cross-holdings between banks and corporations sometimes distorts
supply/demand conditions of certain securities. Such distortions may lead to
higher price-earnings ratios in Japan than in other countries, although more
recently the degree of such security cross-holdings has begun to diminish.
The Bond Portfolio, Intermediate Bond Portfolio, International Bond
Portfolio and Short-Intermediate Bond Portfolio, and, to the extent permitted by
their investment policies, the Equity Portfolios, may invest their assets in
countries with emerging economies or securities markets. These countries are
located in the Asia and Pacific regions, the Middle East, Eastern Europe,
Central America, South America and Africa. Political and economic structures in
many of these
13
countries may be undergoing significant evolution and rapid development, and
these countries may lack the social, political and economic stability
characteristics of more developed countries. In general, the securities markets
of these countries are less liquid, subject to greater price volatility, have
smaller market capitalizations and have problems with securities registration
and custody. As a result, the risks presented by investments in these countries
are heightened. Additionally, settlement procedures in emerging countries are
frequently less developed and reliable than those in the United States and may
involve the Portfolio's delivery of securities before receipt of payment for
their sale. Settlement or registration problems may make it more difficult for
the Portfolio to value its portfolio securities and could cause the Portfolio 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 Portfolio has delivered or the Portfolio's inability to complete
its contractual obligations.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. Each Portfolio 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 Portfolio 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 Portfolio 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 Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions.
When a Portfolio purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Portfolio will segregate liquid assets having a
value (determined daily) at least equal to the amount of the Portfolio'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
Portfolio 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 Portfolio's average dollar-weighted
maturity, the maturity of when-issued, delayed-delivery or forward commitment
securities will be calculated from the commitment date.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio, except the Money
Market Portfolios, may invest in futures contracts and may purchase and sell
call and put options on futures contracts for hedging purposes, to seek to
increase total return, or for liquidity management purposes. The Trust, on
behalf of each Portfolio, has claimed an exclusion from the definition of the
term "commodity pool operator" under the Commodity Exchange Act, and, therefore,
is not subject to registration or regulation as a pool operator under that Act
with respect to the Portfolios. The Portfolios will engage in transactions in
futures contracts and related options only to the extent such transactions are
consistent with the requirement of the Code for maintaining their qualifications
as regulated investment companies for federal income tax purposes.
When used as a hedge, a Portfolio 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
Portfolio may do so either to hedge the value of its portfolio of securities 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 Portfolio may purchase
a futures contract as a hedge in anticipation of purchases of securities. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its portfolio holdings.
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association (the "NFA") 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 CFTC's regulations and the rules of the NFA and any
domestic exchange, including the right to use reparations proceedings before the
CFTC and arbitration proceedings provided them by the NFA or any domestic
futures exchange. In particular, a
14
Portfolio'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.
ILLIQUID OR RESTRICTED SECURITIES. Each Money Market Portfolio may invest
up to 10% (15% for Fixed Income and Equity Portfolios) of its net assets in
securities that are illiquid. The Portfolios may purchase commercial paper
issued pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"1933 Act") and 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. These securities will not be considered illiquid so long as the
Investment Adviser determines, under guidelines approved by the Trust's Board of
Trustees, that an adequate trading market exists. This practice could increase
the level of illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities.
INSURANCE FUNDING AGREEMENTS. The Balanced, Bond, Core Bond, Diversified
Assets, Intermediate Bond and Short-Intermediate Bond Portfolios may invest in
insurance funding agreements ("IFAs"). An 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. 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 Portfolio's limitation on illiquid investments when the
Portfolio may not demand payment of the principal amount within seven days and a
reliable trading market is absent.
INTEREST RATE SWAPS, TOTAL RATE OF RETURN SWAPS, CREDIT SWAPS, INTEREST
RATE FLOORS, CAPS AND COLLARS, AND CURRENCY SWAPS. The Portfolios, except the
Money Market Portfolios, may enter into swap transactions and transactions
involving interest rate floors, caps and collars for hedging purposes or to seek
to increase total return. These instruments are privately negotiated
over-the-counter derivative products. A great deal of flexibility is possible in
the way these instruments are structured. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed rate payments for floating
rate payments. The purchase of an interest rate floor or cap entitles the
purchaser to receive payments of interest on a notional principal amount from
the seller, to the extent the specified index falls below (floor) or exceeds
(cap) a predetermined interest rate. An interest rate collar is a combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Total rate of return swaps are contracts that obligate a
party to pay or receive interest in exchange for the payment by the other party
of the total return generated by a security, a basket of securities, an index or
an index component. Credit swaps are contracts involving the receipt of floating
or fixed rate payments in exchange for assuming potential credit losses of an
underlying security. Credit swaps give one party to a transaction the right to
dispose of or acquire an asset (or group of assets), or the right to receive or
make a payment from the other party, upon the occurrence of specific credit
events. The Portfolios, except for the Core Bond Portfolio and Money Market
Portfolios, may also enter into currency swaps, which involve the exchange of
the rights of a Portfolio and another party to make or receive payments in
specific currencies.
Some transactions, such as interest rate swaps and total rate of return
swaps are entered into on a net basis; i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. If the other party to such a transaction defaults, a
Portfolio's risk of loss consists of the net amount of payments that the
Portfolio is contractually entitled to receive, if any. In contrast, other
transactions involve the payment of the gross amount owed. For example, currency
swaps usually involve the delivery of the entire principal amount of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations. To
the extent that the amount payable by a Portfolio under a swap or an interest
rate floor, cap or collar is covered by segregated cash or liquid assets, the
Portfolio and its Investment Adviser believe that transactions do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to a Portfolio's borrowing restrictions.
The Portfolios will not enter into a total rate of return, credit, currency
or interest rate swap or interest rate floor, cap or collar transaction unless
the unsecured commercial paper, senior debt or the claims-paying ability of the
other party thereto is rated either A or A-l or better by S&P or Fitch, or A or
Prime-1 or better by Moody's, or a comparable rating from another organization
that is recognized as an NRSRO or, if unrated by such rating organization, is
determined to be of comparable quality by the Investment Adviser. If there is a
default by the other party to such transaction, a Portfolio will
15
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with markets for other similar
instruments, which are traded in the interbank market. The use of interest rate,
total rate of return, credit and currency swaps, as well as interest rate caps,
floors and collars, is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Investment Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Portfolio would be less favorable than it would have been if
this investment technique were not used.
INVESTMENT COMPANIES. With respect to the investments of the Portfolios 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
Portfolio, the Trust as a whole and their affiliated persons (as defined in the
1940 Act); or (b) (i) not more than 5% of the value the total assets of a
Portfolio 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 Portfolio. Pursuant to an exemptive order, these limits will not
apply to the investment of securities lending collateral by the Portfolios in
certain investment company portfolios advised by Northern Trust. In addition,
pursuant to the exemptive order the Portfolios may invest their uninvested cash
balances in shares of affiliated money market portfolios to the extent that a
Portfolio's aggregate investment of such balances in such portfolios does not
exceed 25% of the Portfolio's total assets. Investments by the Portfolios in
other investment companies, including exchange-traded funds ("ETFs"), will be
subject to the limitations of the 1940 Act except as permitted by SEC orders.
The Portfolios may rely on SEC orders that permit them to invest in certain ETFs
beyond the limits contained in the 1940 Act, subject to certain terms and
conditions.
Certain investment companies whose securities are purchased by the
Portfolios may not be obligated to redeem such securities in an amount exceeding
1% of the investment company's total outstanding securities during any period of
less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, each Portfolio expects to vote the shares of
other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A Portfolio may invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policy and restrictions as the Portfolio. However, each
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. A Portfolio may adhere
to other limitations with respect to its investments in securities issued by
other investment companies if required or permitted by the SEC or deemed to be
in the best interests of the Trust.
As noted in their Prospectus, the Equity Portfolios may invest in
iShares/sm/, Standard & Poor's Depositary Receipts ("SPDRs") and similar
securities of other investment companies, subject to the restrictions set forth
above.
iShares are shares of an investment company that invests substantially all
of its assets in securities included in specified indices, including the Morgan
Stanley Capital International Index ("MSCI") indices for various countries and
regions. iShares are listed on the American Stock Exchange (the "AMEX"), and
were initially offered to the public in 1996. The market prices of iShares are
expected to fluctuate in accordance with both changes in the net asset values of
their underlying indices and supply and demand of iShares on the AMEX. To date
iShares have traded at relatively modest discounts and premiums to their net
asset values. However, iShares have a limited operating history, and information
is lacking regarding the actual performance and trading liquidity of iShares for
extended periods or over complete market cycles. In addition, there is no
assurance that the requirements of the AMEX necessary to maintain the listing of
iShares will continue to be met or will remain unchanged. In the event
substantial market or other disruptions affecting iShares should occur in the
future, the liquidity and value of a Portfolio's shares could also be
substantially and adversely affected, and a Portfolio's ability to provide
investment results approximating the performance of securities in the designated
index could be impaired. If such disruptions were to occur, a Portfolio could be
required to reconsider the use of iShares as part of its investment strategy.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
AMEX). The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (i) a portfolio of securities
substantially similar to the component
16
securities ("Index Securities") of the S&P 500 Index, (ii) a cash payment equal
to a pro rata portion of the dividends accrued on the UIT's portfolio securities
since the last dividend payment by the UIT, net of expenses and liabilities, and
(iii) a cash payment or credit ("Balancing Amount") designed to equalize the net
asset value of the S&P Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, a Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, a Portfolio
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by a Portfolio could result in losses on SPDRs.
MORTGAGE DOLLAR ROLLS. The Portfolios, except for the Money Market
Portfolios, may enter into mortgage "dollar rolls" in which a Portfolio sells
securities for delivery in the future (generally within 30 days) and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity), but not identical securities on a specified future
date. During the roll period, a Portfolio loses the right to receive principal
and interest paid on the securities sold. However, a Portfolio would benefit to
the extent of any difference between the price received for the securities sold
and the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. Unless such
benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Portfolio compared with what such performance would
have been without the use of mortgage dollar rolls. All cash proceeds will be
invested in instruments that are permissible investments for the applicable
Portfolio. Each Portfolio will hold and maintain in a segregated account until
the settlement date cash or liquid assets, as permitted by applicable law, in an
amount equal to its forward purchase price.
For financial reporting and tax purposes, the Portfolios treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale. The Portfolios do not
currently intend to enter into mortgage dollar rolls that are accounted for as
financing transactions.
Mortgage dollar rolls involve certain risks, including the following
situation. If the broker-dealer to whom a Portfolio sells the security becomes
insolvent, a Portfolio's right to purchase or repurchase the mortgage-related
securities subject to the mortgage dollar roll may be restricted and the
instrument which a Portfolio is required to repurchase may be worth less than an
instrument that a Portfolio originally held. Successful use of mortgage dollar
rolls will depend upon the Investment Adviser's ability to manage a Portfolio's
interest rate and mortgage prepayments exposure. For these reasons, there is no
assurance that mortgage dollar rolls can be successfully employed.
MUNICIPAL INSTRUMENTS. Certain Portfolios may invest in municipal
instruments or other securities issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities. Generally, with the exception of the
Tax-Exempt and Municipal Portfolios, 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 a Portfolio on such
investments will be taxable to shareholders, with the exception of all or a
portion of the dividends paid by the Tax-Exempt and Municipal Portfolios.
The Money Market Portfolios may invest in municipal instruments that are
high quality, short-term instruments, the interest on which is, in the opinion
of bond counsel to the issuers, exempt from federal income tax. Opinions
relating to the validity of municipal instruments and to federal and state tax
issues relating to these securities are rendered by bond counsel to the
respective issuing authorities at the time of issuance. Such opinions may
contain various assumptions, qualifications or exceptions that are reasonably
acceptable to the Investment Adviser. Neither the Trust nor the Investment
Adviser will review the proceedings relating to the issuance of municipal
instruments or the bases for such opinions.
Municipal instruments 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
17
a special excise tax or other specific revenue source such as lease revenue
payments from the user of the facility being financed. Industrial development
bonds are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of an
industrial revenue bond is usually directly related to the credit standing of
the private user of the facility involved.
Within the principal classifications of municipal instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, asset-backed securities such as custodial receipts and
participation certificates. Municipal notes include tax, revenue and bond
anticipation notes of short maturity, generally less than three years, which are
issued to obtain temporary funds for various public purposes. Municipal leases
and participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Participation certificates may represent participation in a lease,
an installment purchase contract, or a conditional sales contract. Certain
municipal lease obligations (and related participation certificates) may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Municipal leases (and participations in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. The Investment
Adviser will determine the credit quality of any unrated municipal leases on an
ongoing basis, including an assessment of the likelihood that the leases will
not be cancelled.
The Portfolios may also invest in "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund (if such a fund has been established),
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal bonds with a series of maturity dates are called Serial Bonds.
The Money Market Portfolios may purchase Serial Bonds and other long-term
securities provided that they have a remaining maturity meeting the Portfolios'
maturity requirements. The Money Market Portfolios may also purchase long-term
variable and floating rate bonds (sometimes referred to as "Put Bonds") where a
Portfolio obtains at the time of purchase the right to put the bond back to the
issuer or a third party at par at least every thirteen months. Put Bonds with
conditional puts (that is, puts which cannot be exercised if the issuer defaults
on its payment obligations) will present risks that are different than those of
other municipal instruments because of the possibility that the Portfolio might
hold long-term Put Bonds on which defaults occur following acquisition by the
Portfolio.
The Portfolios may acquire securities in the form of custodial receipts
evidencing rights to receive a specific future interest payment, principal
payment or both on certain municipal obligations. Such obligations are held in
custody by a bank on behalf of the holders of the receipts. These custodial
receipts are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS") and "Municipal
Zero-Coupon Receipts." The Portfolios may also purchase certificates of
participation that, in the opinion of counsel to the issuer, are exempt from
regular federal income tax. Certificates of participation are a type of floating
or variable rate obligation that represents interests in a pool of municipal
obligations held by a bank.
An issuer's obligations under its municipal instruments are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal instruments may be materially
adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in the future in
Congress as regards the federal income tax status of interest on municipal
instruments or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially and adversely affect the availability of municipal
instruments for investment by the Tax-Exempt and Municipal Portfolios and their
liquidity and value. In such an event, the Board of Trustees would reevaluate
the Portfolios' investment objectives and policies and consider changes in its
structure or possible dissolution.
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As stated below, as a matter of fundamental policy, at least 80% of the
Tax-Exempt and Municipal Portfolios' net assets (plus the amount of any
borrowings for investment purposes) will be invested in debt instruments, the
interest on which is, in the opinion of bond counsel or counsel for issuers, if
any, exempt from regular federal income tax, except in extraordinary
circumstances such as when the Investment Adviser believes that market
conditions indicate that the Portfolios should adopt a temporary defensive
posture by holding uninvested cash or investing in taxable securities. Interest
earned on "private activity bonds" that is treated as an item of tax preference
under federal alternative minimum tax will be deemed by the Municipal Portfolio,
but not by the Tax-Exempt Portfolio, to be exempt from regular federal income
tax for the purposes of this policy. Taxable investments by the Tax-Exempt and
Municipal Portfolios will consist exclusively of instruments that may be
purchased by the Diversified Assets Portfolio. The risks associated with these
investments are described in the Prospectus.
Certain of the municipal instruments held by a Portfolio 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 bond holders. 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. Each
of the Municipal and Tax-Exempt Portfolios may invest more than 25% of its total
assets in municipal instruments covered by insurance policies.
Municipal instruments purchased by the Portfolios may be backed by letters
of credit or other forms of credit enhancement issued by foreign (as well as
domestic) banks and other financial institutions. The credit quality of these
banks and financial institutions could, therefore, cause loss to a Portfolio
that invests in municipal instruments. Letters of credit and other obligations
of foreign financial institutions may involve certain risks in addition to those
of domestic obligations.
The Portfolios may invest in municipal leases, which may be considered
liquid under guidelines established by the Trust's Board of Trustees. The
guidelines will provide for determination of the liquidity of a municipal lease
obligation based on factors including the following: (i) the frequency of trades
and quotes for the obligation; (ii) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (iii) the
willingness of dealers to undertake to make a market in the security; and (iv)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of transfer. The
Investment Adviser, under guidelines approved by the Trust's Board of Trustees,
will also consider marketability of a municipal lease obligation based upon an
analysis of the general credit quality of the municipality issuing the
obligation and the essentiality to the municipality of the property covered by
the lease.
Currently, it is not the intention of the Portfolios to invest more than
25% of the value of their total assets in municipal instruments whose issuers
are in the same state.
OPTIONS. To the extent consistent with its investment objective, each
Portfolio, except for the Money Market Portfolios, 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 stock indices, financial
instruments, foreign currencies or the yield differential between the securities
("yield curve options") and may or may not be listed on a domestic or foreign
securities exchange or issued by the Options Clearing Corporation. A call option
for a particular security or currency gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security or
currency at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security or currency. The premium
paid to the writer is in consideration for undertaking the obligation under the
option contract. A put option for a particular security or currency gives the
purchaser the right to sell the security or currency at the stated exercise
price to the expiration date of the option, regardless of the market price of
the security or currency. In contrast to an option on a particular security, an
option on an index provides the holder with the right to make or receive a cash
settlement upon exercise of the option. The amount of this settlement will be
equal to the difference between the closing price of the index at the time of
exercise and the exercise price of the option expressed in dollars, times a
specified multiple.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options on particular securities 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.
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The Portfolios 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
Portfolio owns the security or currency underlying the call or has an absolute
and immediate right to acquire that security or currency 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 Portfolio
maintains with its custodian a portfolio of securities substantially replicating
the index, or liquid assets equal to the contract value. A call option also is
covered if a Portfolio holds a call on the same security, currency 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 Portfolio segregates liquid
assets in the amount of the difference.
All put options written by a Portfolio would be covered, which means that
such Portfolio will segregate cash or liquid assets with a value at least equal
to the exercise price of the put option or will use the other methods described
in the next sentence. A put option is also covered if a Portfolio holds a put
option on the same security or currency as the option written where the exercise
price of the option held is (i) equal to or higher than the exercise price of
the option written, or (ii) less than the exercise price of the option written
provided the Portfolio segregates liquid assets in the amount of the difference.
With respect to yield curve options, a call (or put) option is covered if a
Portfolio holds another call (or put) option on the spread between the same two
securities and segregates liquid assets sufficient to cover the Portfolio's net
liability under the two options. Therefore, the Portfolio's liability for such a
covered option is generally limited to the difference between the amount of the
Portfolio's liability under the option written by the Portfolio less the value
of the option held by the Portfolio. 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.
A Portfolio's obligation to sell a security subject to a covered call
option written by it, or to purchase a security or currency subject to a secured
put option written by it, may be terminated prior to the expiration date of the
option by the Portfolio's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security or currency, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to realize
a profit on an outstanding option, to prevent an underlying security or currency
from being called, to permit the sale of the underlying security or currency or
to permit the writing of a new option containing different terms on such
underlying security. The cost of such a liquidation purchase plus transaction
costs may be greater than the premium received upon the original option, in
which event the Portfolio will have incurred a loss in the transaction. There is
no assurance that a liquid secondary market will exist for any particular
option. An option writer, unable to effect a closing purchase transaction, will
not be able to sell the underlying security or currency (in the case of a
covered call option) or liquidate the segregated assets (in the case of a
secured put option) until the option expires or the optioned security or
currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the security or currency during such period.
When a Portfolio purchases an option, the premium paid by it is recorded as
an asset of the Portfolio. When a Portfolio writes an option, an amount equal to
the net premium (the premium less the commission) received by the Portfolio is
included in the liability section of the Portfolio'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 Portfolio expires unexercised, the Portfolio realizes a loss
equal to the premium paid. If a Portfolio enters into a closing sale transaction
on an option purchased by it, the Portfolio will realize a gain if the premium
received by the Portfolio 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
Portfolio expires on the stipulated expiration date or if the Portfolio 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 Portfolio is exercised, the proceeds of
the sale will be increased by the net premium originally received and the
Portfolio will realize a gain or loss.
There are several risks associated with transactions in certain options.
For example, there are significant differences between the securities, currency
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange (an "Exchange"), may be
absent for reasons,
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which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
REAL ESTATE INVESTMENT TRUSTS. The Fixed Income and Equity Portfolios 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 a Portfolio to certain risks. REITs may be affected by
changes in the value of the underlying property owned by the trust. 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 (the "Code"), and to maintain
exemption from the 1940 Act. As a shareholder in a REIT, a Portfolio 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
a Portfolio bears directly in connection with its own operations.
RELATIVE VALUE APPROACH. In buying and selling securities for the Fixed
Income Portfolios as well as the fixed income portion of the Balanced Portfolio,
the investment management team uses a relative value approach. This approach
involves an analysis of economic and market information, including economic
growth rates, interest and inflation rates, deficit levels, the shape of the
yield curve, sector and quality spreads and risk premiums. It also involves the
use of proprietary valuation models to analyze and compare expected returns and
assumed risks. Under the relative value approach, the investment management team
will emphasize particular securities and particular types of securities that the
team believes will provide a favorable return in light of these risks.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the 1940
Act. Securities subject to repurchase agreements are normally held either by the
Trust's custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, in the event of a bankruptcy, a Portfolio could suffer
additional losses if a court determines that the Portfolio's interest in the
collateral is unenforceable.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio 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 Portfolios may use the proceeds of reverse
repurchase agreements to purchase other securities either maturing, or under an
agreement to resell, on a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. Reverse repurchase agreements are considered
to be borrowings under the 1940 Act. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Portfolios may decline
below the repurchase price. The Portfolios will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, the Portfolios will segregate liquid assets in an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Adviser
believes that smaller companies can provide greater growth potential than
larger, more mature firms, investing in the securities of such companies also
involves greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks, which will be the Small Company Index and Small Company
Growth Portfolios' primary investments, and stocks of recently organized
companies, in which the Portfolios 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
21
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 Small Company Index and Small Company Growth Portfolios' shares will be more
volatile than, and may fluctuate independently of, broad stock market indices
such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the Small Company Index Portfolio or Small
Company Growth Portfolio 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 LOWER-RATED SECURITIES. While any investment carries some
risk, certain risks associated with lower-rated securities are different than
those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Portfolio's net asset value
per share.
There remains some uncertainty about the performance level of the market
for lower-rated securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the market for lower-rated securities (resulting in a greater number of
bond defaults) and the value of lower-rated securities held in the portfolio of
investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated 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.
If an issuer of a security defaults, a Portfolio 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-rated
securities as well as a Portfolio's net asset value. In general, both the prices
and yields of lower-rated securities will fluctuate.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, a Portfolio's valuation of a security
and the price it is actually able to obtain when it sells the security could
differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
securities held by a Portfolio, especially in a thinly traded market. Illiquid
or restricted securities held by a Portfolio may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
The ratings of S&P, Dominion Bond Rating Service Limited ("Dominion"),
Moody's and Fitch evaluate the safety of a lower-rated security's principal and
interest payments, but do not address market value risk. 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-rated securities
the Portfolios purchase. Because of this, a Portfolio's performance may depend
more on the Investment Adviser's own credit analysis than is the case of mutual
funds investing in higher-rated securities.
In selecting lower-rated securities, the Investment Adviser considers
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities and
the diversity of a Portfolio's investment portfolio. The Investment Adviser
monitors the issuers of lower-rated securities held by
22
a Portfolio for their ability to make required principal and interest payments,
as well as in an effort to control the liquidity of the Portfolio so that it can
meet redemption requests.
SECURITIES LENDING. Collateral for loans of portfolio securities made by a
Portfolio may consist of cash, cash equivalents, securities issued or guaranteed
by the U.S. government or its agencies or irrevocable bank letters of credit (or
any combination thereof). The borrower of securities will be required to
maintain the market value of the collateral at not less than the market value of
the loaned securities, and such value will be monitored on a daily basis. When a
Portfolio lends its securities, it continues to receive payments equal to the
dividends and interest paid on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Investing the collateral
subjects it to market depreciation or appreciation, and a Portfolio is
responsible for any loss that may result from its investment in borrowed
collateral. A Portfolio will have the right to terminate a loan at any time and
recall the loaned securities within the normal and customary settlement time for
securities transactions. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called so that the
securities may be voted by a Portfolio if a material event affecting the
investment is to occur. As with other extensions of credit there are risks of
delay in recovering, or even loss of rights in, the collateral should the
borrower of the securities fail financially.
SHORT SALES AGAINST-THE-BOX. The Equity Portfolios, except for the Equity
Index, International Equity Index and Small Company Index Portfolios, may engage
in short sales "against-the-box." In a short sale, the seller sells a borrowed
security and has a corresponding obligation to the lender to deliver the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
While a short sale is made by selling a security the seller does not own, a
short sale is "against the box" to the extent that the seller contemporaneously
owns or has the right to obtain, at no added cost, securities identical to those
sold short. It may be entered into by a Portfolio, for example, to lock in a
sales price for a security the Portfolio does not wish to sell immediately. If a
Portfolio sells securities short against the box, it may protect itself from
loss if the price of the security declines in the future, but will lose the
opportunity to profit on such securities if the price rises.
STANDBY COMMITMENTS. The Tax-Exempt and Municipal Portfolios may enter into
standby commitments with respect to municipal instruments held by them,
respectively. Under a standby commitment, a dealer agrees to purchase at the
Portfolio's option a specified municipal instrument. Standby commitments may be
exercisable by the Tax-Exempt and Municipal Portfolios at any time before the
maturity of the underlying municipal instruments and may be sold, transferred or
assigned only with the instruments involved.
The Tax-Exempt and Municipal Portfolios expect that standby commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tax-Exempt and Municipal
Portfolios 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 either Portfolio will not exceed 1/2 of 1% of the value of
the Portfolio's total assets calculated immediately after each standby
commitment is acquired.
The Tax-Exempt and Municipal Portfolios intend to enter into standby
commitments only with dealers, banks and broker-dealers which, in the Investment
Adviser's opinion, present minimal credit risks. The Tax-Exempt and Municipal
Portfolios will acquire standby commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. The acquisition of a standby commitment will not affect the valuation
of the underlying municipal instrument. The actual standby commitment will be
valued at zero in determining net asset value. Accordingly, where the Tax-Exempt
and Municipal Portfolios pay directly or indirectly for a standby commitment,
the Portfolios' costs will be reflected as an unrealized loss for the period
during which the commitment is held by the Tax-Exempt and Municipal Portfolios
and will be reflected in realized gain or loss when the commitment is exercised
or expires.
STOCK INDICES. The S&P 500 Index is a market value-weighted index
consisting of 500 common stocks which are traded on the New York Stock Exchange,
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
23
in general or other stocks in particular. Standard & Poor's makes no
representation or warranty, implied or express, to purchasers of Equity Index
Portfolio shares or any member of the public regarding the advisability of
investing in the Equity Index Portfolio or the ability of the S&P 500 Index to
track general stock market performance.
As of November 30, 2003, the approximate market capitalization range of the
companies included in the S&P 500 Index was between $665.8 million and $287.2
billion.
The Russell Midcap(R) Growth Index is an unmanaged index that measures the
performance of those Russell Midcap companies with higher price-to-book and
higher forecasted growth values. As of November 30, 2003, the average market
capitalization range of the companies included in the Russell Midcap Growth
Index was between $414.9 million and $15.3 billion.
The Russell 2000 Index is a market value-weighted index composed of the
stocks of the smallest 2000 companies in the Russell 3000(R) 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 9% of the total market capitalization of the
Russell 3000(R) Index. As of November 30, 2003, the average market
capitalization range of the companies included in the Russell 2000 Index was
between $47.9 million and $2.2 billion. The Russell 2000 Index is reconstituted
annually to reflect changes in market capitalization. The primary criteria used
by Frank Russell & Company ("Russell") to determine the initial list of
securities eligible for inclusion in the Russell 3000 Index (and accordingly,
the Russell 2000 Index) is total market capitalization adjusted for large
private holdings and cross-ownership. However, companies are not selected by
Russell for inclusion in the Russell 2000 Index because they are expected to
have superior stock price performance relative to the market in general or other
stocks in particular. Russell makes no representation or warranty, implied or
express, to purchasers of Small Company Index or Small Company Growth Portfolio
shares or any member of the public regarding the advisability of investing in
the Portfolio or the ability of the Russell 2000 Index to track general market
performance of small capitalization stocks.
The Russell 1000(R) Growth Index is an unmanaged index measuring the
performance of those Russell 1000 Index companies with higher price-to-book
ratios and higher forecasted growth values. As of November 30, 2003, the average
market capitalization range of the companies included in the Russell 1000 Growth
Index was between $414.9 million and $287.2 billion.
The Russell 2000(R) Growth Index measures the performance of those Russell
2000 Index companies with higher price-to-book ratios and higher forecasted
growth values. As of November 30, 2003, the average market capitalization range
of the companies included in the Russell 2000 Growth Index was between $68
million and $2.2 billion.
The MSCI EAFE(R) Index is an unmanaged, market-value weighted index that
tracks changes in the equity markets of 21 developed countries outside of North
America, specifically in Europe, Australia and the Far East.
STRIPPED SECURITIES. To the extent consistent with its investment policies,
each Portfolio, including the Government Select Portfolio to the extent such
stripped securities are Treasury Department strips, may purchase stripped
securities. The Treasury Department has facilitated transfers of ownership of
zero coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "Separate Trading
of Registered Interest and Principal of Securities" or "STRIPS." The Portfolios
may purchase securities registered in the STRIPS program. Under the STRIPS
program, a Portfolio will be able to have its 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.
Other types of stripped securities may be purchased by the Portfolios
(except the Government Select Portfolio), 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 Portfolio 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
24
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, instrumentality or sponsored
enterprise) may be considered liquid under guidelines established by the Trust's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of the net
asset value per share.
SUPRANATIONAL BANK OBLIGATIONS. Each Portfolio, to the extent consistent
with its investment policies, 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
between nations (e.g., the World Bank). Obligations of supranational banks may
be supported by appropriated but unpaid commitments of their member countries
and there is no assurance that these commitments will be undertaken or met in
the future.
TRACKING VARIANCE. As discussed in their Prospectuses, the Equity Index,
Small Company Index, International Equity Index and U.S. Treasury Index
Portfolios 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 Portfolio 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 reorganizations are
made to conform a Portfolio's holdings to its investment objective. Tracking
variance may also occur due to factors such as the size of a Portfolio, the
maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Portfolio'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 Portfolio.
Tracking variance is monitored by the Investment Adviser at least quarterly. In
the event the performance of a Portfolio 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 Portfolio'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 Portfolio's investment objective.
The Small Company Index and International Equity Index Portfolios require
the payment of an additional transaction fee on purchases of shares of the
Portfolios. The purpose of the fee is to indirectly allocate transaction costs
associated with new purchases to investors making those purchases, thus
protecting existing shareholders. These costs include: (i) brokerage costs; (ii)
market impact costs--i.e., the increase in market prices which may result when
the Portfolios purchase thinly traded stocks; (iii) sales charges relating to
the purchase of shares in certain unaffiliated investment companies; and, most
importantly (iv) the effect of the "bid-ask" spread in the over-the-counter
market. (Securities in the over-the-counter market are bought at the "ask" or
purchase price, but are valued in the Portfolios at the last quoted bid price).
The additional transaction fees represent the Investment Adviser's estimate of
the brokerage and other transaction costs which may be incurred by the Small
Company Index and International Equity Index Portfolios in acquiring stocks of
small capitalization or foreign companies. Without the additional transaction
fee, the Portfolios would generally be selling their shares at a price less than
the cost to the Portfolios of acquiring the portfolio securities necessary to
maintain their investment characteristics, thereby resulting in reduced
investment performance for all shareholders in the Portfolios. With the
additional transaction fee, the transaction costs of acquiring additional stocks
are not borne by all existing shareholders, but are defrayed by the transaction
fees paid by those investors making additional purchases of shares.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. government
obligations that may be acquired by the Portfolios 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, Fannie Mae, Ginnie Mae, General Services
Administration, Central Bank for Cooperatives, Freddie Mac, Federal Intermediate
Credit Banks and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies, instrumentalities or sponsored enterprises are also deemed to
include (i) securities for which the payment of principal and interest is backed
by an irrevocable letter of credit issued by the U.S. government or any agency,
instrumentality or sponsored enterprise thereof, and (ii) participations in
loans made to foreign government or their agencies that are so guaranteed.
To the extent consistent with their respective investment objectives, the
Portfolios may invest in a variety of U.S. Treasury obligations and obligations
issued by or guaranteed by the U.S. government or its agencies,
instrumentalities or
25
sponsored enterprises. Not all U.S. government obligations carry the same credit
support. No assurance can be given that the U.S. government would provide
financial support to its agencies, instrumentalities or sponsored enterprises if
it were not obligated to do so by law. There is no assurance that these
commitments will be undertaken or complied with in the future. In addition, the
secondary market for certain participations in loans made to foreign governments
or their agencies may be limited.
VARIABLE AND FLOATING RATE INSTRUMENTS. Variable and floating rate
instruments have interest rates that are periodically adjusted either at set
intervals or that float at a margin in relation to a generally recognized index
rate. These instruments include long-term variable and floating rate bonds
(sometimes referred to as "Put Bonds") where the Portfolio obtains at the time
of purchase the right to put the bond back to the issuer or a third party at par
at a specified date and leveraged inverse floating rate instruments ("inverse
floaters").
With respect to the variable and floating rate instruments that may be
acquired by the Portfolios, the investment management team 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. Where necessary to ensure that a variable or floating rate instrument
meets the Portfolios' quality requirements, the issuer's obligation to pay the
principal of the instrument will be backed by an unconditional bank letter or
line of credit, guarantee or commitment to lend.
The Money Market Portfolios will invest in variable and floating rate
instruments only when the Investment Adviser deems the investment to involve
minimal credit risk. Unrated variable and floating rate instruments will be
determined by the Investment Adviser to be of comparable quality at the time of
the purchase to rated instruments that may be purchased by the Portfolios. In
determining weighted average portfolio maturity, an instrument may, subject to
the SEC's regulations, be deemed to have a maturity shorter than its nominal
maturity based on the period remaining until the next interest rate adjustment
or the time the Portfolio involved can recover payment of principal as specified
in the instrument. Variable and floating rate instruments eligible for purchase
by the Portfolio include variable amount master demand notes, which permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate.
Variable and floating rate instruments that may be purchased by the
Portfolios include variable amount master demand notes, which permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate, and leveraged inverse 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 inherent 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
Portfolios may deem the maturity of variable and floating rate instruments to be
less than their stated maturities based on their variable and floating rate
features and/or their put features. Unrated variable and floating rate
instruments will be determined by the Investment Adviser to be of comparable
quality at the time of purchase to rated instruments which may be purchased by
the Portfolios.
Variable and floating rate instruments including inverse floaters held by a
Portfolio will be subject to the Portfolio's limitation on illiquid investments,
absent a reliable trading market, when the Portfolio may not demand payment of
the principal amount within seven days. Because there is no active secondary
market for certain variable and floating rate instruments, they may be more
difficult to sell if the issuer defaults on its payment obligations or during
periods when the Portfolio is not entitled to exercise its demand rights. As a
result, the Portfolio could suffer a loss with respect to these instruments.
WARRANTS. The Equity Portfolios 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 Portfolio could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
YIELDS AND RATINGS. The yields on certain obligations, including the
instruments in which the Portfolios may invest, are dependent on a variety of
factors, including general market 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.
26
The ratings of S&P, Dominion, Moody's and Fitch represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. For a more complete discussion of ratings, see Appendix A to this
Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held by
a Portfolio undergoes a rating revision, the Portfolio may continue to hold the
security if the Investment Adviser determines such retention is warranted.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, the Portfolios may
invest in zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates
representing interests in such stripped debt obligations or coupons. The market
prices of zero coupon bonds, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, the Portfolio will realize no cash until a specified future payment
date unless a portion of such securities is sold and, if the issuer of such
securities defaults, the Portfolio 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 Portfolio is nonetheless required to
accrue income on such investments for each taxable year and generally is
required to distribute such accrued amounts (net of deductible expenses, if any)
to avoid being subject to tax. Because no cash is generally received at the time
of the accrual, the Portfolio may be required to liquidate other portfolio
securities to obtain sufficient cash to satisfy federal tax distribution
requirements applicable to the Portfolio.
INVESTMENT RESTRICTIONS
Each Portfolio is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Portfolio
only by a vote of the holders of a majority of such Portfolio's outstanding
shares.
No Portfolio may:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of
the Portfolio to the extent permitted by law.
(2) (a) For the Equity and Fixed Income Portfolios: Purchase or sell real
estate, but this restriction shall not prevent a Portfolio from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real
estate investment trusts or other issuers that deal in real estate.
(b) For the Money Market Portfolios: Purchase or sell real estate or
securities issued by real estate investment trusts but this
restriction shall not prevent a Portfolio from investing directly or
indirectly in portfolio instruments secured by real estate or
interests therein.
(3) Invest in commodities or commodity contracts, except that each
Portfolio may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
27
(4) (a) For the Equity and Fixed Income Portfolios: Invest in companies
for the purpose of exercising control.
(b) For the Money Market Portfolios: Invest in companies for the
purpose of exercising control or management.
(5) Act as underwriter of securities, except as a Portfolio may be deemed
to be an underwriter under the Securities Act of 1933 in connection
with the purchase and sale of portfolio instruments in accordance with
its investment objective and portfolio management policies.
(6) Make any investment inconsistent with the Portfolio's classification
as a diversified investment company under the 1940 Act, provided that
this restriction does not apply to the International Bond Portfolio.
(7) (a) For the Equity and Fixed Income Portfolios: Purchase securities
(other than obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities) if such purchase would cause more
than 25% in the aggregate of the market value of the total assets of a
Portfolio to be invested in the securities of one or more issuers
having their principal business activities in the same industry. For
the purpose of this restriction, 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.
(b) For the Money Market Portfolios: Purchase securities if such
purchase would cause more than 25% in the aggregate of the market
value of the total assets of a Portfolio to be invested in the
securities of one or more issuers having their principal business
activities in the same industry, provided that there is no limitation
with respect to, and each Portfolio reserves freedom of action, when
otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, obligations (other than
commercial paper) issued or guaranteed by U.S. banks and U.S. branches
of foreign banks and repurchase agreements and securities loans
collateralized by such U.S. government obligations or such bank
obligations. For the purpose 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.
(8) Borrow money, except that to the extent permitted by applicable law
(a) a Portfolio may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts
up to 33-1/3% of its total assets (including the amount borrowed) or
such other percentage permitted by law, (b) a Portfolio may borrow up
to an additional 5% of its total assets for temporary purposes, (c) a
Portfolio may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities, and (d)
a Portfolio may purchase securities on margin. If due to market
fluctuations or other reasons a Portfolio's borrowings exceed the
limitations stated above, the Trust will promptly reduce the
borrowings of such Portfolio in accordance with the 1940 Act. In
addition, as a matter of fundamental policy, a Portfolio will not
issue senior securities to the extent such issuance would violate
applicable law.
(9) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions
relating to issuer diversification, industry concentration and
control), each Portfolio may (a) purchase securities of other
investment companies to the full extent permitted under Section 12 of
the 1940 Act (or any successor provision thereto) or under any
regulation or order of the Securities and Exchange Commission; and (b)
may invest all or substantially all of its assets in a single open-end
investment company or series thereof with substantially the same
investment objective, policies and fundamental restrictions as the
Portfolio.
For the purposes of Restriction Nos. 1 and 8 above, the Portfolios expect
that they would be required to file an exemptive application with the SEC and
receive the SEC's approval of that application prior to entering into lending or
borrowing arrangements with affiliates. As of the date of this Additional
Statement, the Portfolios had not filed such an exemptive application.
28
In applying Restriction No. 6 above, 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 Portfolio, does not exceed 10% of the value of the Portfolio's total
assets.
The freedom of action reserved in Restriction No. 7(b) with respect to U.S.
branches of foreign banks is subject to the requirement that they are subject to
the same regulation as domestic branches of U.S. banks. Obligations of U.S.
branches of foreign banks may include certificates of deposit, bank and deposit
notes, bankers' acceptances and fixed time deposits. These obligations may be
general obligations of the parent bank or may be limited to the issuing branch.
Such obligations will meet the criteria for "Eligible Securities" as described
in the Prospectus.
Also, as a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of the Municipal
Portfolio and Tax-Exempt Portfolio, at least 80% of the net assets of the
Portfolios (plus the amount of any borrowings for investment purposes) will be
invested in debt instruments, the interest on which is, in the opinion of bond
counsel or counsel for issuers, exempt from regular federal income tax, except
in extraordinary circumstances such as when the Investment Adviser believes that
market conditions indicate that the Portfolios should adopt a temporary
defensive posture by holding uninvested cash or investing in taxable securities.
Investments in such debt instruments may be direct or indirect (for example,
through investments in other investment companies or pools). Interest earned on
"private activity bonds" that is treated as an item of tax preference under
federal alternative minimum tax will be deemed by the Municipal Portfolio, but
will not be deemed by the Tax-Exempt Portfolio, to be exempt from regular
federal income tax for purposes of determining whether the Municipal and
Tax-Exempt Portfolios meet this fundamental policy.
Except to the extent otherwise provided in Investment Restriction No. 7 for
the purpose of such restriction in determining industry classification, the
Trust may use any one or more of the following: the Bloomberg Industry Group
Classification, Standard & Poors, J.J. Kenny Municipal Purpose Codes, FT
Interactive Industrial Codes, Securities Industry Classification Codes or the
Global Industry Classification Standard (except that the International Bond
Portfolio, International Growth Portfolio and the International Equity Index
Portfolio will use the Morgan Stanley Capital International industry
classification titles). For the purpose of determining the percentage of a
Portfolio's total assets invested in securities of issuers having their
principal business activities in a particular industry, an asset-backed security
will be classified separately based upon the nature of its underlying assets.
As a non-fundamental investment restriction that can be changed without
shareholder approval, the International Bond Portfolio may not, at the end of
any tax quarter, hold 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 the
Portfolio 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. In addition, as a non-fundamental
investment restriction, the International Bond Portfolio may not, at the end of
any tax quarter, hold more than 5% of the total value of its assets in the
securities of any one issuer, except that up to 50% of the total value of the
Portfolio's assets may be invested in any securities without regard to this 5%
limitation so long as no more than 25% of the total value of its assets is
invested in the securities of any one issuer. These restrictions do not apply to
the U.S. government, its agencies, instrumentalities and sponsored enterprises
and regulated investment companies.
Securities held in escrow or separate accounts in connection with the
Portfolio's investment practices described in this Additional Statement and the
Prospectus are not deemed to be mortgaged, pledged or hypothecated for purposes
of the foregoing restrictions.
Any restriction which involves a maximum percentage (other than the
restriction set forth in Investment Restriction (8)) will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, a
Portfolio. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (8), the
Portfolio 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.
The Money Market Portfolios 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 Portfolio's total assets at the time of purchase, except that 25% of the value
of the total assets of each Portfolio may be invested in the securities of any
one issuer for a period of up to three Business Days. A security
29
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 Portfolio 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 Portfolio may, subject to certain conditions, invest up to 25% of
its total assets in securities issued or subject to Guarantees of the same
person. This percentage is 100% if the Guarantee is issued by the U.S.
government or an agency thereof. In addition, the Tax-Exempt and Municipal
Portfolios will limit their investments in certain conduit securities that are
not rated in the highest short-term rating category as determined by two NRSROs
(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 each Portfolio's total assets, with investments in any one such issuer
being limited to no more than 1% of a Portfolio'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 Diversified Assets Portfolio will
limit its investments in all Second Tier Securities (that are not subject to a
Guarantee) in accordance with the foregoing percentage limitations.
In addition to the foregoing, each Money Market Portfolio is subject to
additional diversification requirements imposed by SEC regulations on the
acquisition of securities subject to other types of demand features.
30
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Set forth below is information about the Trustees and Officers of Northern
Institutional Funds. Each Trustee has served in that capacity since he or she
was originally elected or appointed to the Board of Trustees. Each Trustee
oversees a total of 53 portfolios in the Northern Funds Complex - Northern
Institutional Funds offers 23 portfolios and Northern Funds offers 30
portfolios.
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NON-INTERESTED TRUSTEES
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
Richard G. Cline . Chairman and President of Hawthorne Investors, Inc. (a management . PepsiAmericas (a soft
Age: 69 advisory services and private investment company) since 1996; drink bottling company);
Trustee since 1997 . Managing Partner of Hawthorne Investments, LLC (a management
advisory services and private investment company) since 2001; . Ryerson Tull, Inc. (a
. Chairman and Director of Hussmann International, Inc. (a metals distribution
refrigeration company) from 1998 to 2000. company).
Edward J. Condon, Jr. . Chairman and CEO of The Paradigm Group, Ltd. (a financial . None
Age: 63 adviser) since 1993;
Trustee since 1994 . Principal and Co-Founder of Paradigm Capital since 1996;
. Senior Partner of NewEllis Ventures since 2001;
. Member of the Board of Managers of The Liberty Hampshire
Company, LLC (a receivable securitization
company);
. Director of Financial Pacific Company (a small
business leasing company);
. Trustee at Dominican University.
William J. Dolan, Jr. . Financial Consultant at Ernst & Young LLP (an accounting firm) . None
Age: 71 From 1992 to 1993 and 1997;
Trustee since 2000 . Partner of Arthur Andersen LLP (an accounting firm) from
1966 to 1989.
Sharon Gist Gilliam . Executive Vice President of Unison-Maximus, Inc. (aviation and . None
Age: 60 governmental consulting);
Trustee since 2001
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation, Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and because she owns shares of Northern Trust
Corporation; and its affiliates, and Mr. Timbers because he a former
officer, director, employee, and is a shareholder, of Northern Trust
Corporation and/or its affiliates.
31
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NON-INTERESTED TRUSTEES (CONTINUED)
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
Sandra Polk Guthman . CEO of Polk Bros. Foundation (an Illinois not-for- . MBIA of Illinois
Age: 60 profit corporation) from 1993 to present. (a municipal bond
Trustee since 1997 insurance company)
1999 to 2000;
Richard P. Strubel . Vice Chairman, President and Chief Operating Officer of UNext Inc. . Gildan Activewear,
Age: 64 (a provider of educational services via the Internet) since 2003 Inc. (an athletic
and 1999; Respectively; clothing marketing and
Trustee since 1982 . Director of Cantilever Technologies (a private software company) manufacturing
since 1999;
. Trustee at The University of Chicago since 1987; . Goldman Sachs Mutual
. Managing Director of Tandem Partners, Inc. (a privately held Fund Complex (64
management services firm) until 1999. portfolios).
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation, Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and its affiliates, and because she owns shares
of Northern Trust Corporation; and Mr. Timbers because he is a former
officer, director, employee, and is a shareholder of Northern Trust
Corporation and/or its affiliates.
32
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INTERESTED TRUSTEES
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
Michael E. Murphy/(3)/ . President of Sara Lee Foundation (philanthropic organization) . Coach, Inc.;
Age: 67 from 1997 to 2001; . Payless Shoe Source,
Trustee since 2000 . Vice Chairman and Chief Administrative Officer of Sara Lee Inc. (a retail shoe
Corporation (a consumer product company) from 1994 to 1997. store business);
. GATX Corporation
railroad holding
company);
. Bassett Furniture
Industries, Inc. (a
furniture manufacturer).
Mary Jacobs Skinner, . Partner in the law firm of Sidley Austin Brown & Wood. . None
Esq./(3)/
Age: 46
Trustee since 2000
Stephen Timbers/(3)/ . Vice Chairman of Northern Trust Corporation and The Northern . USF Corporation
Age: 59 Trust Company from 2003 to 2004;
Trustee since 2000 . President, Chief Executive Officer of Northern Trust
Investments, N.A. (formerly known and conducting business as
Northern Trust Investments, Inc.) from 2001 to 2004;
. President of Northern Trust Global Investments,
a division of Northern Trust Corporation and
Executive Vice President of The Northern Trust
Company from 1998 to 2004.
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation, Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and its affiliates, and because she owns shares
of Northern Trust Corporation; and Mr. Timbers because he is a former
officer, director, employee, and is a shareholder of Northern Trust
Corporation and/or its affiliates.
33
OFFICERS OF THE TRUST
NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE /(1)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
Lloyd A. Wennlund Executive Vice President since 2003 and Director
Age: 46 since 2001 of Northern Trust Investments, N.A.
50 South LaSalle Street (formerly known and conducting business as
Chicago, IL 60675 Northern Trust Investments, Inc.) since 2001;
President since 2000 Executive Vice President and other positions at
The Northern Trust Company, President of Northern
Trust Securities, Inc., and Managing Executive,
Mutual Funds for Northern Trust Global Investments
since 1989.
Eric K. Schweitzer Senior Vice President at Northern Trust
Age: 42 Investments, N.A. (formerly known and conducting
50 South LaSalle Street business as Northern Trust Investments, Inc.)
Chicago, IL 60675 since 2001 and Senior Vice President at The
Vice President since 2000 Northern Trust Company and the Director of
Distribution, Product Management and Client
Services in the Mutual Fund Group of Northern
Trust Global Investments since 2000; Managing
Director of Mutual Funds for US Bancorp from 1997
to 2000.
Brian Ovaert Senior Vice President and Department Head at The
Age: 42 Northern Trust Company overseeing Fund Accounting,
50 South LaSalle Street Transfer Agent and Fund Administration functions,
Chicago, IL 60675 Division Manager of Fund Accounting, 1992-1998;
Treasurer since 2002 Audit Manager at Arthur Andersen LLP (an
accounting firm) prior thereto.
Brian R. Curran Vice President and Director of Fund Administration
Age: 36 at PFPC Inc. since 1997.
4400 Computer Drive
Westborough, MA 01581
Vice President since 1999
Stuart Schuldt Senior Vice President and Division Manager of Fund
Age: 42 Administration and Fund Accounting, The Northern
50 South LaSalle Street Trust Company;
Chicago, IL 60675 Senior Vice President and Division Manger, Fund
Assistant Treasurer since Accounting, Scudder Kemper (a mutual fund
2002 company), from 1993 to 1998; Audit Manager, Arthur
Andersen & Co., (an accounting firm) prior
thereto.
Jeffrey A. Dalke, Esq. Partner in the law firm of Drinker Biddle & Reath
Age: 53 LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Secretary since 2000
Linda J. Hoard, Esq. Senior Counsel and Vice President at PFPC Inc.
Age: 56 since 1998; Attorney Consultant for Fidelity
4400 Computer Drive Management & Research (a financial service
Westborough, MA 01581 company), Investors Bank & Trust Company (a
Assistant Secretary since financial service provider) and FDISG prior
1999 thereto.
(1) Officers hold office at the pleasure of the Board of Trustees until the
next annual meeting of the Trust or until their successors are duly elected
and qualified, or until they die, resign, are removed or become
disqualified.
34
OFFICERS OF THE TRUST (CONTINUED)
NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE /(1)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
Lori V. Russell Associate Counsel at PFPC Inc. since 2002;
Age: 32 Associate Counsel at Investors Bank & Trust
4400 Computer Drive Company, a financial service provider (2001-2002);
Westborough, MA 01581 Manager in the Regulatory Administration
Assistant Secretary since Department of PFPC Inc. (2000-2001) and Senior
2003 Regulatory Administrator (1998-2000).
James Grassi Senior Attorney at The Northern Trust Company
Age: 47 since 1994.
50 South LaSalle Street
Chicago, IL 60675
Assistant Secretary since
2003
(1) Officers hold office at the pleasure of the Board of Trustees until the
next annual meeting of the Trust or until their successors are duly elected
and qualified, or until they die, resign, are removed or become
disqualified.
35
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 Corporation, PFPC Inc., Northern Funds Distributors, LLC and
their respective affiliates. The Trust has been advised by such Trustees and
officers that all such transactions have been and are expected to be in the
ordinary course of business and the terms of such transactions, including all
loans and loan commitments by such persons, have been and are expected to be
substantially the same as the prevailing terms for comparable transactions for
other customers. As a result of the responsibilities assumed by the Trust's
service providers, the Trust itself requires no employees.
Each officer holds comparable positions with Northern Funds and certain
officers hold comparable positions with certain other investment companies of
which Northern Trust Corporation, PFPC Inc. or an affiliate thereof is the
investment adviser, custodian, transfer agent, administrator and/or distributor.
STANDING BOARD COMMITTEES. The Board of Trustees has established three standing
committees in connection with their governance of the Portfolios - Audit,
Committee on Trustees and Valuation.
The Audit Committee consists of four members: Messrs. Condon (Chairman),
Dolan and Strubel, and Ms. Gilliam. The Audit Committee oversees the audit
process and provides assistance to the full Board of Trustees with respect to
fund accounting, tax compliance and financial statement matters. In performing
its responsibilities, the Audit Committee selects and recommends annually to the
entire Board of Trustees a firm of independent certified public auditors to
audit the books and records of the Trust for the ensuing year, and reviews with
the firm the scope and results of each audit. The Audit Committee also is
designated as the Qualified Legal Compliance Committee. The Audit Committee
convenes at least four times each year to meet with independent auditors to
review the scope and results of the audit and to discuss other non-audit matters
as requested by the Trust's Chairman, the Committee's Chairman or the auditors.
During the fiscal year ended November 30, 2003, the Audit Committee convened
four times.
The Committee on Trustees consists of three members: Ms. Guthman
(Chairperson) and Messrs. Dolan and Strubel. The functions performed by the
Committee on Trustees include, among other things, selecting and nominating
candidates to serve as non-interested Trustees, reviewing and making
recommendations regarding Trustee compensation and developing policies regarding
Trustee education. During the fiscal year ended November 30, 2003, the Committee
on Trustees convened four times. As stated above, each Trustee holds office for
an indefinite term until the occurrence of certain events. In filling Board
vacancies, the Committee on Trustees will consider nominees recommended by
shareholders. Nominee recommendations should be submitted to the Trust at its
mailing address stated in the Portfolios' Prospectus and should be directed to
the attention of Northern Institutional Funds Committee on Trustees.
The Valuation Committee consists of three members: Messrs. Murphy
(Chairman) and Timbers and Ms. Skinner. The Valuation Committee is authorized to
act for the Board in connection with the valuation of portfolio securities of
the Trust's non-money market Portfolios in accordance with the Trust's valuation
procedures. During the fiscal year ended November 30, 2003, the Valuation
Committee convened two times.
36
TRUSTEE OWNERSHIP OF PORTFOLIO SHARES. Shares of the Portfolios are offered to
institutional investors acting on their own behalf or on behalf of their
customers and other beneficial owners ("Customers"). For this reason, the
Trustees may not make direct investments in the Portfolios. The following table
shows the dollar range of shares owned by each Trustee in the Portfolios and
other Portfolios of Northern Institutional Funds and Northern Funds.
Information as of December 31, 2003
Aggregate Dollar Range of
Dollar Range of Equity Equity Securities in All
Securities in each Portfolios in Mutual Fund
Name of Trustee Portfolio Family*
--------------------- ---------------------- -------------------------
Richard G. Cline None Over $100,000
Edward J. Condon, Jr. None Over $100,000
William J. Dolan, Jr. None $50,001 - $100,000
Sharon Gist Gilliam None None
Sandra Polk Guthman None $50,001 - $100,000
Richard P. Strubel None None
Michael E. Murphy None Over $100,000
Mary Jacobs Skinner None Over $100,000
Stephen B. Timbers None Over $100,000
----------
* The Northern Mutual Fund Complex consists of Northern Institutional Funds and
Northern Funds. As of December 31, 2003, Northern Institutional Funds consisted
of 23 portfolios and Northern Funds consisted of 30 portfolios.
37
TRUSTEE AND OFFICER COMPENSATION. The Trust pays each Trustee who is not an
officer, director or employee of Northern Trust Corporation or its subsidiaries
annual fees for his or her services as a Trustee of the Trust and as a member of
Board committees, plus additional fees for Board and Committee meetings attended
by such Trustee. In recognition of their services, the fees paid to the Board
and Committee chairpersons are larger than the fees paid to other members of the
Trust's Board and Committees. The Trustees are also reimbursed for travel
expenses incurred in connection with attending such meetings. The Trust may also
pay the incidental costs of a Trustee to attend training or other types of
conferences relating to the investment company industry.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended November 30,
2003:
[Enlarge/Download Table]
Diversified Diversified Equity Focused Government
Balanced Bond Core Bond Assets Growth Index Growth Government Select
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ----------- ----------- --------- --------- ---------- ----------
Stephen B. Timbers $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Richard G. Cline 475 1,900 475 18,395 475 1,900 475 5,700 9,500
Edward J. Condon, Jr. 410 1,640 410 15,876 410 1,640 410 4,920 8,200
Sandra Polk Guthman 410 1,640 410 15,876 410 1,640 410 4,920 8,200
Sharon Gist Gilliam 390 1,560 390 15,101 390 1,560 390 4,680 7,800
Richard P. Strubel 398 1,590 398 15,390 398 1,590 398 4,770 7,950
William J. Dolan, Jr. 40 159 40 1,539 40 159 40 477 795
Michael E. Murphy 390 1,560 390 15,096 390 1,560 390 4,680 7,800
Mary Jacobs Skinner 195 780 195 7,550 195 780 195 2,340 3,900
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Short- Small
Intermediate International International International Mid Cap Intermediate Company
Bond Bond Equity Index Growth Growth Municipal Bond Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- --------- --------- ------------ ---------
Stephen B. Timbers $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Richard G. Cline 475 475 475 475 475 475 475 475
Edward J. Condon, Jr. 410 410 410 410 410 410 410 410
Sandra Polk Guthman 410 410 410 410 410 410 410 410
Sharon Gist Gilliam 390 390 390 390 390 390 390 390
Richard P. Strubel 398 398 398 398 398 398 398 398
William J. Dolan, Jr. 40 40 40 40 40 40 40 40
Michael E. Murphy 390 390 390 390 390 390 390 390
Mary Jacobs Skinner 195 195 195 195 195 195 195 195
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Total
U.S. Compensation from
Small Company Government U.S.Treasury Fund Complex
Index Tax-Exempt Securities Index (including the
Portfolio Portfolio Portfolio Portfolio Portfolios)/(1)/
------------- ---------- ---------- ------------ -----------------
Stephen B. Timbers $ 0 $ 0 $ 0 $ 0 $ 0
Richard G. Cline 475 1,425 475 475 95,000
Edward J. Condon, Jr. 410 1,230 410 410 82,000
Sandra Polk Guthman 410 1,230 410 410 82,000
Sharon Gist Gilliam 390 1,170 390 390 78,000
Richard P. Strubel 398 1,193 398 398 79,500
William J. Dolan, Jr. 40 119 40 40 7,950/(2)/
Michael E. Murphy 390 1,170 390 390 78,000
Mary Jacobs Skinner 195 585 195 195 39,000/(3)/
1 As of December 31, 2003, the Northern Mutual Fund Complex consisted of
Northern Institutional Funds (23 portfolios) and Northern Funds (30
portfolios).
2 For the fiscal year ended November 30, 2003, Mr. Dolan elected to defer
$71,550 of $79,500 total compensation.
3 For the fiscal year ended November 30, 2003, Ms. Skinner elected to defer
$39,000 of $78,000 total compensation.
38
The Trust does not provide pension or retirement benefits to its Trustees.
Effective October 29, 2002, each Trustee became entitled to participate in
the Northern Institutional Funds Deferred Compensation Plan (the "Plan"). Under
the Plan, a Trustee may elect to have his or her deferred fees treated as if
they had been invested by the Trust in the shares of the Diversified Assets
Portfolio and/or at the discretion of the Trust, another money market fund
selected by the Trust that complies with the provisions of Rule 2a-7 under the
1940 Act or one or more short-term fixed income instruments selected by the
Trust that are "eligible securities" as defined by that rule. The amount paid to
the Trustees under the Plan will be determined based upon the performance of
such investments. Deferral of Trustees' fees will not obligate the Trust to
retain the service of any Trustee or obligate a Portfolio to any level of
compensation to the Trustee. The Trust may invest in underlying securities
without shareholder approval.
The Trust's officers do not receive fees from the Trust for services in
such capacities, although PFPC, of which certain of the Trust's officers are
also officers (except Messrs. Dalke, Grassi, Ovaert, Schuldt, Schweitzer and
Wennlund), receives fees from the Trust for administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives fees
from the Trust for legal services.
Northern Trust Corporation and/or its affiliates, of which Messrs. Grassi,
Ovaert, Schuldt, Schweitzer and Wennlund are officers, receive fees from the
Trust as Investment Adviser, Co-Administrator, Custodian and Transfer Agent.
CODE OF ETHICS
The Trust, its Investment Advisers and principal underwriter have adopted
codes of ethics (the "Codes of Ethics") under Rule 17j-1 of the 1940 Act. The
Codes of Ethics permit personnel, subject to the Codes of Ethics and their
provisions, to invest in securities, including securities that may be purchased
or held by the Trust.
INVESTMENT ADVISERS, TRANSFER AGENT AND CUSTODIAN
Northern Trust Investments, N.A. ("NTI," formerly known and conducting
business as Northern Trust Investments, Inc.) and Northern Trust Global
Investments (Europe) Limited ("NTGIE") each a direct or indirect subsidiary of
The Northern Trust Company ("TNTC"), an Illinois state chartered bank, serve
jointly as the Investment Advisers of the Balanced, Bond, Intermediate Bond,
International Bond, International Growth and Short-Intermediate Bond Portfolios.
NTI serves as the Investment Adviser of each of the other Portfolios. NTI and
NTGIE are each referred to as "Investment Adviser." TNTC is a direct wholly
owned subsidiary of Northern Trust Corporation, a bank holding company. NTI is
located at 50 South LaSalle Street, Chicago, IL 60675. NTGIE is located at 6
Devonshire Square, London, EC2A 4YE, United Kingdom. Unless otherwise indicated,
NTI, TNTC and NTGIE are referred to collectively in this Additional Statement as
"Northern Trust."
Northern Trust Corporation, through its subsidiaries, has for more than 100
years managed the assets of individuals, charitable organizations, foundations
and large corporate investors and as of December 31, 2003, administered in
various capacities approximately $2.2 trillion of assets, including
approximately $478.6 billion of assets under discretionary management.
TNTC is an Illinois state chartered banking organization and a member of
the Federal Reserve System. Formed in 1889, it administers and manages assets
for individuals, personal trusts, defined contribution and benefit plans and
other institutional and corporate clients. It is the principal subsidiary of
Northern Trust Corporation, a bank holding company. NTI is an investment adviser
registered under the Investment Advisers Act of 1940. It primarily manages
assets for defined contribution and benefit plans, investment companies and
other institutional investors. NTGIE was formed in 2000 as a private company
with limited liability under the laws of the United Kingdom and is authorized
and regulated by the U.K Financial Services Authority and register with the
Investment Management Regulatory Organization. It is also registered as an
investment adviser under the Investment Advisers Act of 1940 with respect to its
U.S. clients. NTGIE primarily manages the assets of foreign and U.S.
institutional clients including U.S. mutual funds.
39
Under the Advisory Agreements with the Trust, the Investment Advisers,
subject to the general supervision of the Trust's Board of Trustees, makes
decisions with respect to, and places orders for, all purchases and sales of
portfolio securities for each Portfolio. The Advisory Agreements with the Trust
provides that in selecting brokers or dealers to place orders for transactions
on (i) common and preferred stocks, the Investment Advisers shall use their best
judgment to obtain the best overall terms available; and (ii) on bonds and other
fixed income obligations, the Investment Advisers shall attempt to obtain best
net price and execution or, with respect to the Intermediate Bond and
International Bond Portfolios, their best judgment to obtain the best overall
terms available. In assessing the best overall terms available for any
transaction, the Investment Advisers are to consider all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In evaluating the best overall terms
available and in selecting the broker or dealer to execute a particular
transaction, the Investment Advisers may consider the brokerage and research
services provided to the Portfolios and/or other accounts over which the
Investment Advisers or an affiliate 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 but are not limited to,
furnishing of advice, either directly or through publications or writings, as to
the value of securities, the advisability of investing in securities and the
availability of securities or purchasers or sellers of securities. Northern
Trust may also obtain economic statistics, forecasting services, industry and
company analyses, portfolio strategies, quantitative data, quotation services,
order management systems, news services, credit rating services, testing
services, execution services, market information systems, consulting services
from economists and political analysts, computer software or on-line data feeds
and computer hardware necessary to use the product.
Northern Trust and its affiliates also receive products and services that
provide both research and non-research benefits to them ("mixed-use items"). The
research portion of mixed-use items may be paid for with soft dollars. When
paying for the research portion of mixed-use items with soft dollars, Northern
Trust makes a good faith allocation between the cost of the research portion and
the cost of the non-research portion of the mixed-use items. Northern Trust will
pay for the non-research portion of the mixed-use items with hard dollars.
Transactions on U.S. stock exchanges and, increasingly equity securities
traded over-the-counter, involve the payment of negotiated brokerage
commissions, and the cost of transactions may vary among different brokers.
Over-the-counter transactions in equity securities may also involve the payment
of negotiated commissions to brokers. Transactions on foreign stock exchanges
involve payment for brokerage commissions, which may be fixed by applicable
regulatory bodies. Many over-the-counter issues, including corporate debt and
government securities, are normally traded on a "net" basis (i.e., without
commission) through dealers, or otherwise involve transactions directly with the
issuer of an instrument. With respect to over-the-counter transactions, the
Investment Advisers will normally deal directly with dealers who make a market
in the instruments involved except in those circumstances where more favorable
prices and execution are available elsewhere. The cost of foreign and domestic
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
The Portfolios 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 Portfolios will engage in this practice, however, only when the Investment
Advisers believe such practice to be in the Portfolios' interests.
With respect to the Equity and Fixed Income Portfolios, on occasions when
the Investment Advisers deem the purchase or sale of a security to be in the
best interests of a Portfolio as well as other fiduciary or agency accounts
managed by them (including any other Portfolio, investment company or account
for which Northern Trust acts as adviser), the Advisory Agreement provides that
Northern Trust, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for such Portfolio with those
to be sold or purchased for such other accounts in order to obtain the best net
price and execution. 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 Advisers in the manner they consider to be most equitable and
consistent with their fiduciary obligations to the Portfolio and other accounts
involved. In some instances, this procedure may adversely affect the size of the
position obtainable for a Portfolio or the amount of the securities that are
able to be sold for a Portfolio.
With respect to the Money Market Portfolios, to the extent that the
execution and price available from more than one broker or dealer are believed
to be comparable, the Investment Advisory Agreement permits the Investment
Adviser, at its discretion but subject to applicable law, to select the
executing broker or dealer on the basis of the Investment Adviser's
40
opinion of the reliability and quality of such broker or dealer.
For the fiscal year ended November 30 as indicated, each Portfolio paid
brokerage commissions as follows. The amount of brokerage commissions paid by a
Portfolio may vary substantially from year to year because of differences in
shareholder purchase and redemption activity, portfolio turnover rates and other
factors.
[Enlarge/Download Table]
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Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
2003 Paid Brokers Paid Research /1/
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Balanced Portfolio $ 196,736 $ 0 $ 159,307,592 $ 116,851
Equity Index Portfolio $ 154,878.41 $ 0 $ 546,297,891.06 $ 0
Diversified Growth
Portfolio $ 170,129 $ 0 $ 125,387,657 $ 90,042
Focused Growth Portfolio $ 1,294,851 $ 0 $ 866,090,216 701,758
Small Company Index
Portfolio $ 76,070 $ 0 $ 119,787,084 $ 0
Small Company Growth
Portfolio $ 293,003 $ 0 $ 137,180,183 $ 203,664
Mid Cap Growth Portfolio $ 199,287 $ 0 $ 122,562,661 $ 135,552
International Equity Index
Portfolio $ 35,028 $ 0 $ 72,607,788 $ 0
International Growth
Portfolio $ 455,582 $ 0 $ 74,499,000 $ 0
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1 The amounts of the transactions involving commissions paid to brokers
providing research were $81,346,479, $0, $58,883,753, $473,849,206, $0,
$90,240,880, $82,180,280, $0 and $0 for the Balanced, Equity Index,
Diversified Growth, Focused Growth, Small Company Index, Small Company
Growth, Mid Cap Growth, International Equity Index and International Growth
Portfolios, respectively.
For the fiscal year ended November 30 as indicated, each Portfolio paid
brokerage commissions as follows. The amount of brokerage commissions paid by a
Portfolio may vary substantially from year to year because of differences in
shareholder purchase and redemption activity, portfolio turnover rates and other
factors.
[Enlarge/Download Table]
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Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
2002 Paid Brokers Paid Research /1/
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Balanced $ 73,949 $ 0 $ 51,015,452 $ 50,228
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[Enlarge/Download Table]
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Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
2002 Paid Brokers Paid Research /1/
-------------------------------------------------------------------------------------------------------
Equity Index $ 405,650 $ 0 $ 475,029,483 $ 128,895
Diversified Growth $ 120,513 $ 0 $ 87,415,385 $ 84,249
Focused Growth $ 1,024,442 $ 0 $ 740,034,193 $ 562,160
International Equity Index $ 51,218 $ 0 $ 99,867,533 $ 44,353
International Growth $ 1,009,342 $ 0 $ 504,277,147 $ 625,932
Small Company Growth $ 358,557 $ 0 $ 199,160,911 $ 251,546
Small Company Index $ 67,120 $ 0 $ 101,104,332 $ 9,497
Mid Cap Growth $ 179,845 $ 0 $ 156,691,250 $ 141,860
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1 The amounts of the transactions involving commissions paid to brokers
providing research were $35,124,501, $145,938,804, $63,881,027,
$437,314,462, $14,576,322, $133,223,838, $131,821,626, $92,071,302 and
$334,371,064 for the Balanced, Equity Index, Diversified Growth, Focused
Growth, Small Company Index, Small Company Growth, Mid Cap Growth,
International Equity Index and International Growth Portfolios,
respectively.
For the fiscal year ended November 30 as indicated, each Portfolio paid
brokerage commissions as follows:
[Enlarge/Download Table]
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Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
2001 Paid Brokers Paid Research /1/
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Balanced $ 84,852.00 $ 0 $ 70,478,192.04 $ 46,611.00
Diversified Growth $ 223,121.00 $ 0 $ 188,545,091.04 $ 131,004.00
Equity Index $ 292,967.00 $ 0 $ 337,464,477.54 $ 18,299.00
Focused Growth $ 857,802.00 $ 0 $ 696,799,250.90 $ 301,779.00
International Equity Index $ 154,851.00 $ 0 $ 1,867,371,626.23 $ 111.00
International Growth $ 3,044,627.00 $ 0 $ 38,241,829,127.02 $ 1,056,088.00
Mid Cap Growth $ 225,417.00 $ 0 $ 146,177,599.13 $ 108,732.00
Small Company Growth $ 381,086.00 $ 0 $ 275,497,255.38 $ 219,357.00
Small Company Index $ 333,939.00 $ 0 $ 266,581,886.86 $ 35,153.00
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1 The amounts of the transactions involving commissions paid to brokers
providing research were $37,345,785.48, $24,269,286.47, $112,007,082.85,
$262,728,678.90, $37,208,375.32, $140,622,341.14, $65,808,019.32,
$93,087.63 and $3,024,747,395.80 for the Balanced, Equity Index,
Diversified Growth, Focused Growth, Small Company Index, Small Company
Growth, Mid Cap Growth, International Equity Index and International Growth
Portfolios, respectively.
42
To the extent that a Portfolio effects brokerage transactions with any
broker/dealer affiliated directly or indirectly with the Investment Advisers,
such transactions, including the frequency thereof, the receipt of any
commissions payable in connection therewith, and the selection of the affiliated
broker/dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Portfolio. No commissions were paid by the Portfolios to any
such affiliated broker/dealer during the Trust's three most recent fiscal years.
The Trust is required to identify any securities of its "regular brokers or
dealers" or their parents which the Trust acquired during its most recent fiscal
year.
During the fiscal year ended November 30, 2003, the Bond Portfolio acquired
and sold securities of Bear Stearns, Inc., Citigroup, Inc., Credit Suisse First
Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc., Morgan Stanley
Dean Witter & Co. and UBS-Warburg, each a regular broker/dealer. At November 30,
2003, the Bond Portfolio owned the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their
parents: Citicorp Securities, Inc., with an approximate aggregate market value
of $11,162,000; Credit Suisse First Boston Corp., with an approximate aggregate
market value of $6,562,000; Goldman Sachs Group, Inc with an approximate
aggregate market value of $4,906,000; Lehman Brothers, Inc., with an approximate
aggregate market value of $6,449,000; and Morgan Stanley Dean Witter & Co., with
an approximate aggregate market value of $10,041,000.
During the fiscal year ended November 30, 2003, the Core Bond Portfolio
acquired and sold securities Bear Stearns, Inc., Citigroup, Inc., Credit Suisse
First Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc., Morgan
Stanley Dean Witter & Co. and UBS-Warburg, each a regular broker/dealer. At
November 30, 2003, the Core Bond Portfolio owned the following amounts of
securities of its regular broker/dealers, as defined in Rule 10b-1 under the
1940 Act, or their parents: Citicorp Securities, Inc., with an approximate
aggregate market value of $4,694,000; Credit Suisse First Boston Corp., with an
approximate aggregate market value of $906,000; Goldman Sachs Group, Inc with an
approximate aggregate market value of $583,000; Lehman Brothers, Inc., with an
approximate aggregate market value of $851,000; and Morgan Stanley Dean Witter &
Co., with an approximate aggregate market value of $1,883,000.
During the fiscal year ended November 30, 2003, the Intermediate Bond
Portfolio acquired and sold securities Bear Stearns, Inc., Citigroup, Inc.,
Credit Suisse First Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers,
Inc., Morgan Stanley Dean Witter & Co. and UBS-Warburg, each a regular
broker/dealer. At November 30, 2003, the Intermediate Bond Portfolio owned the
following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Citicorp Securities, Inc., with
an approximate aggregate market value of $1,702,000; Credit Suisse First Boston
Corp., with an approximate aggregate market value of $443,000; Goldman Sachs
Group, Inc with an approximate aggregate market value of $540,000; Lehman
Brothers, Inc., with an approximate aggregate market value of $547,000; and
Morgan Stanley Dean Witter & Co., with an approximate aggregate market value of
$772,000.
During the fiscal year ended November 30, 2003, the Short-Intermediate Bond
Portfolio acquired and securities Bear Stearns, Inc., Citigroup, Inc., Credit
Suisse First Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc.,
Morgan Stanley Dean Witter & Co. and UBS-Warburg, each a regular broker/dealer.
At November 30, 2003, the Short-Intermediate Bond Portfolio owned the following
amounts of securities of its regular broker/dealers, as defined in Rule 10b-1
under the 1940 Act, or their parents: Bear Stearns, Inc., with an approximate
aggregate market value of $1,013,000; Citicorp Securities, Inc., with an
approximate aggregate market value of $4,687,000; Credit Suisse First Boston
Corp., with an approximate aggregate market value of $1,965,000; Goldman Sachs
Group, Inc with an approximate aggregate market value of $1,528,000; Lehman
Brothers, Inc., with an approximate aggregate market value of $2,410,000; and
Morgan Stanley Dean Witter & Co., with an approximate aggregate market value of
$1,928,000.
During the fiscal year ended November 30, 2003, the International Bond
Portfolio acquired and sold securities of Citigroup, Inc. and UBS-Warburg, each
a regular broker/dealer. At November 30, 2003, the International Bond Portfolio
did not own any securities of its regular broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the U.S. Government
Securities Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the U.S. Treasury Index
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
43
During the fiscal year ended November 30, 2003, the International Growth
Portfolio acquired and sold securities of Credit Suisse First Boston Corp. and
UBS-Warburg, each a regular broker/dealer. At November 30, 2003, the
International Growth Portfolio owned the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their
parents: Credit Suisse First Boston Corp., with an approximate aggregate market
value of $1,075,000.
During the fiscal year ended November 30, 2003, the International Equity
Index Portfolio acquired and sold securities of Citigroup, Inc. and UBS-Warburg,
each a regular broker/dealer. At November 30, 2003, the International Growth
Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Credit Suisse First Boston Corp. with an approximate aggregate market value of
$336,000 and UBS-Warburg with an approximate aggregate market value of $648,000.
During the fiscal year ended November 30, 2003, the Small Company Growth
Portfolio acquired and sold securities of Citigroup, Inc., Credit Suisse First
Boston Corp. and UBS-Warburg, each a regular broker/dealer. At November 30,
2003, the Small Company Growth Portfolio did not own any securities of its
regular broker/dealers or their parents.
During the fiscal year ended November 30, 2003, Small Company Index
Portfolio acquired and sold securities of Citigroup, Inc., Credit Suisse First
Boston Corp. and UBS-Warburg, each a regular broker/dealer. At November 30,
2003, the Small Company Index Portfolio did not own any securities of its
regular broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the Mid Cap Growth
Portfolio acquired and sold securities of Citigroup, Inc., Credit Suisse First
Boston Corp. and UBS-Warburg, each a regular broker/dealer. At November 30,
2003, the Mid Cap Growth Portfolio did not own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the Focused Growth
Portfolio acquired and sold securities of Citigroup, Inc., Credit Suisse First
Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc., Merrill Lynch &
Co., Inc. and UBS-Warburg, each a regular broker/dealer. At November 30, 2003,
the Focused Growth Portfolio did not own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the Diversified Growth
Portfolio acquired and sold of Citigroup, Inc., Credit Suisse First Boston
Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc., Merrill Lynch & Co.,
Inc., Morgan Stanley Dean Witter & Co. and UBS-Warburg, each a regular
broker/dealer. At November 30, 2003, the Diversified Growth Portfolio owned the
following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Citicorp Securities, Inc., with
an approximate aggregate market value of $1,932,000; Goldman Sachs Group, Inc.
with an approximate aggregate market value of $886,000; Lehman Brothers, Inc.
with an approximate aggregate market value of $1,078,000; and Merrill Lynch &
Co., Inc., with an approximate aggregate market value of $770,000.
During the fiscal year ended November 30, 2003, the Equity Index Portfolio
acquired and sold securities of Citigroup, Inc., Credit Suisse First Boston
Corp., Goldman Sachs Group, Inc., Lehman Brothers, Inc., Merrill Lynch & Co.,
Inc., Morgan Stanley Dean Witter & Co. and UBS-Warburg, each a regular
broker/dealer. At November 30, 2003, the Equity Index Portfolio owned the
following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Bear Stearns, Inc. with an
approximate aggregate market value of $488,000; Citicorp Securities, Inc., with
an approximate aggregate market value of $16,464,000; Goldman Sachs Group, Inc.,
with an approximate aggregate market value of $3,092,000; Lehman Brothers
Holdings, Inc., with an approximate aggregate market value of $1,349,000;
Merrill Lynch & Co., Inc., with an approximate aggregate market value of
$3,604,000; Morgan Stanley Dean Witter & Co., with an approximate aggregate
market value of $4,084,000.
During the fiscal year ended November 30, 2003, the Balanced Portfolio
acquired and sold securities of Bear Stearns, Inc., Citigroup, Inc., Credit
Suisse First Boston Corp., Inc., Goldman Sachs Group, Inc., Lehman Brothers,
Inc., Merrill Lynch & Co., Inc., Morgan Stanley Dean Witter & Co. and
UBS-Warburg, each a regular broker/dealer. At November 30, 2003, the Balanced
Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Citicorp Securities, Inc., with an approximate aggregate market value of
$4,313,000; Credit Suisse First Boston Corp., with an approximate aggregate
market value of $636,000; Goldman Sachs Group, Inc with an approximate aggregate
market value of $1,667,000; Lehman Brothers, Inc., with an approximate aggregate
market value of $2,046,000; Merrill Lynch & Co., Inc., with an approximate
aggregate market value of $1,107,000; Morgan Stanley Dean Witter & Co., with an
approximate aggregate market value of $769,000.
44
During the fiscal year ended November 30, 2003, the Diversified Asset
Portfolio acquired and sold securities of Bear Stearns, Inc., Citigroup, Inc.,
Credit Suisse First Boston Corp., Goldman Sachs Group, Inc., Lehman Brothers,
Inc., Merrill Lynch & Co., Inc., Morgan Stanley Dean Witter & Co. and
UBS-Warburg each a regular broker/dealer. At November 30, 2003, the Diversified
Asset Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Bear Stearns, Inc. with an approximate aggregate market value of $175,000;
Citicorp Securities, Inc., with an approximate aggregate market value of
$119,905,000; Credit Suisse First Boston Corp., with an approximate aggregate
market value of $63,702,000; Goldman Sachs Group, Inc with an approximate
aggregate market value of $215,000,000; Lehman Brothers Holdings, Inc., with an
approximate aggregate market value of $120,000,000; Merrill Lynch & Co., Inc.,
with an approximate aggregate market value of $567,088,000; Morgan Stanley Dean
Witter & Co., with an approximate aggregate market value of $114,683,000 and
UBS-Warburg, with an approximate aggregate market value of $569,285,000.
During the fiscal year ended November 30, 2003, the Government Portfolio
acquired and sold securities of Lehman Brothers, Inc., Merrill Lynch & Co.,
Inc., Morgan Stanley Dean Witter & Co. and UBS-Warburg, each a regular
broker/dealer. At November 30, 2003, the Government Portfolio owned the
following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Lehman Brothers, Inc., with an
approximate aggregate market value of $90,179,000; Merrill Lynch & Co., Inc.,
with an approximate aggregate market value of $300,000,000; Morgan Stanley Dean
Witter & Co., with an approximate aggregate market value of $32,490,000 and
UBS-Warburg, with an approximate aggregate market value of $48,735,000.
During the fiscal year ended November 30, 2003, the Government Select
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 2003, the Tax-Exempt Portfolio
did not acquire, sell or own any securities of its regular broker/dealers or
their parents.
During the fiscal year ended November 30, 2003, the Municipal Portfolio did
not acquire, sell or own any securities of its regular broker/dealers or their
parents.
For the fiscal years ended November 30, 2003, 2002, and 2001, all portfolio
transactions for the Fixed Income and Money Market Portfolios were executed on a
principal basis and, therefore, no brokerage commissions were paid by the Fixed
Income and Money Market Portfolios. Purchases by the Fixed Income and Money
Market Portfolios from underwriters of portfolio securities, however, normally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers include the spread between the dealer's cost for a given
security and the resale price of the security.
The Advisory Agreement provides that the Investment Advisers may render
similar services to others so long as their services under the Advisory
Agreement are not impaired thereby. The Advisory Agreement also provides that
the Trust will indemnify the Investment Advisers against certain liabilities
(including liabilities under the federal securities laws relating to untrue
statements or omissions of material fact and actions that are in accordance with
the terms of the Advisory Agreement) or, in lieu thereof, contribute to
resulting losses.
The Advisory Agreement most recently was approved with respect to the
Portfolios by the Trustees, including a majority of the Trustees who are not
parties to the Advisory Agreement or "interested persons" (as such term is
defined in the 1940 Act) of any party thereto (the "non-interested trustees") on
February 13, 2004. At that meeting, the Board of Trustees reviewed the written
and oral presentations provided by the Investment Advisers in connection with
the Trustees' consideration of the Advisory Agreements. The Trustees also
reviewed, with the advice of legal counsel, their responsibilities under
applicable law. The Trustees considered, in particular, the Portfolios'
contractual advisory fee rates; the Portfolios' respective operating expense
ratios; and the Investment Advisers' voluntary fee waivers and expense
reimbursements for the Portfolios. The information on these matters was also
compared to similar information for other mutual funds. In addition, the
Trustees considered the Portfolios' investment advisory fee structure and the
use of fee waivers and breakpoints by other mutual funds; the revenues received
by Northern Trust and its affiliates from the Portfolios for their investments
advisory services and for other, non-investment advisory services, and their
expenses in providing such services; the efficiencies achieved by the Investment
Advisers in managing the Portfolios and similar investment products; the
brokerage and research services received in connection with the placement of
brokerage transactions for the Portfolios; and the Portfolios' asset levels and
possible economies of scale. The Trustees also considered the investment
performance of the Portfolio; the personnel and resources of the Investment
Advisers; the types
45
of services provided to the Portfolios under the Investment Advisory Agreement;
and the nature of the Portfolios' institutional investors. The Trustees reviewed
at length the information comparing the Portfolios' total expense ratios (after
fee waivers and expense reimbursements) to those of other mutual funds as
compiled by a third party consultant. After consideration of the Investment
Advisers' presentations, the Trustees determined that the Advisory Agreements
should be reapproved and continued.
Unless sooner terminated, the Advisory Agreement will continue in effect
with respect to the Portfolios until April 30, 2005 and the Custodian Agreement
(or, in the case of the International Bond Portfolio, International Equity Index
Portfolio and International Growth Portfolio, the Foreign Custody Agreement) and
the Transfer Agency Agreement will continue in effect with respect to a
particular Portfolio until April 30, 2005 and thereafter for successive 12-month
periods, provided that the continuance is approved at least annually (i) by the
vote of a majority of the Trustees who are not parties to the agreement or
"interested persons" (as such term is defined in the 1940 Act) of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval, and (ii) by the Trustees or by the vote of a majority of the
outstanding shares of such Portfolio (as defined below under "Other
Information"). Each agreement is terminable at any time without penalty by
either the Trust (by specified Trustee or shareholder action) or by the
Investment Adviser, Custodian or Transfer Agent, as the case may be, on 60 days'
written notice.
For the Fixed Income and Equity Portfolios under its Transfer Agency
Agreement with the Trust, with respect to shares held by Institutions, TNTC as
Transfer Agent has undertaken to perform some or all of the following services:
(i) establish and maintain an omnibus account in the name of each Institution;
(ii) process purchase orders and redemption requests from an Institution, and
furnish confirmations and disburse redemption proceeds; (iii) act as the income
disbursing agent of the Trust; (iv) answer inquiries from Institutions; (v)
provide periodic statements of account to each Institution; (vi) process and
record the issuance and redemption of shares in accordance with instructions
from the Trust or its administrator; (vii) if required by law, prepare and
forward to Institutions shareholder communications (such as proxy statements and
proxies, annual and semi-annual financial statements, and dividend, distribution
and tax notices); (viii) preserve records; and (ix) furnish necessary office
space, facilities and personnel. Under the Transfer Agency Agreement, with
respect to shares held by investors, the Transfer Agent has also undertaken to
perform some or all of the following services: (i) establish and maintain
separate accounts in the name of the investors; (ii) process purchase orders and
redemption requests, and furnish confirmations in accordance with applicable
law; (iii) disburse redemption proceeds; (iv) process and record the issuance
and redemption of shares in accordance with instructions from the Trust or its
administrator; (v) act as income disbursing agent of the Trust in accordance
with the terms of the Prospectus and instructions from the Trust or its
administrator; (vi) provide periodic statements of account; (vii) answer
inquiries (including requests for prospectuses and statements of additional
information, and assistance in the completion of new account applications) from
investors and respond to all requests for information regarding the Trust (such
as current price, recent performance, and yield data) and questions relating to
accounts of investors (such as possible errors in statements, and transactions);
(viii) respond to and seek to resolve all complaints of investors with respect
to the Trust or their accounts; (ix) furnish proxy statements and proxies,
annual and semi-annual financial statements, and dividend, distribution and tax
notices to investors; (x) furnish the Trust with all pertinent Blue Sky
information; (xi) perform all required tax withholding; (xii) preserve records;
and (xiii) furnish necessary office space, facilities and personnel. The
Transfer Agent may appoint one or more sub-transfer agents in the performance of
its services.
As compensation for the services rendered by the Transfer Agent under the
Transfer Agency Agreement and the assumption by the Transfer Agent of related
expenses, TNTC is entitled to a fee from the Trust, payable monthly, at an
annual rate of 0.01%, 0.10% and 0.15% of the average daily net asset value of
the Class A, C and D Shares, respectively, of the Equity and Fixed Income
Portfolios.
For the Money Market Portfolios, under its Transfer Agency Agreement with
the Trust, TNTC has undertaken to (i) answer Customer inquiries regarding the
current yield of, and certain other matters (e.g., account status information)
pertaining to, the Trust, (ii) process purchase and redemption transactions,
including transactions generated by any service provided outside of the
Agreement by the Transfer Agent, its affiliates or correspondent banks whereby
Customer account cash balances are automatically invested in shares of the
Portfolios, and the disbursement of the proceeds of redemptions, (iii) establish
and maintain separate omnibus accounts with respect to shareholders investing
through TNTC or any of its affiliates and correspondent banks and act as
transfer agent and perform sub-accounting services with respect to each such
account, (iv) provide periodic statements showing account balances, (v) mail
reports and proxy materials to shareholders, (vi) provide information in
connection with the preparation by the Trust of various regulatory reports and
prepare reports to the Trustees and management, (vii) answer inquiries
(including requests for prospectuses and statements of additional information,
and assistance in the completion of new account applications) from investors and
respond to all requests for
46
information regarding the Trust (such as current price, recent performance, and
yield data) and questions relating to accounts of investors (such as possible
errors in statements, and transactions), (viii) respond to and seek to resolve
all complaints of investors with respect to the Trust or their accounts, (ix)
furnish proxy statements and proxies, annual and semi-annual financial
statements, and dividend, distribution and tax notices to investors, (x) furnish
the Trust with all pertinent Blue Sky information, (xi) perform all required tax
withholding, (xii) preserve records, and (xiii) furnish necessary office space,
facilities and personnel. The Transfer Agent may appoint one or more
sub-transfer agents in the performance of its services.
As compensation for the services rendered by the Transfer Agent under the
Transfer Agency Agreement with respect to the Shares Class of the Money Market
Portfolios described in this Additional Statement and the assumption by the
Transfer Agent of related expenses, TNTC is entitled to a fee from the Trust,
calculated daily and payable monthly, at an annual rate equal to $18 for each
subaccount relating to such Shares of the Portfolios. This fee which is borne
solely by the Shares described in this Additional Statement and not by the
Portfolios' other share classes, is subject to annual upward adjustments based
on increases in the Consumer Price Index for All Urban Consumers, provided that
the Transfer Agent may permanently or temporarily waive all or any portion of
any upward adjustment. Different transfer agency fees are payable with respect
to the Portfolios' different share classes. The Transfer Agent's affiliates and
correspondent banks may receive compensation for performing the services
described in the preceding paragraph that the Transfer Agent would otherwise
receive. Conflict-of-interest restrictions under state and federal law
(including the Employee Retirement Income Security Act of 1974) may apply to the
receipt by such affiliates or correspondent banks of such compensation in
connection with the investment of fiduciary funds in Shares of the Portfolios.
As compensation for the services rendered by the Transfer Agent under the
Transfer Agency Agreement with respect to Service Shares and Premier Shares of
the Money Market Portfolios described in this Additional Statement and the
assumption by the Transfer Agent of related expenses, TNTC is entitled to a fee
from the Trust, calculated daily and payable monthly, at the following annual
rates: (i) 0.01% of the average daily net asset value of the outstanding Service
Shares of each Portfolio; and (ii) 0.02% of the average daily net asset value of
the outstanding Premier Shares of the Money Market Portfolios. The transfer
agency fee attributable to each class of shares is borne solely by that class.
The Transfer Agent's affiliates and correspondent banks may receive compensation
for performing the services described in the preceding paragraph that the
Transfer Agent would otherwise receive. Conflict-of-interest restrictions under
state and federal law (including the Employee Retirement Income Security Act of
1974) may apply to the receipt by such affiliates or correspondent banks of such
compensation in connection with the investment of fiduciary funds in Service
Shares and Premier Shares of the Money Market Portfolios.
Under its Custodian Agreement (and in the case of the International Bond,
International Growth and International Equity Index Portfolios, its Foreign
Custody Agreement) with the Trust, TNTC (i) holds each Portfolio's cash and
securities, (ii) maintains such cash and securities in separate accounts in the
name of the Portfolio, (iii) makes receipts and disbursements of funds on behalf
of the Portfolio, (iv) receives, delivers and releases securities on behalf of
the Portfolio, (v) collects and receives all income, principal and other
payments in respect of the Portfolio's investments held by the Custodian, and
(vi) maintains the accounting records of the Trust. The Custodian may employ one
or more subcustodians, provided that the Custodian, subject to certain
monitoring responsibilities, shall have no more responsibility or liability to
the Trust on account of any action or omission of any subcustodian so employed
than such subcustodian has to the Custodian and that the responsibility or
liability of the subcustodian to the Custodian shall conform to the resolution
of the Trustees of the Trust authorizing the appointment of the particular
subcustodian (or, in the case of foreign securities, to the terms of any
agreement entered into between the Custodian and such subcustodian to which such
resolution relates). In addition, the Trust's custodial arrangements provide,
with respect to foreign securities, that the Custodian shall not be: (i)
responsible for the solvency of any subcustodian appointed by it with reasonable
care; (ii) responsible for any act, omission, default or for the solvency of any
eligible foreign securities depository; and (iii) liable for any loss, damage,
cost, expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
subcustodian has otherwise exercised reasonable care. The Custodian may also
appoint agents to carry out such of the provisions of the Custodian Agreement
and the Foreign Custody Agreement as the Custodian may from time to time direct,
provided that the appointment of an agent shall not relieve TNTC of any of its
responsibilities under either Agreement. The Custodian has entered into
agreements with financial institutions and depositories located in foreign
countries with respect to the custody of the Portfolios' foreign securities.
As compensation for the services rendered to the Trust by the Custodian
with respect to each Portfolio except the International Bond, International
Growth and International Equity Index Portfolios, and the assumption by the
Custodian of certain related expenses, the Custodian is entitled to payment from
the Trust as follows: (i) $18,000 annually for each Portfolio, plus (ii) 1/100th
of 1% annually of each Portfolio's average daily net assets to the extent they
exceed $100
47
million, plus (iii) a fixed dollar fee for each trade in portfolio securities,
plus (iv) a fixed dollar fee for each time that the Custodian receives or
transmits funds via wire, plus (v) reimbursement of expenses incurred by the
Custodian for telephone, postage, courier fees, office supplies and duplicating.
The fees referred to in clauses (iii) and (iv) are subject to annual upward
adjustments based on increases in the Consumer Price Index for All Urban
Consumers, provided that the Custodian may permanently or temporarily waive all
or any portion of any upward adjustment.
As compensation for the services rendered to the Trust under the Foreign
Custody Agreement with respect to the International Bond, International Growth
and International Equity Index Portfolios, and the assumption by the Custodian
of certain related expenses, the Custodian is entitled to payment from the Trust
as follows: (i) $35,000 annually for the International Bond, International
Growth and International Equity Index Portfolios, plus (ii) 9/100th of 1%
annually of the Portfolios' average daily net assets, plus (iii) reimbursement
for fees incurred by the Custodian for telephone, postage, courier fees, office
supplies and duplicating.
The Custodian's fees under the Custodian Agreement and Foreign Custody
Agreement are subject to reduction based on the Portfolios' daily uninvested
U.S. dollar cash balances (if any).
For the fiscal years or period ended November 30 as indicated, the amount
of advisory fees incurred by each Portfolio (after fee waivers) was as follows:
------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
Balanced $ 508,486 $ 445,675 $ 440,570
Bond 1,616,490 2,040,405 2,482,532
Core Bond /1/ 303,554 278,921 314,103
Diversified Assets 28,861,652 27,167,465 22,364,398
Diversified Growth 385,859 476,664 568,240
Equity Index 697,294 793,036 1,037,740
Focused Growth 1,616,903 1,782,168 1,915,217
Government 7,266,808 7,322,057 6,645,202
Government Select 4,669,774 4,551,657 3,636,314
Intermediate Bond 111,266 115,587 95,356
International Bond 89,632 185,284 202,481
-----------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
International Equity Index 177,417 203,586 200,294
International Growth 891,284 1,055,894 1,060,830
Mid Cap Growth 212,937 267,228 281,555
Municipal 616,834 280,496 149,911
Short-Intermediate Bond 457,747 557,893 691,027
Small Company Growth 214,762 293,423 296,250
Small Company Index 195,486 427,371 578,244
Tax-Exempt 1,841,411 1,982,340 1,649,409
U.S. Government Securities 306,406 285,638 250,695
U.S. Treasury Index 92,028 71,668 62,605
-----------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
48
For the fiscal years or period ended November 30 as indicated, the
Investment Adviser waived advisory fees as follows:
------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
Balanced $ 101,697 $ 154,099 $ 264,342
Bond 969,896 1,826,293 3,475,544
Core Bond /1/ 182,133 260,973 439,744
Diversified Assets 0 0 0
Diversified Growth 59,363 124,852 258,291
Equity Index 697,300 1,107,339 2,075,479
Focused Growth 215,588 401,765 718,206
Government 0 0 0
Government Select 4,669,819 5,374,825 5,454,472
Intermediate Bond 66,760 99,112 133,497
International Bond 19,207 43,987 57,852
International Equity Index 70,967 125,762 200,294
International Growth 111,411 174,617 265,207
Mid Cap Growth 26,617 57,537 105,583
Municipal 616,840 315,335 224,866
Short-Intermediate Bond 274,649 497,433 967,438
Small Company Growth 40,268 74,316 111,094
Small Company Index 97,742 301,333 578,244
Tax-Exempt $ 0 $ 0 $ 0
U.S. Government Securities 183,844 241,739 350,974
U.S. Treasury Index 92,028 86,458 104,341
-----------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
For the fiscal years or period ended November 30 as indicated, the amount
of transfer agency fees incurred by each Portfolio was as follows:
------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
Balanced $ 11,277 $ 10,102 $ 10,146
Bond 71,783 93,218 127,247
Core Bond /1/ 12,143 11,158 12,564
Diversified Assets 183,007 221,758 199,532
Diversified Growth 6,470 8,372 10,991
Equity Index 114,048 138,044 187,294
Focused Growth 36,137 31,431 33,454
Government 77,694 81,436 70,775
Government Select 87,003 63,070 61,703
Intermediate Bond 4,562 4,680 3,852
International Bond 1,700 2,661 2,893
-----------------------------------------------------------------------
------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
International Equity Index 7,197 8,171 8,028
International Growth 11,844 16,348 13,870
Mid Cap Growth 4,573 4,533 3,990
Municipal 10,400 18,691 11,814
Short-Intermediate Bond 18,411 22,385 27,690
Small Company Growth 2,739 3,684 3,703
Small Company Index 9,915 21,466 29,011
Tax-Exempt 13,210 16,240 17,412
U.S. Government Securities 14,493 13,085 11,344
U.S. Treasury Index 10,572 6,624 5,001
-----------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
49
For the fiscal years or period ended November 30 as indicated, the amount
of custodian fees (and, in the case of the International Bond, International
Equity Index Portfolio and International Growth Index Portfolio, the foreign
custodian fees) incurred by each Portfolio was as follows:
------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------
Balanced $ 40,768 $ 39,352 $ 6,572
Bond 98,414 58,986 73,257
Core Bond /1/ 45,636 32,822 23,192
Diversified Assets 951,434 1,246,428 489,508
Diversified Growth 29,408 31,444 14,019
Equity Index 153,167 171,122 148,960
Focused Growth 42,983 44,234 33,763
Government 288,359 351,392 295,166
Government Select 348,178 61,592 296,132
Intermediate Bond 37,120 33,244 13,954
International Bond 47,223 57,581 53,956
International Equity Index 96,454 112,042 116,236
International Growth 131,342 157,774 148,409
Mid Cap Growth 33,611 32,379 36,834
Municipal 94,044 46,980 13,233
Short-Intermediate Bond 33,156 43,941 11,210
Small Company Growth 36,026 40,501 62,580
Small Company Index 185,519 273,895 209,892
Tax-Exempt 104,259 99,963 69,605
U.S. Government Securities 25,899 23,903 13,234
U.S. Treasury Index 23,244 23,641 17,004
-----------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
TNTC is active as an underwriter of municipal instruments. Under the 1940
Act, the Portfolios are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which TNTC is serving as a principal underwriter. In the opinion of TNTC, this
limitation will not significantly affect the ability of the Portfolios to pursue
their respective investment objectives.
Under a Service Mark License Agreement with the Trust, Northern Trust
Corporation has agreed that the name "Northern Institutional Funds" may be used
in connection with the Trust's business on a royalty-free basis. Northern Trust
Corporation has reserved to itself the right to grant the non-exclusive right to
use the name "Northern Institutional Funds" to any other person. The Agreement
provides that at such time as the Agreement is no longer in effect, the Trust
will cease using the name "Northern Institutional Funds."
PROXY VOTING
The Trust, on behalf of the Portfolios, has delegated the voting of
portfolio securities to Northern Trust in its capacity as Investment Adviser.
Northern Trust has adopted proxy voting policies and procedures (the "Proxy
Voting Policy") for the voting of proxies on behalf of client accounts for which
Northern Trust has voting discretion, including the Portfolios. Under the Proxy
Voting Policy, shares are to be voted in the best interests of the Portfolios.
Normally, Northern Trust exercises proxy voting discretion on particular
types of proposals in accordance with guidelines (the "Proxy Guidelines") set
forth in the Proxy Voting Policy. The Proxy Guidelines address, for example,
proposals to classify the board of directors, to eliminate cumulative voting, to
limit management's ability to alter the size of the board, to require
shareholder ratification of poison pills, to require a supermajority shareholder
vote for charter or bylaw amendments and mergers or other significant business
combinations, to provide for director and officer indemnification and liability
protection, to increase the number of authorized shares, to create or abolish
preemptive rights, to approve executive and director compensation plans, to
limit executive and director pay, to opt in or out of state takeover statutes
and to approve mergers, acquisitions, corporate restructuring, spin-offs, assets
sales or liquidations.
50
A Proxy Committee comprised of senior Northern Trust investment and
compliance officers has the responsibility for the content, interpretation and
application of the Proxy Guidelines. In addition, Northern Trust has retained an
independent third party (the "Service Firm") to review proxy proposals and to
make voting recommendations to the Proxy Committee in a manner consistent with
the Proxy Guidelines. The Proxy Committee may apply these Proxy Guidelines with
a measure of flexibility. Accordingly, except as otherwise provided in the Proxy
Voting Policy, the Proxy Committee may vote proxies contrary to the
recommendations of the Service Firm if it determines that such action is in the
best interests of a Portfolio. In exercising its discretion, the Proxy Committee
may take into account a variety of factors relating to the matter under
consideration, the nature of the proposal and the company involved. As a result,
the Proxy Committee may vote in one manner in the case of one company and in a
different manner in the case of another where, for example, the past history of
the company, the character and integrity of its management, the role of outside
directors, and the company's record of producing performance for investors
justifies a high degree of confidence in the company and the effect of the
proposal on the value of the investment. Similarly, poor past performance,
uncertainties about management and future directions, and other factors may lead
the Proxy Committee to conclude that particular proposals present unacceptable
investment risks and should not be supported. The Proxy Committee also evaluates
proposals in context. A particular proposal may be acceptable standing alone,
but objectionable when part of an existing or proposed package. Special
circumstances may also justify casting different votes for different clients
with respect to the same proxy vote.
Northern Trust may occasionally be subject to conflicts of interest in the
voting of proxies due to business or personal relationships with persons having
an interest in the outcome of certain votes. For example, Northern Trust may
provide trust, custody, investment management, brokerage, underwriting, banking
and related services to accounts owned or controlled by companies whose
management is soliciting proxies. Occasionally, Northern Trust may also have
business or personal relationships with other proponents of proxy proposals,
participants in proxy contests, corporate directors or candidates for
directorships. Northern Trust may also be required to vote proxies for
securities issued by Northern Trust Corporation or its affiliates or on matters
in which Northern Trust has a direct financial interest, such as shareholder
approval of a change in the advisory fees paid by a Portfolio. Northern Trust
seeks to address such conflicts of interest through various measures, including
the establishment, composition and authority of the Proxy Committee and the
retention of the Service Firm to perform proxy review and vote recommendation
functions. The Proxy Committee has the responsibility of determining whether a
proxy vote involves a potential conflict of interest and how the conflict should
be addressed in conformance with the Proxy Voting Policy. The Proxy Committee
may resolve such conflicts in any of a variety of ways, including the following:
voting in accordance with the vote recommendation of the Service Firm; voting in
accordance with the recommendation of an independent fiduciary appointed for
that purpose; voting pursuant to client direction by seeking instructions from
the Board of Trustees of the Trust; or by voting pursuant to a "mirror voting"
arrangement under which shares are voted in the same manner and proportion as
shares over which Northern Trust does not have voting discretion. The method
selected by the Proxy Committee may vary depending upon the facts and
circumstances of each situation.
Northern Trust may choose not to vote proxies in certain situations or for
a Portfolio. This may occur, for example, in situations where the exercise of
voting rights could restrict the ability to freely trade the security in
question (as is the case, for example, in certain foreign jurisdictions known as
"blocking markets").
CO-ADMINISTRATORS AND DISTRIBUTOR
Prior to January 1, 2001, TNTC and PFPC Inc. ("PFPC"), 4400 Computer Drive,
Westborough, Massachusetts 01581, acted as Co-Administrators for the Portfolios
under a Co-Administration Agreement with the Trust. On January 1, 2001, NTI
assumed TNTC's rights and responsibilities under the Co-Administration
Agreement. PFPC remained a Co-Administrator. Subject to the general supervision
of the Trust's Board of Trustees, the Co-Administrators provide supervision of
all aspects of the Trust's non-investment advisory operations and perform
various corporate secretarial, treasury and blue sky services, including but not
limited to: (i) maintaining office facilities and furnishing corporate officers
for the Trust; (ii) furnishing data processing services, clerical services, and
executive and administrative services and standard stationery and office
supplies; (iii) performing all functions ordinarily performed by the office of a
corporate treasurer, and furnishing the services and facilities ordinarily
incident thereto, such as expense accrual monitoring and payment of the Trust's
bills, preparing monthly reconciliation of the Trust's expense records, updating
projections of annual expenses, preparing materials for review by the Board of
Trustees and compliance testing; (iv) preparing and submitting reports to the
Trust's shareholders and the SEC; (v) preparing and printing financial
statements; (vi) preparing monthly Portfolio profile reports; (vii) preparing
and filing the Trust's federal and state tax returns (other than those required
to be filed by the Trust's custodian and transfer agent) and providing
shareholder tax information to the Trust's transfer agent; (viii) assisting in
marketing strategy and product development; (ix) performing oversight/management
responsibilities, such
51
as the supervision and coordination of certain of the Trust's service providers;
(x) effecting and maintaining, as the case may be, the registration of shares of
the Trust for sale under the securities laws of various jurisdictions; (xi)
assisting in maintaining corporate records and good standing status of the Trust
in its state of organization; and (xii) monitoring the Trust's arrangements with
respect to services provided by Servicing Agents to their Customers who are the
beneficial owners of shares, pursuant to servicing agreements between the Trust
and such Servicing Agents.
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 Portfolio, computed daily and
payable monthly, at an annual rate of 0.15% of the average daily net assets of
each of the International Bond, International Equity Index and International
Growth Portfolios, and 0.10% of the average daily net assets of each other
Portfolio. The Co-Administrators are also entitled to additional fees for
special legal services. The Co-Administrators will reimburse each Portfolio for
its expenses (including administration fees payable to the Co-Administrators,
but excluding advisory fees, transfer agency fees, servicing fees and
extraordinary expenses) which exceed on an annualized basis 0.25% of the
International Bond, International Equity Index and International Growth
Portfolios' respective average daily net assets and 0.10% of each other
Portfolio's average daily net assets.
For the fiscal years ended November 30, the Co-Administrators received fees
under the Co-Administration Agreement in the amount of:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Balanced Portfolio $ 101,696 $ 89,134 $ 88,114
Bond Portfolio 646,591 816,156 993,013
Core Bond Portfolio /1/ 121,421 111,567 125,641
Diversified Assets Portfolio 11,544,629 10,866,980 8,945,759
Diversified Growth Portfolio 59,362 78,125 103,316
Equity Index Portfolio 697,294 793,036 1,037,740
Focused Growth Portfolio 215,585 231,961 239,402
Government Portfolio 2,906,702 2,928,821 2,658,081
Government Select Portfolio 4,669,774 4,551,657 3,636,314
Intermediate Bond Portfolio 44,506 46,235 38,142
International Bond Portfolio 19,207 39,704 43,389
International Equity Index Portfolio 106,451 122,152 120,176
International Growth Portfolio 167,116 197,981 198,906
Mid Cap Growth Portfolio 26,617 33,403 35,194
Municipal Portfolio 616,834 280,496 149,911
Short-Intermediate Bond Portfolio 183,097 223,155 276,411
Small Company Growth Portfolio 26,845 36,678 37,031
Small Company Index Portfolio 97,741 213,682 289,121
Tax-Exempt Portfolio 736,559 792,930 659,764
U.S. Government Securities Portfolio 122,561 114,254 100,278
U.S. Treasury Index Portfolio 61,351 47,778 41,737
-------------------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
52
Additionally, for the fiscal years ended November 30, the Co-Administrators
voluntarily waived/reimbursed each Portfolio for its expenses reducing the
administration fees in the following amounts for the fiscal year ended November
30:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Balanced Portfolio $ 77,278 $ 72,787 $ 88,144
Bond Portfolio 201,170 83,549 288,654
Core Bond Portfolio /1/ 91,145 91,955 127,090
Diversified Assets Portfolio 1,687,427 2,046,492 1,329,121
Diversified Growth Portfolio 65,928 66,746 96,529
Equity Index Portfolio 259,695 198,027 383,891
Focused Growth Portfolio 80,473 72,353 149,997
Government Portfolio 572,008 681,919 705,432
Government Select Portfolio 726,020 513,410 698,166
Intermediate Bond Portfolio 72,348 67,229 102,222
International Bond Portfolio 61,207 65,194 103,465
International Equity Index Portfolio 60,993 63,904 116,031
International Growth Portfolio 50,769 62,653 94,979
Mid Cap Growth Portfolio 75,917 64,379 125,412
Municipal Portfolio 145,167 110,289 100,397
Short-Intermediate Bond Portfolio 74,341 73,734 123,136
Small Company Growth Portfolio 77,673 77,629 152,279
Small Company Index Portfolio 223,803 302,301 330,693
Tax-Exempt Portfolio 184,042 174,453 209,930
U.S. Government Securities Portfolio 59,750 58,538 96,719
U.S. Treasury Index Portfolio 57,768 56,192 99,668
-------------------------------------------------------------------------------
/1/ Commenced investment operations on March 29, 2001.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until April 30, 2005, and thereafter for successive one-year terms with
respect to each Portfolio, provided that the Agreement is approved annually (i)
by the Board of Trustees or (ii) by the vote of a majority of the outstanding
shares of such Portfolio (as defined below under "Other Information"), 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 without penalty by the Trust on at least 120
days' written notice to the Co-Administrators. Each Co-Administrator may
terminate the Co-Administration Agreement with respect to itself at any time
without penalty on at least 120 days' written notice to the Trust and the other
Co-Administrator.
The Trust has entered into a Distribution Agreement under which Northern
Funds Distributors, LLC, ("NFD") as agent, sells shares of each Portfolio on a
continuous basis. NFD pays the cost of printing and distributing prospectuses to
persons who are not shareholders of the Trust (excluding preparation and
typesetting expenses) and of certain other distribution efforts. No compensation
is payable by the Trust to NFD for such distribution services. NFD is a
wholly-owned subsidiary of PFPC Distributors, Inc. ("PFPC Distributors"). PFPC
Distributors, based in King of Prussia, Pennsylvania, is a wholly-owned
subsidiary of PFPC, a co-administrator for the Trust. Prior to January 2, 2001,
NFD was a wholly-owned subsidiary of Provident Distributors, Inc. ("PDI"), an
independently owned and operated broker-dealer. Effective January 2, 2001, PDI
was acquired by PFPC Distributors and NFD became a wholly-owned subsidiary of
PFPC Distributors.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD's, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with NFD,
Northern Trust Corporation agrees that the name "Northern Funds" may be used in
connection with Northern Institutional 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
53
"Northern Funds" to any other person. The License Agreement provides that at
such time as the License Agreement is no longer in effect NFD will cease using
the name "Northern Funds."
SHAREHOLDER SERVICING PLAN FOR FIXED InCOME AND EQUITY PORTFOLIOS
As stated in the Fixed Income and Equity Portfolios' Prospectuses,
Servicing Agents may enter into servicing agreements with the Trust under which
they provide (or arrange to have provided) support services to their Customers
or other investors who beneficially own such shares in consideration of the
Portfolios' payment of not more than 0.15% and 0.25% (on an annualized basis) of
the average daily net asset value of the Class C and D Shares, respectively,
beneficially owned by such Customers or investors.
For the fiscal years or periods ended November 30 as indicated, the
aggregate amount of the Shareholder Service Fee incurred by each class of each
Portfolio then in existence was as follows:
-------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------
Balanced Portfolio
Class C $ 1,128 $ 1,316 $ 1,340
Class D 768 713 947
Bond Portfolio
Class C 11,103 18,751 27,702
Class D 812 613 419
Core Bond Portfolio /1/
Class C N/A N/A N/A
Class D 4 2 N/A
Diversified Growth Portfolio
Class D 951 998 1,176
Equity Index Portfolio
Class C 59,682 86,025 52,649
Class D 15,183 12,711 21,176
Focused Growth Portfolio
Class C 21,049 12,078 14,405
Class D 3,480 1,763 1,553
Intermediate Bond Portfolio
Class D 198 102 66
International Bond Portfolio
Class D /2/ 749 25 N/A
International Equity Index Portfolio
Class D 179 49 29
International Growth Portfolio
Class D /3/ 1,254 5,621 1,088
Mid Cap Growth Portfolio
Class C /6/ 2,712 1,653 491
Class D /7/ 506 360 314
Short-Intermediate Bond Portfolio
Class D 178 118 87
Small Company Growth Portfolio
Class D /4/ 91 27 N/A
Small Company Index Portfolio
Class C /5/ N/A N/A N/A
Class D 250 170 177
U.S. Government Securities Portfolio
Class C /8/ N/A N/A N/A
Class D 3,991 2,961 2,350
U.S. Treasury Index Portfolio
Class C 4,057 2,383 1,134
Class D 3,576 744 261
-------------------------------------------------------------------------------
/1/ Class C and Class D Shares were issued on March 29, 2001.
/2/ Class D Shares were redeemed on September 22, 1999 and reissued on
September 5, 2002.
/3/ No shares were outstanding for Class D for the period August 23, 1999
through June 14, 2001
/4/ Class D Shares were issued on June 13, 2002.
/5/ Shares were issued on January 8, 1998. From June 20, 1999 through the date
of this Additional Statement, no Class C Shares were held by shareholders.
54
/6/ Class C Shares were issued on April 4, 2001.
/7/ Class D Shares were issued on January 29, 2001.
/8/ From February 10, 1999 to the date of this Additional Statement, no Class C
Shares were held by shareholders.
Services provided by or arranged to be provided by Servicing Agents under
their servicing agreements may include: (i) establishing and maintaining
separate account records of Customers or other investors; (ii) providing
Customers or other investors with a service that invests their assets in shares
of certain classes pursuant to specific or pre-authorized instructions, and
assistance with new account applications; (iii) aggregating and processing
purchase and redemption requests for shares of certain classes from Customers or
other investors, and placing purchase and redemption orders with the Transfer
Agent; (iv) issuing confirmations to Customers or other investors in accordance
with applicable law; (v) arranging for the timely transmission of funds
representing the net purchase price or redemption proceeds; (vi) processing
dividend payments on behalf of Customers or other investors; (vii) providing
information periodically to Customers or other investors showing their positions
in shares; (viii) responding to Customer or other investor inquiries (including
requests for prospectuses), and complaints relating to the services performed by
the Servicing Agents; (ix) acting as liaison with respect to all inquiries and
complaints from Customers and other investors relating to errors committed by
the Trust or its agents, and other matters pertaining to the Trust; (x)
providing or arranging for another person to provide subaccounting with respect
to shares of certain classes beneficially owned by Customers or other investors;
(xi) if required by law, forwarding shareholder communications from the Trust
(such as proxy statements and proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Customers and other investors; (xii) providing such office space, facilities and
personnel as may be required to perform their services under the servicing
agreements; (xiii) maintaining appropriate management reporting and statistical
information; (xiv) paying expenses related to the preparation of educational and
other explanatory materials in connection with the development of investor
services; (xv) developing and monitoring investment programs; and (xvi)
providing such other similar services as the Trust may reasonably request to the
extent the Servicing Agents are permitted to do so under applicable statutes,
rules and regulations.
The Trust's agreements with Servicing Agents are governed by a Plan (called
the "Shareholder Servicing Plan"), which has been adopted by the Board of
Trustees. Pursuant to the Shareholder Servicing Plan, the Board of Trustees will
review, at least quarterly, a written report of the amounts expended under the
Trust's agreements with Servicing Agents and the purposes for which the
expenditures were made. In addition, the arrangements with Servicing Agents must
be approved annually by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act, and have no direct or indirect financial interest in
such arrangements.
The Board of Trustees has approved the arrangements with Servicing Agents
based on information provided by the Trust's service contractors that there is a
reasonable likelihood that the arrangements will benefit the Portfolios and
their shareholders by affording the Portfolios greater flexibility in connection
with the servicing of the accounts of the beneficial owners of their shares in
an efficient manner.
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serves as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of a Portfolio may, in the discretion of Northern Trust,
be made in the form of securities that are permissible investments for the
Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern Trust. In connection with an in-kind
securities payment, a Portfolio will require, among other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by the Portfolio and that the Portfolio 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
Portfolio; and that adequate information be provided concerning the basis and
other tax matters relating to the securities.
55
The additional transaction fee described in the Prospectus with respect to
the Small Company Index Portfolio and the International Equity Index Portfolio
does not apply to in-kind purchases of shares that are structured to minimize
the related brokerage, market impact costs and other transaction costs to such
Portfolios as described in the Prospectus.
Although each Portfolio generally will redeem shares in cash, each
Portfolio reserves the right to pay redemptions by a distribution in-kind of
securities (instead of cash) from such Portfolio. The securities distributed
in-kind would be readily marketable and would be valued for this purpose using
the same method employed in calculating the Portfolio'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.
THIRD-PARTY FEES AND REQUIREMENTS
Shares of the Portfolios are sold and generally redeemed without any
purchase or redemption charge imposed by the Trust. However, as described in the
Prospectus, there will be a 2% redemption fee (including redemption by exchange)
on shares of the International Bond, International Equity Index and
International Growth Portfolios exchanged within 30 days of purchase. In
addition Northern Trust and other institutions may charge their Customers for
services provided in connection with their investments.
The exercise of voting rights and the delivery to Customers of shareholder
communications from the Trust will be governed by the Customers' account
agreements with the Institutions. Customers should read the Prospectus in
connection with any relevant agreement describing the services provided by an
Institution and any related requirements and charges, or contact the Institution
at which the Customer maintains its account for further information.
EXPENSES
Except as set forth above and in this Additional Statement, each Portfolio
is responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to the Investment Adviser,
Co-Administrators, Transfer Agent and Custodian; brokerage fees and commissions,
fees for the registration or qualification of Portfolio shares under federal or
state securities laws; expenses of the organization of the Trust; taxes;
interest; costs of liability insurance, fidelity bonds, indemnification or
contribution, any costs, expenses or losses arising out of any liability of, or
claim for damages or other relief asserted against the Trust for violation of
any law; legal, tax and auditing fees and expenses; expenses of preparing and
printing prospectuses, statements of additional information, proxy materials,
reports and notices and distributing of the same to the Portfolios' shareholders
and regulatory authorities; compensation and expenses of its Trustees; fees of
industry organizations such as the Investment Company Institute; and
miscellaneous and extraordinary expenses incurred by the Trust.
The Investment Advisers and PFPC intend to voluntarily reimburse a portion
of the Portfolios' expenses and/or reduce their advisory and co-administrative
fees from the Portfolios during the current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Portfolios during the periods for which the reductions and reimbursements are
made.
PERFORMANCE INFORMATION
MONEY MARKET PORTFOLIOS
The performance of a class of shares of the Money Market Portfolios may be
compared to the performance of other money market funds with similar investment
objectives 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 class of shares
may be compared to data prepared by iMoneyNet, Inc. or other independent mutual
fund reporting services. Performance data as reported in national financial
publications such as Money Magazine, Morningstar, 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 class of shares of a
Portfolio.
From time to time, the Money Market Portfolios may advertise their "yields"
and "effective yields," and the Municipal Portfolio and Tax-Exempt Portfolio may
advertise their "tax-equivalent yields" and "tax-equivalent effective yields."
Yield, effective yield, tax-equivalent yield and tax-equivalent effective yield
are computed separately for each class of shares. Each class of shares has
different fees and expenses, and consequently, may have different yields for the
same period. These yield figures will fluctuate, are based on historical
earnings and are not intended to indicate future
56
performance. "Yield" refers to the net investment income generated by an
investment in the Portfolio over a seven-day period identified in the
advertisement. This net investment income is then "annualized." That is, the
amount of net investment income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment.
In arriving at such quotations as to "yield," the Trust first determines
the net change, exclusive of capital changes, during the seven-day period in the
value of a hypothetical pre-existing account having a balance of one Service
Share or Premier 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 Portfolio 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 Service Shares and Premier Shares of a Portfolio 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 Portfolio'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
Portfolio'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 current 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 Portfolio'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 Portfolio'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.
Quotations of yield, effective yield, tax-equivalent current yield and
tax-equivalent effective yield provided by the Trust are carried to at least the
nearest hundredth of one percent. Any fees imposed by Northern Trust, its
affiliates or correspondent banks on their Customers in connection with
investments in Service Shares and Premier Shares of the Portfolios are not
reflected in the calculation of yields for the Portfolios.
The annualized yield of each Portfolio with respect to Shares for the
seven-day period ended November 30, 2003 was as follows*:
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.83% 0.83% N/A N/A
Government Portfolio 0.75% 0.75% N/A N/A
Diversified Assets Portfolio 0.78% 0.78% N/A N/A
Tax-Exempt Portfolio 0.78% 0.79% 1.20% 1.22%
Municipal Portfolio 0.90% 0.91% 1.38% 1.40%
-----------------------------------------------------------------------------------
----------
* An income tax rate of 35% was used in the calculation of tax-equivalent
current yield and tax-equivalent effective yield.
57
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Co-Administrators and Distributor" and "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian." In the absence of such fee
reductions and expense limitations, the annualized yield of each Portfolio with
respect to Shares for the same seven-day period would have been as follows:
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.71% 0.71% N/A N/A
Government Portfolio 0.73% 0.73% N/A N/A
Diversified Assets Portfolio 0.76% 0.76% N/A N/A
Tax-Exempt Portfolio 0.75% 0.76% 1.15% 1.17%
Municipal Portfolio 0.77% 0.78% 1.18% 1.20%
-----------------------------------------------------------------------------------
The annualized yield of each Portfolio with respect to Service Shares for
the seven-day period ended November 30, 2003 was as follows:/*/
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.57% 0.57% N/A N/A
Government Portfolio 0.49% 0.49% N/A N/A
Diversified Assets Portfolio 0.52% 0.52% N/A N/A
Tax-Exempt Portfolio 0.52% 0.53% 0.80% 0.82%
Municipal Portfolio 0.64% 0.65% 0.98% 1.00%
-----------------------------------------------------------------------------------
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Co-Administrators and Distributor" and "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian." In the absence of such fee
reductions and expense limitations, the annualized yield of each Portfolio with
respect to Shares for the same seven-day period would have been as follows:/*/
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.45% 0.45% N/A N/A
Government Portfolio 0.47% 0.47% N/A N/A
Diversified Assets Portfolio 0.50% 0.50% N/A N/A
Tax-Exempt Portfolio 0.49% 0.50% 0.75% 0.77%
Municipal Portfolio 0.51% 0.52% 0.78% 0.80%
-----------------------------------------------------------------------------------
The annualized yield of each Portfolio with respect to Premier Shares
(except Premier Shares of the Municipal and Tax-Exempt Portfolios, which were
not outstanding during the period) for the seven-day period ended November 30,
2003 was as follows:
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.31% 0.31% N/A N/A
Government Portfolio 0.23% 0.23% N/A N/A
Diversified Assets Portfolio 0.26% 0.26% N/A N/A
-----------------------------------------------------------------------------------
----------
* An income tax rate of 35% was used in the calculation of tax-equivalent
current yield and tax-equivalent effective yield.
58
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Co-Administrators and Distributor" and "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian." In the absence of such fee
reductions and expense limitations, the annualized yield of each Portfolio with
respect to Premier Shares (except Premier Shares of the Municipal and Tax-Exempt
Portfolios, which were not outstanding during the period) for the same seven-day
period would have been as follows:
[Download Table]
----------------------------------------------------
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
-----------------------------------------------------------------------------------
Government Select Portfolio 0.19% 0.19% N/A N/A
Government Portfolio 0.21% 0.21% N/A N/A
Diversified Assets Portfolio 0.24% 0.24% N/A N/A
-----------------------------------------------------------------------------------
The Portfolios' yields may not provide a basis for comparison with bank
deposits and other investments which provide a fixed yield for a stated period
of time. Each Portfolio's yields fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. The
annualization of one week's income is not necessarily indicative of future
actual yields. Actual yields will depend on such variables as portfolio quality,
average portfolio maturity, the type of portfolio instruments acquired, changes
in money market interest rates, portfolio expenses and other factors. Yields are
one basis investors may use to analyze a class of shares of the Portfolio as
compared to comparable classes of shares of other money market funds and other
investment vehicles. However, yields of other money market 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 yield.
Each Portfolio may also quote from time to time the total return of its
Shares, Service Shares or Premier Shares in accordance with SEC regulations.
EQUITY AND FIXED INCOME PORTFOLIOS
The performance of a class of shares of a Portfolio may be compared to
those of other mutual funds with similar investment objectives and to bond,
stock 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 class of shares may be compared
to data prepared by Lipper Analytical Services, Inc. or other independent mutual
fund reporting services. In addition, the performance of a class may be compared
to the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Treasury Bond
Index, the Lehman Brothers Intermediate Government/Corporate Bond Index, the S&P
500/ /Index, the Russell 1000 Growth Index, the Russell 2000 Index, the Russell
2000 Growth Index, the Russell Midcap Growth Index, the MSCI EAFE/(R)/ Index or
other unmanaged stock and bond indices, including, but not limited to, the
Merrill Lynch 1-5 Year Government Index, the Merrill Lynch 1-5 Year
Corporate/Government Bond Index, the 3-month LIBOR Index, the 91-day Treasury
Bill Rate, the Composite Index, the J.P. Morgan Non-U.S. Government Bond Index,
and the Dow Jones Industrial Average, a recognized unmanaged index of common
stocks of 30 industry companies listed on the New York Stock Exchange.
Performance data as reported in national financial publications such as Money
Magazine, Morningstar, 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 class of shares of a Portfolio.
The Portfolios calculate their total returns for each class of shares
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 class over the measuring period. Total returns for
each class of shares may also be calculated on an "aggregate total return" basis
for various periods. Aggregate total return reflects the total percentage change
in value over the measuring period. Both methods of calculating total return
reflect changes in the price of the shares and assume that any dividends and
capital gain distributions made by the Portfolio with respect to a class during
the period are reinvested in the shares of that class. When considering average
total return figures for periods longer than one year, it is important to note
that the annual total return of a class for any one year in the period might
have been more or less than the average for the entire period. The Portfolios
may also advertise from time to time the total return of one or more classes of
shares on a year-by-year or other basis for various specified periods by means
of quotations, charts, graphs or schedules.
59
Each Portfolio that advertises an "average annual total return" for a class
of shares computes such 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:
P(1 + T)/n/ = ERV
Where: P = hypothetical initial payment of $1,000;
T = average annual total return;
n = period covered by the computation, expressed in terms of years;
and
ERV = ending redeemable value at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-year (or
other) period at the end of the 1-, 5- or 10-year period (or
fractional portion);
Average annual total return (before taxes) for a specified period is
derived by calculating the actual dollar amount of the investment return on a
$1,000 investment made at the maximum public offering price applicable to the
relevant class at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount, assuming a redemption
at the end of the period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Each Portfolio that advertises an "average annual total return - after
taxes on distributions" for a class of shares computes such return by
determining the average annual compounded rate of return after taxes on
distributions during specified periods that equates the initial amount invested
to the ending redeemable value after taxes on distributions but not after taxes
on redemption according to the following formula:
P(1 + T)/n/ = ATV//D//
Where: P = a hypothetical initial payment of $1, 000
T = average annual total return (after taxes on distributions)
n = number of years
ATV//D// = ending value of a hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10 year periods at the end of
the 1-, 5-, or 10- year periods (or fractional portion),
after taxes on distributions but not after taxes on
redemption.
Average annual total return (after taxes on distributions) for a specified
period is derived by calculating the actual dollar amount of the investment
return on a $1,000 investment made at the maximum public offering price
applicable to the relevant class at the beginning of the period, and then
calculating the annual compounded rate of return (after federal income taxes on
distributions but not redemptions) which would produce that amount, assuming a
redemption at the end of the period. This calculation assumes a complete
redemption of the investment but further assumes that the redemption has no
federal income tax consequences. This calculation also assumes that all
dividends and distributions, less the federal income taxes due on such
distributions, are reinvested at net asset value on the reinvestment dates
during the period. In calculating the impact of federal income taxes due on
distributions, the federal income tax rates used correspond to the tax character
of each component of the distributions (e.g., ordinary income rate for ordinary
income distributions, short-term capital gain rate for short-term capital gain
distributions and long-term capital gain rate for long-term capital gain
distributions). The highest individual marginal federal income tax rate in
effect on the reinvestment date is applied to each component of the
distributions on the reinvestment date. These tax rates may vary over the
measurement period. The effect of applicable tax credits, such as the foreign
tax credit, is also taken into account in accordance with federal tax law. The
calculation disregards (i) the effect of phase-outs of certain exemptions,
deductions and credits at various income levels, (ii) the impact of the federal
alternative minimum tax and (iii) the potential tax liabilities other than
federal tax liabilities (e.g. state and local taxes).
60
Each Portfolio that advertises an "average annual total return-after taxes
on distributions and redemption" for a class of shares computes such return by
determining the average annual compounded rate of return after taxes on
distributions and redemption during specific periods that equates the initial
amount invested to the ending redeemable value after taxes on distributions and
redemption according to the following formula:
P(1+T)/n/= ATV//DR//
Where: P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions
and redemption)
n = number of years
ATV//DR// = ending value of a hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10- year periods (or fractional portion),
after taxes on distributions and redemption.
Average annual total return (after taxes) on distributions and redemptions
for a specified period is derived by calculating the actual dollar amount of the
investment return on a $1,000 investment made at the maximum public offering
price applicable to the relevant class at the beginning of the period, and then
calculating the annual compounded rate of return (after federal income taxes on
distributions and redemptions) which would produce that amount, assuming a
redemption at the end of the period. This calculation assumes a complete
redemption of the investment but further assumes that the redemption has no
federal income tax consequences. This calculation also assumes that all
dividends and distributions, less the federal income taxes due on such
distributions, are reinvested at net asset value on the reinvestment dates
during the period. In calculating the federal income taxes due on distributions,
the federal income tax rates used correspond to the tax character of each
component of the distributions (e.g., ordinary income rate for ordinary income
distributions, short-term capital gain rate for short-term capital gain
distributions and long-term capital gain rate for long-term capital gain
distributions). The highest individual marginal federal income tax rate in
effect on the reinvestment date is applied to each component of the
distributions on the reinvestment date. These tax rates may vary over the
measurement period. The effect of applicable tax credits, such as the foreign
tax credit, is taken into account in accordance with federal tax law. The
calculation disregards (i) the effect of phase-outs of certain exemptions,
deductions and credits at various income levels, (ii) the impact of the federal
alternative minimum tax and (iii) the potential tax liabilities other than
federal tax liabilities (e.g., state and local taxes). In calculating the
federal income taxes due on redemptions, capital gains taxes resulting from a
redemption are subtracted from the redemption proceeds and the tax benefits from
capital losses resulting from the redemption are added to the redemption
proceeds. The highest federal individual capital gains tax rate in effect on the
redemption date is used in such calculation. The federal income tax rates used
correspond to the tax character of any gains or losses (e.g., short-term or
long-term).
Each Portfolio that advertises an "aggregate total return" for a class of
shares computes such 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:
T = [(ERV/P)]-1
The Small Company Index and International Equity Index Portfolios may
advertise total return data without reflecting the 0.50% and 1.00% portfolio
transaction fee in accordance with the rules of the SEC. Quotations which do not
reflect the fee will, of course, be higher than quotations which do.
The calculations set forth below are made assuming that (i) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, (ii) all recurring fees
charged to all shareholder accounts are included, and (iii) the portfolio
transaction fee is taken into account for purchases of shares of the Small
Company Index Portfolio and the International Equity Index Portfolio. 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. Total return
calculations excluding the transaction fee are also provided for the Small
Company Index Portfolio and the International Equity Index Portfolio.
The average annual total returns, aggregate total returns, average annual
total returns-after taxes on distributions and average annual total
returns-after taxes on distributions and redemptions shown below for the Bond,
Diversified Growth, Equity Index, Short-Intermediate Bond, Small Company Index
International Growth and U.S.
61
Treasury Index Portfolios include, for periods prior to the commencement of
the Portfolios' operations, the performance of predecessor collective funds
adjusted to reflect the higher estimated fees and expenses applicable to such
Portfolios' Class A Shares at the time of their inception. Although all such
predecessor collective funds were managed by Northern Trust for the periods
stated in a manner and pursuant to investment objectives that were equivalent in
all material respects to the management and investment objectives of the
corresponding Portfolios, such predecessor collective funds were not registered
under the 1940 Act and were not subject to certain investment restrictions
imposed by the 1940 Act. If they had been registered under the 1940 Act,
performance might have been adversely affected. The average annual total
returns, average annual total returns-after taxes on distributions, average
annual total returns-after taxes on distributions and redemptions, and aggregate
total returns shown for the Portfolios for their Class C and/or Class D Shares
also include, for the periods prior to the inception of such classes, the
performance of the Portfolios' Class A Shares. Because the fees and expenses of
Class C and Class D Shares are, respectively, 0.24% and 0.39% higher than those
of Class A Shares, actual performance for periods prior to the inception of
Class C and Class D Shares would have been lower if such higher fees and
expenses had been taken into account.
The average annual total returns, average annual total returns-after taxes
on distributions, average annual total returns-after taxes on distributions and
redemptions and aggregate total returns of each Portfolio with respect to Class
A, Class C and Class D Shares, as applicable, are shown below with and without
fee waivers and expense reimbursements by the Portfolios' current and former
administrators and investment advisers.
62
EQUITY PORTFOLIOS
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Diversified Growth/1/
Class A
with fee waivers and
expense reimbursements 15.58 (0.28) 8.18 -- 15.58 (1.38) 119.62 --
without fee waivers and
expense reimbursements 15.37 (0.56) 7.85 -- 15.37 (2.78) 116.28 --
Class D
with fee waivers and
expense reimbursements 15.07 (0.67) 7.81 -- 15.07 (3.29) 112.17 --
without fee waivers and
expense reimbursements 14.86 (0.95) 7.48 -- 14.86 (4.69) 108.83 --
Focused Growth/2/
Class A
with fee waivers and
expense reimbursements 9.45 (1.06) 7.81 -- 9.45 (5.19) 112.10 --
without fee waivers and
expense reimbursements 9.31 (1.34) 7.42 -- 9.31 (6.59) 108.19 --
Class C
with fee waivers and
expense reimbursements 9.30 (1.28) 7.63 -- 9.30 (6.24) 108.52 --
without fee waivers and
expense reimbursements 9.16 (1.56) 7.24 -- 9.16 (7.64) 104.61 --
Class D
with fee waivers and
expense reimbursements 9.11 (1.42) 7.45 -- 9.11 (6.89) 105.09 --
without fee waivers and
expense reimbursements 8.97 (1.70) 7.06 -- 8.97 (8.29) 101.18 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Total Returns-After Taxes on Distributions and
Taxes on Distributions Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Diversified Growth/1/
Class A
with fee waivers and
expense reimbursements 15.32 (3.74) 5.42 -- 10.08 (0.93) 6.30 --
without fee waivers and
expense reimbursements 15.11 (4.02) 5.09 -- 9.87 (1.21) 5.97 --
Class D
with fee waivers and
expense reimbursements 14.98 (4.08) 5.09 -- 9.78 (1.18) 6.02 --
without fee waivers and
expense reimbursements 14.77 (4.36) 4.76 -- 9.57 (1.46) 5.69 --
Focused Growth/2/
Class A
with fee waivers and
expense reimbursements 9.45 (2.41) 5.99 -- 6.15 (1.05) 6.15 --
without fee waivers and
expense reimbursements 9.31 (2.69) 5.60 -- 6.01 (1.33) 5.76 --
Class C
with fee waivers and
expense reimbursements 9.30 (2.64) 5.82 -- 6.04 (1.23) 6.00 --
without fee waivers and
expense reimbursements 9.16 (2.92) 5.43 -- 5.90 (1.51) 5.61 --
Class D
with fee waivers and
expense reimbursements 9.11 (2.80) 5.63 -- 5.92 (1.34) 5.84 --
without fee waivers and
expense reimbursements 8.97 (3.08) 5.24 -- 5.78 (1.62) 5.45 --
63
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Equity Index/3/
Class A
with fee waivers and
expense reimbursements 14.78 (0.69) 10.36 -- 14.78 (3.42) 167.90 --
without fee waivers and
expense reimbursements 14.64 (0.89) 10.11 -- 14.64 (4.43) 165.44 --
Class C
with fee waivers and
expense reimbursements 14.56 (0.92) 10.15 -- 14.56 (4.53) 162.94 --
without fee waivers and
expense reimbursements 14.42 (1.12) 9.90 -- 14.42 (5.54) 160.48 --
Class D
with fee waivers and
expense reimbursements 14.37 (1.03) 10.02 -- 14.37 (5.05) 159.88 --
without fee waivers and
expense reimbursements 14.23 (1.23) 9.77 -- 14.23 (6.06) 157.42 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Total Returns-After Taxes on Distributions and
Taxes on Distributions Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Equity Index/3/
Class A
with fee waivers and
expense reimbursements 13.92 (2.68) 8.33 -- 10.08 (1.07) 8.35 --
without fee waivers and
expense reimbursements 13.78 (2.88) 8.08 -- 9.94 (1.27) 8.10 --
Class C
with fee waivers and
expense reimbursements 13.75 (2.83) 7.45 -- 9.90 (1.21) 7.48 --
without fee waivers and
expense reimbursements 13.61 (3.03) 7.20 -- 9.76 (1.41) 7.23 --
Class D
with fee waivers and
expense reimbursements 13.58 (2.89) 8.10 -- 9.76 (1.27) 8.12 --
without fee waivers and
expense reimbursements 13.44 (3.09) 7.85 -- 9.62 (1.47) 7.87 --
64
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Small Company Index/4/
Class A
with fee waivers and
expense reimbursements
and portfolio
transaction fee 35.36 7.56 9.17 -- 35.36 43.96 140.35 --
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 36.11 7.68 9.22 -- 36.11 44.74 141.62 --
without fee waivers and
expense reimbursements
and portfolio
transaction fee 35.03 7.21 8.77 -- 35.03 42.21 136.32 --
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 35.78 7.33 8.82 -- 35.78 42.99 137.59 --
Class C/8/
with fee waivers and
expense reimbursements
and portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
with fee waivers and
expense reimbursements
but without portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
without fee waivers and
expense reimbursements
and portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
without fee waivers and
expense reimbursements
but without portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Returns-After Taxes on Average Annual Total Returns-After
Distributions Taxes on Distributions and Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Small Company Index/4/
Class A
with fee waivers and
expense reimbursements
and portfolio
transaction fee 34.79 4.94 6.63 -- 22.84 5.03 6.52 --
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 35.53 5.05 6.68 -- 23.32 5.13 6.57 --
without fee waivers and
expense reimbursements
and portfolio
transaction fee 34.46 4.59 6.23 -- 22.51 4.68 6.12 --
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 35.20 4.70 6.28 -- 22.99 4.78 6.17 --
Class C/8/
with fee waivers and
expense reimbursements
and portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
with fee waivers and
expense reimbursements
but without portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
without fee waivers and
expense reimbursements
and portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
without fee waivers and
expense reimbursements
but without portfolio
transaction fee See footnote 8 See footnote 8
(Page 71) (Page 71)
65
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Class D
with fee waivers and
expense reimbursements
and portfolio
transaction fee 34.79 6.99 8.77 -- 34.79 40.20 131.78 --
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 35.40 7.11 8.83 -- 35.40 40.96 133.00 --
without fee waivers and
expense reimbursements
and portfolio
transaction fee 34.46 6.64 8.37 -- 34.46 38.45 127.75 --
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 35.07 6.76 8.43 -- 35.07 39.21 128.97 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Returns-After Taxes on Average Annual Total Returns-After
Distributions Taxes on Distributions and Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Class D
with fee waivers and
expense reimbursements
and portfolio
transaction fee 34.37 4.53 6.33 -- 22.51 4.65 6.24 --
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 34.98 4.64 6.38 -- 22.90 4.75 6.29 --
without fee waivers and
expense reimbursements
and portfolio
transaction fee 34.04 4.18 5.93 -- 22.18 4.30 5.84 --
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 34.65 4.29 5.98 -- 22.57 4.40 5.89 --
66
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Growth/5/
Class A
with fee waivers and
expense reimbursements 24.05 0.78 5.01 -- 24.05 3.97 63.05 --
without fee waivers and
expense reimbursements 23.90 0.56 4.70 -- 23.90 2.85 59.95 --
Class D
with fee waivers and
expense reimbursements 23.54 0.77 4.83 -- 23.54 3.93 60.28 --
without fee waivers and
expense reimbursements 23.39 0.55 4.52 -- 23.39 2.81 57.18 --
Balanced/6/
Class A
with fee waivers and
expense reimbursements 11.69 3.34 7.76 -- 11.69 17.85 111.16 --
without fee waivers and
expense reimbursements 11.51 3.01 7.28 -- 11.51 16.18 106.41 --
Class C
with fee waivers and
expense reimbursements 11.54 3.13 7.57 -- 11.54 16.66 107.45 --
without fee waivers and
expense reimbursements 11.36 2.80 7.09 -- 11.36 14.99 102.70 --
Class D
with fee waivers and
expense reimbursements 11.24 2.94 7.44 -- 11.24 15.61 104.86 --
without fee waivers and
expense reimbursements 11.06 2.61 6.96 -- 11.06 13.94 100.11 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Returns-After Taxes Taxes on Distributions and
on Distributions Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Growth/5/
Class A
with fee waivers and
expense reimbursements 23.61 (1.93) 2.96 -- 15.53 (0.57) 3.28 --
without fee waivers and
expense reimbursements 23.46 (2.15) 2.65 -- 15.38 (0.79) 2.97 --
Class D
with fee waivers and
expense reimbursements 23.46 (1.83) 2.85 -- 15.28 (0.50) 3.17 --
without fee waivers and
expense reimbursements 23.31 (2.05) 2.54 -- 15.13 (0.72) 2.86 --
Balanced/6/
Class A
with fee waivers and
expense reimbursements 11.21 1.20 5.88 -- 7.72 1.92 5.80 --
without fee waivers and
expense reimbursements 11.03 0.87 5.40 -- 7.54 1.59 5.32 --
Class C
with fee waivers and
expense reimbursements 11.12 1.09 5.76 -- 7.61 1.81 5.68 --
without fee waivers and
expense reimbursements 10.94 0.76 5.28 -- 7.43 1.48 5.20 --
Class D
with fee waivers and
expense reimbursements 10.87 0.94 5.65 -- 7.40 1.67 5.58 --
without fee waivers and
expense reimbursements 10.69 0.61 5.17 -- 7.22 1.34 5.10 --
67
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Equity
Index/7/
Class A
with fee waivers and
expense reimbursements
and portfolio
transaction fee 22.96 (1.19) -- 2.09 22.96 (5.81) -- 14.75
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 24.22 (0.99) -- 2.24 24.22 (4.87) -- 15.89
without fee waivers and
expense reimbursements
and portfolio
transaction fee 22.77 (1.50) -- 1.72 22.77 (7.37) -- 12.31
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 24.03 (1.30) -- 1.87 24.03 (6.43) -- 13.45
Class D
with fee waivers and
expense reimbursements
and portfolio
transaction fee 21.71 (1.88) -- 1.53 21.71 (9.07) -- 10.68
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 22.98 (1.69) -- 1.69 22.98 (8.16) -- 11.79
without fee waivers and
expense reimbursements
and portfolio
transaction fee 21.52 (2.19) -- 1.16 21.52 (10.63) -- 8.24
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 22.79 (2.00) -- 1.32 22.79 (9.72) -- 9.35
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Returns-After Taxes Taxes on Distributions and
on Distributions Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Equity
Index/7/
Class A
with fee waivers and
expense reimbursements
and portfolio
transaction fee 22.11 (2.16) -- 1.24 14.73 (1.38) -- 1.43
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 23.37 (1.96) -- 1.39 15.55 (1.22) -- 1.56
without fee waivers and
expense reimbursements
and portfolio
transaction fee 21.92 (2.47) -- 0.87 14.54 (1.69) -- 1.06
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 23.18 (2.27) -- 1.02 15.36 (1.53) -- 1.19
Class D
with fee waivers and
expense reimbursements
and portfolio
transaction fee 20.91 (2.75) -- 0.76 13.94 (1.89) -- 1.01
with fee waivers and
expense reimbursements
but without portfolio
transaction fee 22.18 (2.55) -- 0.92 14.76 (1.73) -- 1.14
without fee waivers and
expense reimbursements
and portfolio
transaction fee 20.72 (3.06) -- 0.39 13.75 (2.20) -- 0.64
without fee waivers and
expense reimbursements
but without portfolio
transaction fee 21.99 (2.86) -- 0.55 14.57 (2.04) -- 0.77
68
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Small Company Growth/9/
Class A
with fee waivers and
expense reimbursements 31.99 -- -- (4.93) 31.99 -- -- (18.30)
without fee waivers and
expense reimbursements 31.55 -- -- (5.59) 31.55 -- -- (20.94)
Class C
with fee waivers and
expense reimbursements See footnote 9 See footnote 9
(Page 71) (Page 71)
without fee waivers and
expense reimbursements See footnote 9 See footnote 9
(Page 71) (Page 71)
Class D
with fee waivers and
expense reimbursements 31.44 -- -- (5.10) 31.44 -- -- (18.90)
without fee waivers and
expense reimbursements 31.00 -- -- (5.76) 31.00 -- -- (21.54)
Mid Cap Growth/10/
Class A
with fee waivers and
expense reimbursements 25.44 -- -- (0.10) 25.44 -- -- (0.40)
without fee waivers and
expense reimbursements 25.05 -- -- (0.75) 25.05 -- -- (2.95)
Class C
with fee waivers and
expense reimbursements 25.32 -- -- (0.26) 25.32 -- -- (1.00)
without fee waivers and
expense reimbursements 24.93 -- -- (0.91) 24.93 -- -- (3.55)
Class D
with fee waivers and
expense reimbursements 25.00 -- -- (0.39) 25.00 -- -- (1.50)
without fee waivers and
expense reimbursements 24.61 -- -- (1.04) 24.61 -- -- (4.05)
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Returns-After Taxes Taxes on Distributions and
on Distributions Redemptions
--------------------------------------- ---------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Small Company Growth/9/
Class A
with fee waivers and
expense reimbursements 31.99 -- -- (4.93) 20.79 -- -- (4.14)
without fee waivers and
expense reimbursements 31.55 -- -- (5.59) 20.35 -- -- (4.80)
Class C
with fee waivers and
expense reimbursements See footnote 9 See footnote 9
(Page 71) (Page 71)
without fee waivers and
expense reimbursements See footnote 9 See footnote 9
(Page 71) (Page 71)
Class D
with fee waivers and
expense reimbursements 31.44 -- -- (5.10) 20.44 -- -- (4.28)
without fee waivers and
expense reimbursements 31.00 -- -- (5.76) 20.00 -- -- (4.94)
Mid Cap Growth/10/
Class A
with fee waivers and
expense reimbursements 25.44 -- -- (0.10) 16.54 -- -- (0.09)
without fee waivers and
expense reimbursements 25.05 -- -- (0.75) 16.15 -- -- (0.74)
Class C
with fee waivers and
expense reimbursements 25.32 -- -- (0.26) 16.46 -- -- (0.22)
without fee waivers and
expense reimbursements 24.93 -- -- (0.91) 16.07 -- -- (0.87)
Class D
with fee waivers and
expense reimbursements 25.00 -- -- (0.39) 16.25 -- -- (0.33)
without fee waivers and
expense reimbursements 24.61 -- -- (1.04) 15.86 -- -- (0.98)
69
FOOTNOTES
---------
1. For Class D Shares, performance information from January 11, 1993 to
September 14, 1994 (commencement of Class D Shares) is that of Class A
Shares. Because the fees and expenses of Class D Shares are 0.39% higher
than those of Class A Shares, actual performance would have been lower had
such higher fees and expenses been taken into account. The predecessor
collective fund has been managed in a manner and pursuant to investment
objectives equivalent in all material respects to the management and
investment objective of the Portfolio for the periods shown. The
performance information of the predecessor collective fund is adjusted to
reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
2. For Class C and D Shares of the Focused Growth Portfolio, performance from
July 1, 1993 to June 14, 1996 (commencement of Class C Shares) and December
8, 1994 (commencement of Class D Shares), respectively, is that of Class A
Shares. Class A Shares commenced operations on July 1, 1993. Because the
fees and expenses of Class C and D Shares are 0.24% and 0.39%,
respectively, higher than those of Class A Shares, actual performance would
have been lower had such higher expenses been taken into account.
3. For Class C and D Shares, performance information from January 11, 1993 to
September 28, 1995 (commencement of Class C Shares) and September 14, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and D Shares are 0.24% and 0.39%,
respectively, higher than those of Class A Shares, actual performance would
have been lower had such higher fees and expenses been taken into account.
The predecessor collective fund has been managed in a manner and pursuant
to investment objectives equivalent in all material respects to the
management and investment objective of the Portfolio for the periods shown.
The performance information of the predecessor collective fund is adjusted
to reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
4. For Class D Shares, performance information from January 11, 1993 to
December 8, 1994 (commencement of Class D Shares) is that of Class A
Shares. Because the fees and expenses of Class D Shares are 0.39% higher
than those of Class A Shares, actual performance would have been lower had
such higher fees and expenses been taken into account. The predecessor
collective fund was managed in a manner and pursuant to investment
objectives equivalent in all material respects to the management and
investment objective of the Portfolio for the periods shown. The
performance information of the predecessor collective fund is adjusted to
reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
5. For Class A and D Shares of the International Growth Portfolio, performance
data prior to March 28, 1994 (commencement of Portfolio) is that of a
predecessor collective fund. For Class D Shares, performance data from
March 28, 1994 to November 16, 1994 (commencement of Class D Shares) and
from August 23, 1999 to June 14, 2001 is that of Class A Shares. Because
the fees and expenses of Class D Shares are 0.39% higher than those of
Class A Shares, actual performance would have been lower had such higher
fees and expenses been taken into account. The predecessor collective fund
has been managed in a manner and pursuant to investment objectives
equivalent in all material respects to the management and investment
objective of the Portfolio for the periods shown. The performance
information of the predecessor collective fund is adjusted to reflect the
higher fees and expenses applicable to Class A Shares at the time of their
inception.
6. For Class C and D Shares of the Balanced Portfolio, performance from July
1, 1993 to December 29, 1995 (commencement of Class C Shares) and February
20, 1996 (commencement of Class D Shares), respectively, is that of Class A
Shares. Class A Shares commenced operations on July 1, 1993. Because the
fees and expenses of Class C and Class D Shares are 0.24% and 0.39%,
respectively, higher than those of Class A Shares, actual performance would
have been lower had such higher fees and expenses been taken into account.
7. For Class D Shares of the International Equity Index Portfolio, performance
from April 1, 1997 to October 5, 1998 (commencement of Class D Shares) is
that of Class A Shares. Class A Shares commenced operations on April 1,
1997. Because the fees and expenses of Class D Shares are 0.39% higher than
those of Class A Shares, actual performance would have been lower had such
higher fees and expenses been taken into account.
70
8. From June 30, 1999 to the date of the Additional Statement, no Class C
Shares of the Small Company Index Portfolio were held by shareholders.
Class C Shares of the Small Company Index Portfolio will have substantially
similar annual returns when compared with Class A Shares of the Small
Company Index Portfolio because Shares of both Class A and C are invested
in the same portfolio of securities. The annual returns of Class A and C
Shares will differ only to the extent that the share classes do not have
the same expenses. Annual returns reflected since inception will also
differ as the classes do not have the same inception date.
9. As of the date of the Additional Statement, Class C Shares of the Small
Company Growth Portfolio had not yet been issued. The inception date of the
Small Company Growth Portfolio was December 1, 1999. For Class D Shares,
performance information from December 1, 1999 to June 13, 2002
(commencement of Class D Shares) is that of Class A Shares. Because the
fees and expenses of Class D Shares are 0.39% higher than those of Class A
Shares, actual performance would have been lower had such higher fees and
expenses been taken into account.
10. For Class C and D Shares of the Mid Cap Growth Portfolio, performance from
December 31, 1999 to April 4, 2001 (commencement of Class C Shares) and
January 29, 2001 (commencement of Class D Shares) respectively, is that of
Class A Shares. Class A Shares commenced operations on December 31, 1999.
Because the fees and expenses of Class C and D Shares are 0.24% and 0.39%
respectively, higher than those of Class A Shares, actual performance would
have been lower had such higher fees and expenses been taken into account.
71
FIXED INCOME PORTFOLIOS
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Core Bond
Class A
with fee waivers and
expense reimbursements 5.04 -- -- 5.70 5.04 -- -- 15.98
without fee waivers and
expense reimbursements 4.81 -- -- 5.33 4.81 -- -- 14.98
Class C
with fee waivers and
expense reimbursements 4.76 -- -- 5.57 4.76 -- -- 15.59
without fee waivers and
expense reimbursements 4.53 -- -- 5.20 4.53 -- -- 14.59
Class D
with fee waivers and
expense reimbursements 4.80 -- -- 5.59 4.80 -- -- 15.67
without fee waivers and
expense reimbursements 4.57 -- -- 5.22 4.57 -- -- 14.67
Bond/1/
Class A
with fee waivers and
expense reimbursements 6.45 5.48 6.73 -- 6.45 30.56 91.86 --
without fee waivers and
expense reimbursements 6.27 5.17 6.35 -- 6.27 29.01 88.04 --
Class C
with fee waivers and
expense reimbursements 6.24 5.24 6.52 -- 6.24 29.08 88.10 --
without fee waivers and
expense reimbursements 6.06 4.93 6.14 -- 6.06 27.53 84.28 --
Class D
with fee waivers and
expense reimbursements 6.00 5.02 6.32 -- 6.00 27.73 84.62 --
without fee waivers and
expense reimbursements 5.82 4.71 5.94 -- 5.82 26.18 80.80 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Total Returns-After Taxes on Distributions and
Taxes on Distributions Redemptions
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Core Bond
Class A
with fee waivers and
expense reimbursements 3.68 -- -- 3.56 3.26 -- -- 3.54
without fee waivers and
expense reimbursements 3.45 -- -- 3.19 3.03 -- -- 3.17
Class C
with fee waivers and
expense reimbursements 3.42 -- -- 3.45 3.08 -- -- 3.44
without fee waivers and
expense reimbursements 3.19 -- -- 3.08 2.85 -- -- 3.07
Class D
with fee waivers and
expense reimbursements 3.55 -- -- 3.52 3.10 -- -- 3.49
without fee waivers and
expense reimbursements 3.32 -- -- 3.15 2.87 -- -- 3.12
Bond/1/
Class A
with fee waivers and
expense reimbursements 4.74 2.85 3.99 -- 4.16 3.03 4.02 --
without fee waivers and
expense reimbursements 4.56 2.54 3.61 -- 3.98 2.72 3.64 --
Class C
with fee waivers and
expense reimbursements 4.63 2.71 3.87 -- 4.03 2.89 3.89 --
without fee waivers and
expense reimbursements 4.45 2.40 3.49 -- 3.85 2.58 3.51 --
Class D
with fee waivers and
expense reimbursements 4.44 2.57 3.74 -- 3.87 2.75 3.77 --
without fee waivers and
expense reimbursements 4.26 2.26 3.36 -- 3.69 2.44 3.39 --
72
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Intermediate Bond/2/
Class A
with fee waivers and
expense reimbursements 5.40 5.69 -- 5.87 5.40 31.90 -- 43.52
without fee waivers and
expense reimbursements 5.09 5.23 -- 5.29 5.09 29.60 -- 39.85
Class D
with fee waivers and
expense reimbursements 4.95 5.30 -- 5.53 4.95 29.47 -- 40.64
without fee waivers and
expense reimbursements 4.64 4.84 -- 4.95 4.64 27.17 -- 36.97
Short-Intermediate Bond/3/
Class A
with fee waivers and
expense reimbursements 4.01 5.14 5.70 -- 4.01 28.49 74.00 --
without fee waivers and
expense reimbursements 3.82 4.81 5.28 -- 3.82 26.84 69.84 --
Class D
with fee waivers and
expense reimbursements 3.61 4.73 5.32 -- 3.61 26.01 67.85 --
without fee waivers and
expense reimbursements 3.42 4.40 4.90 -- 3.42 24.36 63.69 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Total Returns-After Taxes on Distributions and
Taxes on Distributions(%) Redemptions(%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
Intermediate Bond/2/
Class A
with fee waivers and
expense reimbursements 4.17 3.60 -- 3.71 3.50 3.53 -- 3.64
without fee waivers and
expense reimbursements 3.86 3.14 -- 3.13 3.19 3.07 -- 3.06
Class D
with fee waivers and
expense reimbursements 3.86 3.37 -- 3.51 3.21 3.29 -- 3.44
without fee waivers and
expense reimbursements 3.55 2.91 -- 2.93 2.90 2.83 -- 2.86
Short-Intermediate Bond/3/
Class A
with fee waivers and
expense reimbursements 2.94 2.64 3.13 -- 2.59 2.80 3.23 --
without fee waivers and
expense reimbursements 2.75 2.31 2.71 -- 2.40 2.47 2.81 --
Class D
with fee waivers and
expense reimbursements 2.68 2.39 2.89 -- 2.33 2.56 2.99 --
without fee waivers and
expense reimbursements 2.49 2.06 2.47 -- 2.14 2.23 2.57 --
73
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
U.S. Treasury Index/4/
Class A
with fee waivers and
expense reimbursements 3.78 5.73 6.41 -- 3.78 32.15 86.15 --
without fee waivers and
expense reimbursements 3.54 5.31 5.90 -- 3.54 30.03 81.02 --
Class C
with fee waivers and
expense reimbursements 3.58 5.59 6.27 -- 3.58 31.29 83.71 --
without fee waivers and
expense reimbursements 3.34 5.17 5.76 -- 3.34 29.17 78.58 --
Class D
with fee waivers and
expense reimbursements 3.42 5.34 6.05 -- 3.42 29.69 79.95 --
without fee waivers and
expense reimbursements 3.18 4.92 5.54 -- 3.18 27.57 74.82 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual
Average Annual Total Returns-After Total Returns-After Taxes
Taxes on Distributions on Distributions and Redemptions
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
U.S. Treasury Index/4/
Class A
with fee waivers and
expense reimbursements 2.25 5.29 6.11 -- 2.89 5.30 6.06 --
without fee waivers and
expense reimbursements 2.01 4.87 5.60 -- 2.65 4.88 5.55 --
Class C
with fee waivers and
expense reimbursements 2.13 5.17 5.98 -- 2.75 5.16 5.93 --
without fee waivers and
expense reimbursements 1.89 4.75 5.47 -- 2.51 4.74 5.42 --
Class D
with fee waivers and
expense reimbursements 2.01 4.92 5.77 -- 2.65 4.93 5.72 --
without fee waivers and
expense reimbursements 1.77 4.50 5.26 -- 2.41 4.51 5.21 --
74
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
U.S. Government
Securities/5/
Class A
with fee waivers and
expense reimbursements 2.92 5.64 5.69 -- 2.92 31.54 73.87 --
without fee waivers and
expense reimbursements 2.72 5.29 5.21 -- 2.72 29.77 69.04 --
Class C/6/
with fee waivers and See Footnote 6 See Footnote 6
expense reimbursements (Page 77) (Page 77)
without fee waivers and See Footnote 6 See Footnote 6
expense reimbursements (Page 77) (Page 77)
Class D
with fee waivers and
expense reimbursements 2.48 5.22 5.30 -- 2.48 28.97 67.55 --
without fee waivers and
expense reimbursements 2.28 4.87 4.82 -- 2.28 27.20 62.72 --
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual
Average Annual Total Returns-After Total Returns-After Taxes
Taxes on Distributions on Distributions and Redemptions
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
U.S. Government
Securities/5/
Class A
with fee waivers and
expense reimbursements 1.32 3.48 3.50 -- 1.92 3.48 3.48 --
without fee waivers and
expense reimbursements 1.12 3.13 3.02 -- 1.72 3.13 3.00 --
Class C/6/
with fee waivers and See Footnote 6 See Footnote 6
expense reimbursements (Page 77) (Page 77)
without fee waivers and See Footnote 6 See Footnote 6
expense reimbursements (Page 77) (Page 77)
Class D
with fee waivers and
expense reimbursements 1.01 3.22 3.25 -- 1.64 3.22 3.24 --
without fee waivers and
expense reimbursements 0.81 2.87 2.77 -- 1.44 2.87 2.76 --
75
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns (%) Aggregate Total Returns (%)
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Bond
Class A
with fee waivers and
expense reimbursements 18.32 3.57 -- 5.89 18.32 19.17 -- 73.99
without fee waivers and
expense reimbursements 17.69 3.04 -- 5.35 17.69 16.51 -- 68.72
Class D/7/
with fee waivers and
expense reimbursements 17.48 3.40 -- 5.80 17.48 18.21 -- 72.59
Without fee waivers and
Expense reimbursements 16.85 2.87 -- 5.26 16.85 15.55 -- 67.32
[Enlarge/Download Table]
For Periods Ended November 30, 2003
Average Annual Total Returns-After
Average Annual Total Returns-After Taxes on Distributions and
Taxes on Distributions Redemptions
------------------------------------ ------------------------------------
Since Since
1 Year 5 Years 10 Years Inception 1 Year 5 Years 10 Years Inception
------ ------- -------- --------- ------ ------- -------- ---------
International Bond
Class A
with fee waivers and
expense reimbursements 13.82 2.00 -- 3.76 11.15 2.04 -- 3.68
without fee waivers and
expense reimbursements 13.19 1.47 -- 3.22 10.52 1.51 -- 3.14
Class D/7/
with fee waivers and
expense reimbursements 13.02 1.84 -- 3.67 10.62 1.90 -- 3.61
Without fee waivers and
Expense reimbursements 12.39 1.31 -- 3.13 9.99 1.37 -- 3.07
76
FOOTNOTES
---------
1. For Class C and D Shares, performance information from January 11, 1993 to
July 3, 1995 (commencement of Class C Shares) and September 14, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and D Shares are 0.24% and 0.39%,
respectively, higher than those of Class A Shares, actual performance would
have been lower had such fees and expenses been taken into account. The
predecessor collective fund has been managed in a manner and pursuant to
investment objectives equivalent in all material respects to the management
and investment objective of the Portfolio for the periods shown. The
performance information of the predecessor collective fund is adjusted to
reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
2. For Class D Shares of the Intermediate Bond Portfolio, performance
information from August 1, 1997 to October 2, 1998 (commencement of Class D
Shares) is that of Class A Shares. Class A Shares commenced operations on
August 1, 1997. Because the fees and expenses of Class D Shares are 0.39%
higher than those of Class A Shares, actual performance would have been
lower had such higher fees and expenses been taken into account.
3. For Class D Shares, performance information from January 11, 1993 to
September 14, 1994 (commencement of Class D Shares) is that of Class A
Shares. Because the fees and expenses of Class D Shares are 0.39% higher
than those of Class A Shares, actual performance would have been lower had
such higher fees and expenses been taken into account. The predecessor
collective fund has been managed in a manner and pursuant to investment
objectives equivalent in all material respects to the management and
investment objective of the Portfolio for the periods shown. The
performance information of the predecessor collective fund is adjusted to
reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
4. For Class C and D Shares, performance information from January 11, 1993 to
October 6, 1998 (commencement of Class C Shares) and November 16, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and D Shares are 0.24% and 0.39%,
respectively, higher than those of Class A Shares, actual performance would
have been lower had such higher fees and expenses been taken into account.
The predecessor collective fund has been managed in a manner and pursuant
to investment objectives equivalent in all material respects to the
management and investment objective of the Portfolio for the periods shown.
The performance information of the predecessor collective fund is adjusted
to reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
5. For Class D Shares of the U.S. Government Securities Portfolio, performance
information prior to September 15, 1994 (commencement of Class D Shares) is
that of Class A Shares. Class A Shares commenced operations April 5, 1993.
Because fees and expenses of Class D Shares are 0.39%, higher than those of
Class A Shares, actual performance would have been lower had such higher
fees and expenses been taken into account.
6. From February 10, 1999 to the date of the Prospectus, no Class C Shares of
the U.S. Government Securities Portfolio were held by shareholders. Class C
Shares of the U.S. Government Securities Portfolio will have substantially
similar annual returns when compared with Class A Shares of the U.S.
Government Securities Portfolio because Shares of both Class A and C are
invested in the same portfolio of securities. The annual returns of Class A
and C Shares will differ only to the extent that the share classes do not
have the same expenses. Annual returns reflected since inception will also
differ as the classes do not have the same inception date.
7. Class D Shares of the International Bond Portfolio were issued on November
20, 1995 and were redeemed on August 22, 1999. Class D Shares were reissued
on September 5, 2002. Performance information from August 23, 1999 to
September 4, 2002 is that of Class A Shares. Because the fees and expenses
of Class D Shares are higher than those of Class A Shares, actual
performance would have been lower if these higher fees and expenses had
been taken into account.
77
The yield of a class of shares in the Balanced, Bond, Core Bond,
Intermediate Bond, International Bond, Short-Intermediate Bond, U.S. Government
Securities and U.S. Treasury Index Portfolios is computed based on the net
income of such class during a 30-day (or one month) period (which period will be
identified in connection with the particular yield quotation). More
specifically, a Portfolio's yield for a class of shares is computed by dividing
the per share net income for the class during a 30-day (or one month) period by
the net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis.
The Portfolios calculate their 30-day (or one month) standard yield for a
class of shares in accordance with the method prescribed by the SEC for mutual
funds:
Yield = 2[{(a-b/cd) + 1}/6/ - 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.
For the 30-day period ended November 30, 2003, the annualized yields for the
outstanding Class A, Class C and Class D Shares of the Portfolios were as
follows:
----------------------------------------------------
30-Day Yield
----------------------------------------------------
Balanced Portfolio
Class A 1.23%
Class C 0.95%
Class D 0.84%
Bond Portfolio
Class A 4.52%
Class C 4.28%
Class D 4.13%
Core Bond Portfolio
Class A 3.82%
Class C 3.48%
Class D 3.48%
Intermediate Bond Portfolio
Class A 3.35%
Class D 2.96%
International Bond Portfolio
Class A 1.97%
Class D 1.42%
Short-Intermediate Bond Portfolio
Class A 2.68%
Class D 2.30%
U.S. Government Securities Portfolio
Class A 2.23%
Class D 1.85%
U.S. Treasury Index Portfolio
Class A 3.15%
Class C 2.91%
Class D 2.77%
----------------------------------------------------
78
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 "Additional Trust
Information - Co-Administrators and Distributor." In the absence of such fee
reductions and expense limitations, the annualized 30-day yields of each
Portfolio with respect to Class A, Class C and Class D Shares would have been as
follows:
----------------------------------------------------
30-Day Yield
----------------------------------------------------
Balanced Portfolio
Class A 0.98%
Class C 0.70%
Class D 0.59%
Bond Portfolio
Class A 4.29%
Class C 4.05%
Class D 3.90%
Core Bond Portfolio
Class A 3.50%
Class C 3.16%
Class D 3.16%
Intermediate Bond Portfolio
Class A 2.99%
Class D 2.60%
International Bond Portfolio
Class A 1.56%
Class D 1.01%
Short-Intermediate Bond Portfolio
Class A 2.42%
Class D 2.04%
U.S. Government Securities Portfolio
Class A 1.97%
Class D 1.59%
U.S. Treasury Index Portfolio
Class A 2.85%
Class C 2.61%
Class D 2.47%
----------------------------------------------------
Because of the different servicing fees and transfer agency fees payable
with respect to Class A, C and D Shares in a Portfolio, performance quotations
for shares of Class C and D of the Portfolio will be lower than the quotations
for Class A Shares of the Portfolio, which will not bear any fees for
shareholder support services and will bear minimal transfer agency fees.
The performance of each class of shares of the Portfolios is based on
historical earnings, will fluctuate and is not intended to indicate future
performance. The investment return and principal value of an investment in a
class will fluctuate so that when redeemed, shares may be worth more or less
than their original cost. Performance information may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Total return data should also be considered in
light of the risks associated with a Portfolio's composition, quality, maturity,
operating expenses and market conditions. Any fees charged by Institutions
directly to their Customer accounts in connection with investments in a
Portfolio will not be included in the Portfolios' calculations of performance
information.
NET ASSET VALUE
As stated in the Prospectuses, the Money Market Portfolios seek to maintain
a net asset value of $1.00 per share and, in this connection, values their
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Portfolio would receive if the Portfolio sold
the instrument. During such periods the
79
yield to investors in the Portfolio 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 Portfolio value on a particular day, a prospective
investor in the Portfolio would be able to obtain a somewhat higher (lower)
yield and ownership interest than would result from investment in such similar
entity and existing investors would receive less (more) investment income and
ownership interest. However, the Trust expects that the procedures and
limitations referred to in the following paragraphs of this section will tend to
minimize the differences referred to above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the Trust's
operations and delegating special responsibilities involving portfolio
management to the Investment Adviser, has established procedures that are
intended, taking into account current market conditions and the Portfolios'
investment objectives, to stabilize the net asset value of each Portfolio, as
computed for the purposes of purchases and redemptions, at $1.00 per share. The
Trustees' procedures include periodic monitoring of the difference (the "Market
Value Difference") between the amortized cost value per share and the net asset
value per share based upon available indications of market value. Available
indications of market value used by the Trust consist of actual market
quotations or appropriate substitutes which reflect current market conditions
and include (i) quotations or estimates of market value for individual portfolio
instruments and/or (ii) values for individual portfolio instruments derived from
market quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference of a given Portfolio
exceeds certain limits or NTI believes that the Market Value Difference may
result in material dilution or other unfair results to investors or existing
shareholders, the Trust will take action in accordance with the 1940 Act and 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 Portfolio, 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
Portfolio'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 Portfolio.
Rule 2a-7 requires that the Money Market Portfolios limit their investments
to instruments which the Investment Adviser determines (pursuant to guidelines
established by the Board of Trustees) to present minimal credit risks and which
are "Eligible Securities" as defined by the SEC and described in the
Prospectuses. The Rule also requires that the Money Market Portfolios 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 calendar days (as calculated pursuant to Rule 2a-7).
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Rule requires a Portfolio
to invest its available cash in such a manner as to reduce such maturity to the
prescribed limit as soon as reasonably practicable.
With respect to the Equity and Fixed Income Portfolios, equity securities
traded on U.S. securities exchanges or quoted in the NASDAQ National Market
System are valued at the regular trading session closing price on the exchange
or system in which such securities are principally traded. If any such security
is not traded on a valuation date, it is valued at the most recent quoted bid
price. Over-the-counter securities that are not reported in the NASDAQ National
Market System are also generally valued at the most recent quoted bid price.
Fixed income securities, however, may be valued on the basis of evaluated prices
provided by independent pricing services when such prices are believed to
reflect the fair market value of such securities. Such evaluated prices may be
determined taking into account securities prices, yields, maturities, call
features, ratings, institutional size trading in similar groups of securities
and developments related to specific securities. The values of securities of
foreign issuers are generally based upon market quotations which, depending upon
local convention or regulation, may be the last sale price, the last bid or
asked price or the mean between the last bid and asked price as of, in each
case, the close of the appropriate exchange or other designated time. Foreign
fixed income securities, however, may, like domestic fixed income securities, be
valued based on evaluated prices provided by independent pricing services when
such prices are believed to reflect the fair market value of such securities.
Shares of investment companies are valued at net asset value. Spot and forward
currency exchange contracts are generally valued using an independent pricing
service. Exchange-traded financial futures and options are valued at the
settlement price as established by the exchange on which they are traded.
Over-the-counter options are valued at broker-provided bid prices, as are swaps,
caps, collars and floors. The foregoing prices may be obtained from one or more
independent pricing services or, as needed or applicable, independent
broker-dealers. Short-term investments are valued at amortized cost, which the
Investment Advisers have
80
determined, pursuant to Board authorization, approximates market value. Any
securities for which market quotations are not readily available or are believed
to be incorrect are valued at fair value as determined in good faith by the
Investment Advisers under the supervision of the Board of Trustees. The use of
fair valuation involves the risk that the values used by the Portfolios to price
their investments may be higher or lower than the values used by other
unaffiliated investment companies and investors to price the same investment.
The time at which transactions and shares are priced and the time by which
orders must be received may be changed in case of an emergency or if regular
trading on the New York Stock Exchange is stopped at a time other than 4:00 p.m.
Eastern Standard Time. The Trust reserves the right to reprocess purchase,
redemption and exchange transactions that were processed at a net asset value
other than the Portfolio's official closing net asset value. The Trust reserves
the right to advance the time by which purchase and redemption orders must be
received for same business day credit as otherwise permitted by the SEC. In
addition, each Portfolio may compute its net asset value as of any time
permitted pursuant to any exemption, order or statement of the SEC or its staff.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolios 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 Portfolios 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 the federal tax consequences in the Prospectus and this
Additional Statement are based on the Internal Revenue Code of 1986, as amended
(the "Code") and the laws and regulations issued thereunder as in effect on the
date of this Additional Statement. Future legislative or administrative changes
or court decisions may significantly change the conclusions expressed herein,
and any such changes or decisions may have a retroactive effect with respect to
the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
Each Portfolio intends to qualify as a regulated investment company under
Subtitle A, Chapter 1, of Subchapter M of the Code. As a regulated investment
company, each Portfolio is generally exempt from federal income tax on its net
investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
Each Portfolio intends to make sufficient distributions or deemed distributions
each year to avoid liability for corporate income tax. If the Portfolio were to
fail to make sufficient distributions, it could be liable for corporate income
tax and for excise tax in respect of the shortfall or, if the shortfall is large
enough, the Portfolio could be disqualified as a regulated investment company.
In addition to satisfaction of the Distribution Requirement, each Portfolio 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 income derived with respect to its business of investing in
such stock, securities, or currencies (the "Income Requirement"). Also, at the
close of each quarter of its taxable year, at least 50% of the value of each
Portfolio's assets must generally 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 Portfolio has not invested more than
5% of the value of its total assets in securities of such issuer and as to which
a Portfolio does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of each Portfolio'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 Portfolio controls and which are engaged in the same or
similar trades or businesses. Each Portfolio intends to comply with these
requirements.
If for any taxable year any Portfolio 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, the shareholders would recognize dividend income on distributions to the
extent of such Portfolio's current and accumulated earnings and profits and
corporate shareholders may be eligible for the dividends received deduction.
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
81
capital gains over capital losses). Each Portfolio 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.
For federal income tax purposes, each portfolio is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year after the loss. These amounts are
available to be carried forward to offset future capital gains to the extent
permitted by the Code and applicable tax regulations.
As of November 30, 2003, the following Portfolios had capital loss carry
forwards approximating the amount (in thousands) indicated for federal tax
purposes, expiring in the year indicated:
----------------------------------------------------------------------
Expiring Expiring Expiring Expiring
Portfolio: November November November November
30, 2008 30, 2009 30, 2010 30, 2011
----------------------------------------------------------------------
Balanced $ -- $ 1,467 $ 2,286 $ 957
Bond -- -- 17,797 --
Core Bond -- -- 316 --
Diversified Growth -- 3,110 919 2,421
Focused Growth -- 48,238 36,803 --
Government Select -- -- -- 36
Intermediate Bond 1,186 -- -- --
International Bond -- -- 528 --
International Equity Index -- -- 11,608 --
International Growth -- 45,530 24,623 --
Mid Cap Growth -- 9,068 4,316 --
Municipal -- -- 1 --
Short-Intermediate Bond 10,005 -- 2,589 --
Small Company Growth 309 19,157 6,855 --
Small Company Index -- 6,780 32,262 13,094
----------------------------------------------------------------------
The Trust will be required in certain cases to withhold and remit to the
U.S. Treasury 28% of the dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of taxable interest or
dividend income properly, or (iii) who has failed to certify to the Trust, when
required to do so, that he or she is not subject to backup withholding or that
he or she is an "exempt recipient."
STATE AND LOCAL TAXES
Although each Portfolio 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
Portfolio may be subject to the tax laws of such states or localities.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments and
futures contracts and options that may be engaged in by a Portfolio, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a
Portfolio to recognize taxable income prior to the receipt of cash, thereby
requiring the Portfolio 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 Portfolio
invests, the Portfolio may be liable for corporate-level tax on any ultimate
gain or distributions on the shares if the Portfolio fails to make an election
to recognize income annually during the period of its ownership of the shares.
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SPECIAL TAX CONSIDERATIONS PERTAINING TO THE TAX-EXEMPT AND MUNICIPAL PORTFOLIOS
Investors in either of the Tax-Exempt and Municipal Portfolios should note
that taxpayers are required to report the receipt of tax-exempt interest and
"exempt-interest dividends" on their federal income tax returns and that in two
circumstances such amounts, while exempt from regular federal income tax, are
taxable to persons subject to alternative minimum taxes. First, tax-exempt
interest and "exempt-interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and noncorporate taxpayers in determining alternative
minimum tax liability. Second, all tax-exempt interest and "exempt-interest
dividends" must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum tax purposes.
As described above and in the Prospectus, the Tax-Exempt and Municipal
Portfolios are designed to provide investors with federally tax-exempt interest
income. Neither the Tax-Exempt Portfolio nor the Municipal Portfolio is intended
to constitute a balanced investment program and is not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of these Portfolios 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 Portfolio's dividends being tax-exempt. In addition, the
Portfolios 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, or 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 its partners and an S corporation and its shareholders.
In order for the Tax-Exempt and Municipal Portfolios 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 Portfolio must
consist of tax-exempt obligations. An exempt-interest dividend is any dividend
or part thereof (other than a capital gain dividend) paid by the Tax-Exempt or
Municipal Portfolios and designated as an exempt-interest dividend in a written
notice mailed to shareholders not later than 60 days after the close of the
Portfolio's taxable year. However, the aggregate amount of dividends so
designated by either Portfolio cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Portfolio
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 each of
the Tax-Exempt and Municipal Portfolios with respect to any taxable year which
qualifies as federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Portfolio with respect to such year.
The Tax-Exempt and Municipal Portfolios will determine annually the
percentages of their net investment income which is exempt from tax, which
constitute an item of tax preference for purposes of the federal alternative
minimum tax, and which is 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 Tax-Exempt and Municipal Portfolios.
Income from the Tax-Exempt and Municipal Portfolios may not be tax-exempt
in its entirety and may be subject to taxes in certain jurisdictions.
FOREIGN INVESTORS
Foreign shareholders generally will be subject to U.S. withholding tax at a rate
of 30% (or a lower treaty rate, if applicable) on distributions by a Portfolio
of net investment income, other ordinary income, and the excess, if any, of net
short-term capital gain over net long-term capital loss for the year, regardless
of the extent, if any, to which the income or gain is derived from non-U.S.
investments of the Portfolio. For this purpose, foreign shareholders include
individuals other than U.S. citizens, residents and certain nonresident aliens,
and foreign corporations, partnerships, trusts and estates. A foreign
shareholder generally will not be subject to U.S. income or withholding tax in
respect of proceeds from or gain on the redemption of shares or in respect of
capital gain dividends (i.e., dividends attributable to long-term capital gains
of a Portfolio), provided such shareholder submits a statement, signed under
penalties of perjury, attesting to such shareholder's exempt status. Different
tax consequences apply to a foreign shareholder engaged in a U.S. trade or
business or present in
83
the U.S. for 183 days or more in a year. Foreign shareholders should consult
their tax advisers regarding the U.S. and foreign tax consequences of investing
in a Portfolio.
The foregoing discussion is based on federal tax laws and regulations which
are in effect on the date of this Additional Statement. Such laws and
regulations may be changed by legislative or administrative action. No attempt
is made to present a detailed explanation of the tax treatment of the Portfolio
or its shareholders, and the discussion here and in the Prospectus is not
intended as a substitute for careful tax planning. Shareholders are advised to
consult their tax advisers with specific reference to their own tax situation,
including the application of state and local taxes.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in one or more investment
portfolios. The Trustees or Trust may hereafter create series in addition to the
Trust's twenty-three existing series, which represent interests in the Trust's
twenty-three respective portfolios, twenty-one of which are discussed in this
Additional Statement. The Trust Agreement also permits the Board of Trustees to
classify or reclassify any unissued shares into classes within a series.
Pursuant to such authority, the Trustees have authorized the issuance of an
unlimited number of shares of beneficial interest in three separate classes of
shares in each of the Trust's Equity and Fixed Income Portfolios: Class A, C and
D Shares as well as an unlimited number of shares of beneficial interest in
three separate classes of shares in each of the Trust's money market portfolios:
Shares, Service Shares and Premier Shares.
Under the terms of the Trust Agreement, each share of each Portfolio is
without par value, represents an equal proportionate interest in the particular
Portfolio with each other share of its class in the same Portfolio and is
entitled to such dividends and distributions out of the income belonging to the
Portfolio as are declared by the Trustees. Upon any liquidation of a Portfolio,
shareholders of each class of a Portfolio 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 "About Your Account - Selling Shares" in the Prospectus. In addition,
pursuant to the terms of the 1940 Act, the right of a shareholder to redeem
shares and the date of payment by a Portfolio may be suspended for more than
seven days (i) for any period during which the New York Stock Exchange is
closed, other than the customary weekends or holidays, or trading in the markets
the Portfolio normally utilizes is closed or is restricted as determined by the
SEC, (ii) during any emergency, as determined by the SEC, as a result of which
it is not reasonably practicable for the Portfolio to dispose of instruments
owned by it or fairly to determine the value of its net assets, or (iii) for
such other period as the SEC may by order permit for the protection of the
shareholders of the Portfolio. The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions. In addition, shares of each Portfolio are redeemable at
the unilateral option of the Trust. 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 Portfolios are not issued.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Trust. General liabilities of the Trust 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.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement 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. In addition,
shareholders of each of the classes in a particular investment portfolio have
equal voting rights except that only shares of a particular class of an
investment portfolio will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing expenses and transfer
agency fees that are payable by that class.
84
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees
without the vote or consent of shareholders, either to one vote for each share
or to one vote for each dollar of net asset value represented by such shares on
all matters presented to shareholders, including the election of Trustees (this
method of voting being referred to as "dollar-based voting"). However, to the
extent required by the 1940 Act or otherwise determined by the Trustees, series
and classes of the Trust will vote separately from each other. Shareholders of
the Trust do not have cumulative voting rights in the election of Trustees and,
accordingly, the holders of more than 50% of the aggregate voting power of the
Trust may elect all of the Trustees, irrespective of the vote of the other
shareholders. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meeting. To the extent required by law, the Trust will assist in shareholder
communications in connection with a meeting called by shareholders. The
shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder approval
(except as stated in the next paragraph), to cause the Trust, or any series
thereof, to merge or consolidate with any corporation, association, trust or
other organization or sell or exchange all or substantially all of the property
belonging to the Trust, or any series thereof. In addition, the Trustees,
without shareholder approval, may adopt a "master-feeder" structure by investing
substantially all of the assets of a series of the Trust in the securities of
another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with the
merger, consolidation, termination or other reorganization of the Trust or any
series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
The Trust Agreement permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Statutory Trust Act (the "Delaware Act"), shareholders
are not personally liable for obligations of the Trust. The Delaware Act
entitles shareholders of the Trust to the same limitation of liability as is
available to shareholders of private for-profit corporations. However, no
similar statutory or other authority limiting statutory trust shareholder
liability exists in many other states. As a result, to the extent that the Trust
or a shareholder is subject to the jurisdiction of courts in such other states,
those courts may not apply Delaware law and may subject the shareholders to
liability. To offset this risk, the Trust Agreement (i) contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
and instrument entered into or executed by the Trust or its Trustees and (ii)
provides for indemnification out of the property of the applicable series of the
Trust of any shareholder held personally liable for the obligations of the Trust
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss beyond his or her investment because of
shareholder liability is limited to circumstances in which all of the following
factors are present: (i) a court refuses to apply Delaware law; (ii) the
liability arises under tort law or, if not, no contractual limitation of
liability is in effect; and (iii) the applicable series of the Trust is unable
to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to any
person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith,
85
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office. The Trust Agreement provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is liable by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Trust Agreement and to have become a party thereto.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of March 1, 2004, substantially all of the Portfolios' outstanding
shares were held of record by Northern Trust for the benefit of its Customers
and the Customers of its affiliates and correspondent banks that have invested
in the Portfolios. As of the same date, Northern Trust possessed sole or shared
voting and/or investment power for its Customer accounts with respect to less
than 10% of the Trust's outstanding shares. As of the same date, the Trust's
Trustees and officers as a group owned beneficially less than 1% of the
outstanding shares of each class of each Portfolio. Northern Trust has advised
the Trust that the following persons (whose mailing address is: c/o The Northern
Trust Company, 50 South LaSalle, Chicago, IL 60675) beneficially owned five
percent or more of the outstanding shares of the Portfolios' classes as of March
1, 2004:
Number of Shares % of Fund
----------------------------
Balanced Portfolio- Class A
Northern Trust TIP Balanced-DV 2,318,482.13 20.4%
Sealed Air Corp. - Cash Account 2,283,619.22 20.1%
Blommer RET SAV-Northern Balanced PORT 1,773,457.35 15.6%
Energizer Charitable Trust 658,792.04 5.8%
LUMC-Northern Balanced Fund 645,230.92 5.7%
Trimas - Northern Balanced Fund 580,507.92 5.1%
Number of Shares % of Fund
----------------------------
Balanced Portfolio- Class C
Ameron 401(k) - NIF Balanced-DV 343,138.41 83.6%
Kitch - Balanced-DV 67,293.06 16.4%
Balanced Portfolio- Class D
Circle Trust Company CUST 18,662.32 55.3%
Marine Bank, Springfield 5,442.63 16.1%
Downers Grove National Bank 4,416.18 13.1%
Heartland Bank & Trust 3,844.15 11.4%
86
Number of Shares % of Fund
----------------------------
Bond Portfolio- Class A
Northern Trust as Trustee for PWC Group
Investment Savings Plan 3,783,042.78 13.0%
Marshfield Master Trust Domestic 3,142,162.75 10.8%
Northern Trust Tip Bond Fund-DV 2,427,831.69 8.3%
Sunbeam - TNT Bond Fund 1,823,359.62 6.3%
Northern Trust as Trustee for PWC
Retirement Benefit Acc Plan 1,720,315.51 5.9%
Bond Portfolio- Class C
Kitch - Profit Sharing-DV 168,951.53 91.5%
Kitch - Benchmark Bond-DV 11,372.26 6.2%
Bond Portfolio- Class D
Kish Valley National Bank 6,869.67 43.3%
Circle Trust Company CUST 4,440.41 28.0%
Alaska USA Trust Company 4,107.87 25.9%
Core Bond Portfolio- Class A
Northern Trust - Pension General 5,179,702.83 47.9%
Pharmacia Rabbi - Various Funds 3,359,113.25 31.1%
First Busey Trust Company 869,947.62 8.1%
Core Bond Portfolio- Class C
Northern Trust Corporation 109.96 100.0%
Core Bond Portfolio- Class D
Northern Trust Corporation 109.55 100.0%
Diversified Assets Portfolio- Service
Greatbanc Trust Company 36,231,007.29 29.9%
IL Mutual Life Insurance Co. 12,819,780.25 10.6%
Penfirn Co. 11,464,393.75 9.5%
Downers Grove National Bank 7,407,749.13 6.1%
Diversified Assets Portfolio- Premier
Riverview Asset Management 11,839,485.21 79.2%
Michigan Trust Bank 2,309,254.15 15.5%
Diversified Growth Portfolio- Class A
Seiko Corp - Northern 1,154,775.60 15.3%
A. Finkl & Sons Pension SAL 847,505.21 11.2%
American Meter Pension 490,048.03 6.5%
Harry W. Bass Jr. FDN-Northern 478,480.09 6.3%
A. Finkl & Sons Pension HRLY 473,494.34 6.3%
87
Number of Shares % of Fund
----------------------------
Diversified Growth Portfolio- Class D
Circle Trust Company CUST 50,107.12 72.9%
Alaska USA Trust Company 9,604.36 14.0%
Marine Bank, Springfield 7,070.86 10.3%
Equity Index Portfolio- Class A
Pharmacia Rabbi-Various Funds 6,391,191.94 13.3%
Army/Air Force - Northern 4,822,534.07 10.0%
Dingle Co. 3,657,844.61 7.6%
AER - NTGI S&P 500 3,007,587.62 6.3%
Capital Blue Cross 2,997,756.55 6.2%
Pilkington Equity Index FD-DV 2,897,071.96 6.0%
Equity Index Portfolio- Class C
Wilson Sporting Goods - Equity Index-DV 974,395.52 48.6%
BMAC - NIF Equity Index FD-DV 665,952.56 33.2%
CHSD/TNT Index FD LT 303,475.40 15.1%
Equity Index Portfolio- Class D
FNB Beloit 204,253.43 26.3%
United Bank & Trust - Tecumseh 179,634.69 23.1%
Olcoba Company 105,680.48 13.6%
Peoples Bank 73,451.16 9.5%
Circle Trust Company CUST 43,851.29 5.6%
Focused Growth Portfolio- Class A
Northern Trust TIP Focused-DV 5,377,603.81 30.7%
Northern Trust - Pension General 3,499,342.00 20.0%
ADVPCS-N INST Focused Growth 1,705,482.31 9.7%
Focused Growth Portfolio- Class C
Prot Life 401(k) - Large Cap Growth 751,167.40 51.8%
Kitch - Profit Sharing-DV 557,201.81 38.4%
Kitch - Focused Growth-DV 140,778.71 9.7%
Focused Growth Portfolio- Class D
Peoples Bank 44,819.79 43.1%
Circle Trust Company CUST 33,562.64 32.3%
Downers Grove National Bank 9,262.06 8.9%
Marine Bank, Springfield 6,658.86 6.4%
Government Portfolio- Shares
Waste Management 423,966,504.06 13.9%
Office of the Illinois State Treasurer 225,017,828.96 7.4%
88
Number of Shares % of Fund
----------------------------
Government Portfolio- Service
Horizon Trust & Investment Management 17,562,133.00 55.1%
Calumet Investments Ltd. - PR 4,618,399.11 14.5%
Greatbanc Trust Company 3,750,229.33 11.8%
Calumet Investments Corp. - PR 3,517,330.28 11.0%
Government Portfolio- Premier
Cole Taylor Benchmark 5,373,538.30 73.7%
EGAP & CO/17 1,862,196.00 25.5%
Government Select Portfolio- Shares
Office of the Illinois State Treasurer 350,000,000.00 7.2%
Pharmacia Rabbi - Various Funds 255,428,096.59 5.2%
Government Select Portfolio- Service
Cape Cod Bank & Trust 56,946,410.32 33.4%
EGAP & CO/17 46,880,964.35 27.5%
Marine Bank, Springfield 22,299,140.62 13.1%
Maril & Co/Plymouth State Bank 11,736,291.67 6.9%
Government Select Portfolio- Premier
Cole Taylor Benchmark 144,430,056.89 83.3%
Marine Bank, Springfield 19,684,529.27 11.4%
Intermediate Bond- Class A
Kemper National NQ Retirement Plan 351,048.68 15.2%
Peoples EN Life & Health BA 335,362.04 14.5%
The Trust Company of Florida 177,422.11 7.7%
Peoples EN - Life NON-BAR 119,824.34 5.2%
Intermediate Bond- Class D
Marine Bank, Springfield 3,437.34 79.2%
Peoples National Bank & Trust 849.48 19.6%
International Bond- Class A
Doe Run Resources - TNT MGMT 203,609.53 32.3%
Viskase Pension - NIC 67,106.74 10.6%
Nisource Bay State VEBA - Union 55,045.21 8.7%
Credit Agricole Indosuez 49,093.28 7.8%
ERTL - DB 40,592.15 6.4%
International Bond- Class D
Keyco/Bank Champaign 10,401.50 99.4%
89
Number of Shares % of Fund
----------------------------
International Equity Index Portfolio- Class A
Pharmacia Rabbi - Various Funds 1,883,444.59 29.9%
Northern Trust - Pension General 821,762.27 13.1%
Lifepoint - International Equity Index A-DV 767,403.43 12.2%
Autoliv ASP, Inc. INTL MST-DV 723,947.38 11.5%
Sisters of the PRE BLD FDA-D 607,970.61 9.7%
Peoples EN-INT'L EQTY FD-DV 507,315.66 8.1%
International Equity Index Portfolio- Class D
Peoples Bank 7,594.21 62.2%
Alaska USA Trust Company 3,233.35 26.5%
Peoples National Bank & Trust 1,232.14 10.1%
International Growth Portfolio- Class A
Northern Trust - Pension General 3,479,561.62 18.5%
Northern Trust TIP INTL GTH-DV 2,974,485.34 15.8%
Atlanta Police - NTGI INTER'L 2,064,130.78 11.0%
Purdue Pharma. L.P. - NOR TRUST 1,737,141.31 9.2%
Thorek Hospital - TNT INTL 1,054,686.75 5.6%
Doe Run Resources - TNT MGMT 1,036,419.27 5.5%
International Growth Portfolio- Class D
Keyco/Bank Champaign 24,935.87 39.3%
Circle Trust/NIF CASH 23,592.65 37.2%
Downers Grove National Bank 5,718.59 9.0%
Circle Trust Company 4,363.32 6.9%
Marine Bank, Springfield 4,288.50 6.8%
Mid Cap Growth Portfolio- Class A
Masonic Health - NTGI-SL 383,939.13 13.8%
Newberry Library Endowment - NTGI 337,198.01 12.1%
Sisters of the PRE BLD FD A - D 219,590.84 7.9%
Nisource Bay State VEBA - Union 180,676.59 6.5%
Mid Cap Growth Portfolio- Class C
Autoliv ASP, Inc. Mid Cap 353,251.59 100.0%
Mid Cap Growth Portfolio- Class D
Peoples Bank 19,537.64 51.0%
Keyco/Bank Champaign 10,460.93 27.3%
Marine Bank, Springfield 5,519.06 14.4%
Municipal Portfolio- Shares
Sentinel Trust Company 186,337,113.68 21.5%
FirstTrust Indiana 61,801,495.98 7.1%
Saban - Titanium Trading JPM ROG 60,450,883.90 7.0%
90
Number of Shares % of Fund
----------------------------
Municipal Portfolio- Service
EGAP & CO/15 25,638,182.00 88.8%
Stephenson National Bank & Trust 2,283,194.78 7.9%
Short-Intermediate Bond Portfolio- Class A
ALPA VEBA - NIF Bond Fund 1,533,026.72 17.1%
Ford Family Foundation - TNT 928,526.67 10.4%
Doe Run Resources - TNT MGMT 543,160.28 6.1%
Short-Intermediate Bond Portfolio- Class D
Keyco/Bank Champaign 10,805.90 72.7%
Heartland Bank & Trust 1,560.39 10.5%
FNB Beloit 1,411.98 9.5%
Small Company Growth Portfolio- Class A
Northern Trust TIP Small Cap-DV 1,637,245.14 40.7%
Masonic Health - NTGI - SL 403,685.07 10.0%
Newberry Library Endowment - NTGI 383,577.82 9.5%
Securian Trust Company 240,136.83 6.0%
Sisters of the PRE BLD FD A - D 218,039.86 5.4%
Small Company Growth Portfolio- Class D
Marine Bank, Springfield 6,741.92 98.1%
Small Company Index Portfolio- Class A
Autoliv ASP, Inc. SML C. MST-DV 1,512,197.66 25.3%
Gen Dyn Hourly VEBA - TEMP 546,627.51 9.2%
Century Bank & Trust 367,638.13 6.2%
Trustmark Retirement Trust 364,231.21 6.1%
United Farm Family Mutual Insurance Co. 307,264.39 5.1%
Small Company Index Portfolio- Class D
FNB Beloit 7,876.68 38.2%
Great Plains Trust Company 6,263.89 30.4%
Peoples Bank 3,826.80 18.6%
Alaska USA Trust Company 2,460.06 11.9%
Tax Exempt Portfolio- Shares
Graco Inc. 50,081,487.41 6.6%
Daniel Ziff 44,535,716.92 5.8%
Tax Exempt Portfolio- Service
MB Financial 7,650,955.53 65.8%
Greatbanc Trust Company 3,003,961.13 25.8%
91
Number of Shares % of Fund
----------------------------
U.S. Government Securities Portfolio- Class A
CTA - Authority Trust 1,515,350.55 25.3%
EIT 134 Sub Fund - NI Fixed 555,417.58 9.3%
MCG Rabbi - BNCH Government 506,940.32 8.5%
SLB - H. C. Medical 413,495.90 6.9%
LUMC - Northern Government Securities Fund 371,665.12 6.2%
U.S. Government Securities Portfolio- Class D
First Bankers Trust 28,861.13 69.2%
Circle Trust Company CUST 5,520.57 13.2%
Kish Valley National Bank 3,383.14 8.1%
Marine Bank, Springfield 2,598.07 6.2%
U.S. Treasury Index Portfolio- Class A
Canandaigua National Bank 356,080.44 14.9%
Henkel Rabbi Trust Account 331,448.95 13.8%
Novartis - Treasury Bond Index Fund 288,884.45 12.1%
Cognis Rabbi Trust 224,235.95 9.4%
EGS Electrical Salaried 152,259.43 6.4%
Autoliv ASP, Inc. - Restricted Tr. 133,096.90 5.6%
Peoples Bank 132,017.61 5.5%
U.S. Treasury Index Portfolio- Class C
Wilson Sporting Goods - U.S. Treasury-DV 84,188.01 99.9%
U.S. Treasury Index Portfolio- Class D
Peoples Bank 91,577.51 88.5%
Circle Trust Company CUST 6,013.45 5.8%
SERVICE PLAN FOR MONEY MARKET PORTFOLIOS
The Trust, on behalf of the Money Market Portfolios, has adopted a Service
Plan (the "Plan") with respect to the Service Shares and Premier Shares. Under
the Plan, the Trust, on behalf of the Service Shares and the Premier Shares of
each Money Market Portfolio, is authorized to pay to TNTC monthly or quarterly
fees in respect of (i) administrative support services performed and expenses
incurred in connection with such Portfolio's Service Shares and Premier Shares
and (ii) personal and account maintenance services performed and expenses
incurred in connection with such Portfolio's Premier Shares as set forth below.
The fee paid for administrative support services during any one year shall not
exceed 0.25% of the average daily net asset value of the Service Shares and
Premier Shares of such Portfolio. The fee paid for personal and account
maintenance services during any one year shall not exceed an additional 0.25% of
the average daily net asset value of the Premier Shares of such Portfolio.
Northern Trust will determine the amount of the servicing agent fees to be paid
to one or more brokers, dealers, other financial institutions or other industry
professionals (collectively, "Servicing Agents") and the basis on which such
payments will be made. Payments to a Servicing Agent will be subject to
compliance by the Servicing Agent with the terms of the related Plan agreement
entered into by the Servicing Agent. The servicing agent fees payable pursuant
to this Plan shall not pertain to services or expenses which are primarily
intended to result in the sales of Service Shares and Premier Shares.
Payments of the servicing agent fees with respect to Service Shares and
Premier Shares will be used to compensate or reimburse Northern Trust and the
Servicing Agents for administrative support services and expenses, which may
include without limitation: (i) acting or arranging for another party to act, as
recordholder and nominee of Service Shares and Premier Shares of a Portfolio
beneficially owned by Customers; (ii) establishing and maintaining individual
accounts and records with respect to Service Shares and Premier Shares of a
Portfolio owned by Customers; (iii) processing and issuing
92
confirmations concerning Customer orders to purchase, redeem and exchange
Service Shares and Premier Shares of a Portfolio; (iv) receiving and
transmitting funds representing the purchase price or redemption proceeds of
Service Shares and Premier Shares of a Portfolio; (v) processing dividend
payments on behalf of Customers; and (vi) performing other related
administrative support services that do not constitute "personal and account
maintenance services" within the meaning of the National Association of
Securities Dealers, Inc.'s Conduct Rules. Payments of the servicing agent fees
with respect to the Premier Shares will also be used to compensate or reimburse
Northern and the Servicing Agents for personal and account maintenance services
and expenses, which may include, without limitation: (i) providing facilities to
answer inquiries and respond to correspondence with Customers and other
investors about the status of their accounts or about other aspects of the Trust
or the applicable Portfolio; (ii) assisting Customers in completing application
forms, selecting dividend and other account options and opening custody accounts
with the Servicing Agents; (iii) providing services to Customers intended to
facilitate, or improve their understanding of the benefits and risks of, a
Portfolio to Customers, including asset allocation and other similar services;
(iv) acting as liaison between Customers and the Trust, including obtaining
information from the Trust and assisting the Trust in correcting errors and
resolving problems; and (v) performing any similar personal and account
maintenance services.
For the fiscal years or periods ended November 30 as indicated, the
aggregate amount of the Shareholder Service Fee incurred by each class of each
Portfolio then in existence was as follows:
------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------
Diversified Assets Portfolio
Service Class $ 216,847 $ 242,461 $ 154,713
Premier Class 115,691 181,117 201,508
Government Portfolio
Service Class 92,009 100,792 107,548
Premier Class 550,967 603,913 547,753
Government Select Portfolio
Service Class 340,925 268,481 382,454
Premier Class 771,039 106,058 48,749
Municipal Portfolio
Service Class 99,036 100,890 115,273
Premier Class N/A N/A N/A
Tax-Exempt Portfolio
Service Class 26,062 16,350 28,708
Premier Class N/A 1 22,050
-------------------------------------------------------------------------
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Servicing Agent's receipt of compensation
paid by the Trust in connection with the investment of fiduciary funds in
Service or Premier Shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the FDIC, and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state securities commissions, are urged to
consult legal advisers before investing fiduciary assets in Service or Premier
Shares.
The Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of such Plan or the related agreements, most recently re-approved
the Plan and the related agreements for each Portfolio at a meeting called for
the purpose of voting on such Plan and related agreements on February 13, 2004.
The Plan and related agreements will remain in effect until April 30, 2005
and will continue in effect thereafter only if such continuance is specifically
approved annually by a vote of the Board of Trustees in the manner described
above.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the Board of Trustees in
the manner described above. The Plan may be terminated as to Service Shares and
Premier Shares at any time by a majority of the non-interested Trustees. A
service agreement may be terminated at any time, without payment of any penalty,
by vote of a majority of the Trustees as described above or by any party to the
agreement on not more than sixty (60) days' written notice to any other party to
the agreement. Each service agreement shall terminate automatically if assigned.
While the Plan is in effect, the selection and nomination of those Trustees who
are not interested persons shall be committed to the non-interested members of
the Board of Trustees. The Board of Trustees has
93
determined that, in its judgment, there is a reasonable likelihood that the Plan
will benefit each Portfolio and holders of Service and Premier Shares of such
Portfolio. The Plan provides that the Board of Trustees will review, at least
quarterly, a written report of the amount expended under the Plan and the
purposes of the expenditures.
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 2003 (the "Annual Report")
are hereby incorporated herein by reference. No other parts of the Annual
Report, including without limitation, "Management's Discussion of Portfolio
Performance," are incorporated by reference herein. Copies of the Trust's
Semiannual Report and the Annual Report may be obtained upon request and without
charge by calling 800/637-1380 (toll-free).
OTHER INFORMATION
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Trust's Prospectuses.
Certain portions of the Registration Statement have been omitted from the
Prospectuses 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.
The term "majority of the outstanding shares" of either the Trust or a
particular Portfolio means, with respect to the approval of an investment
advisory agreement or a change in a fundamental investment policy, the vote of
the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Trust or such Portfolio.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
94
APPENDIX A
----------
DESCRIPTION OF SECURITIES RATINGS
Short-Term Credit Ratings
-------------------------
A Standard & Poor's short-term issue credit rating is a current opinion of
the creditworthiness of an obligor with respect to a specific financial
obligation having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard & Poor's for short-term
issues:
"A-1" - Obligations are rated in the highest category and indicate 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 have significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment on the obligation.
However, it faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating 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.
Local Currency and Foreign Currency Risks - Country risk considerations are
a standard part of Standard & Poor's analysis for credit ratings on any issuer
or issue. Currency of repayment is a key factor in this analysis. An obligor's
capacity to repay foreign currency obligations may be lower than its capacity to
repay obligations in its local currency due to the sovereign government's own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. These obligations have an original maturity
not exceeding thirteen months, unless explicitly noted. The following summarizes
the rating categories used by Moody's for short-term obligations:
"P-1" - Issuers (or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.
"P-2" - Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.
A-1
"P-3" - Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term debt obligations.
"NP" - Issuers (or supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
Fitch Ratings, Inc. ("Fitch") short-term ratings apply to time horizons of
less than 12 months for most obligations, or up to three years for U.S. public
finance securities, and thus place greater emphasis on the liquidity necessary
to meet financial commitments in a timely manner. The following summarizes the
rating categories used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. Default is a real possibility.
This designation indicates a capacity for meeting financial commitments which is
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
The following summarizes the ratings used by Dominion Bond Rating Service
Limited ("DBRS") for commercial paper and short-term debt:
R-1 Prime Credit Quality
R-2 Adequate Credit Quality
R-3 Speculative
D In Arrears
All three DBRS rating categories for short-term debt use "high", "middle"
or "low" as subset grades to designate the relative standing of the credit
within a particular rating category. The following comments provide separate
definitions for the three grades in the Prime Credit Quality area.
"R-1 (high)" - Short-term debt rated "R-1 (high)" is of the highest credit
quality, and indicates an entity which possesses unquestioned ability to repay
current liabilities as they fall due. Entities rated in this category normally
maintain strong liquidity positions, conservative debt levels and profitability
which is both stable and above average. Companies achieving an "R-1 (high)"
rating are normally leaders in structurally sound industry segments with proven
track records, sustainable positive future results and no substantial qualifying
negative factors. Given the
A-2
extremely tough definition which DBRS has established for an "R-1 (high)", few
entities are strong enough to achieve this rating.
"R-1 (middle)" - Short-term debt rated "R-1 (middle)" is of superior credit
quality and, in most cases, ratings in this category differ from "R-1 (high)"
credits to only a small degree. Given the extremely tough definition which DBRS
has for the "R-1 (high)" category, entities rated "R-1 (middle)" are also
considered strong credits which typically exemplify above average strength in
key areas of consideration for debt protection.
"R-1 (low)" - Short-term debt rated "R-1 (low)" is of satisfactory credit
quality. The overall strength and outlook for key liquidity, debt and
profitability ratios is not normally as favorable as with higher rating
categories, but these considerations are still respectable. Any qualifying
negative factors which exist are considered manageable, and the entity is
normally of sufficient size to have some influence in its industry.
"R-2 (high)", "R-2 (middle)", "R-2 (low)" - Short-term debt rated "R-2" is
of adequate credit quality and within the three subset grades, debt protection
ranges from having reasonable ability for timely repayment to a level which is
considered only just adequate. The liquidity and debt ratios of entities in the
"R-2" classification are not as strong as those in the "R-1" category, and the
past and future trend may suggest some risk of maintaining the strength of key
ratios in these areas. Alternative sources of liquidity support are considered
satisfactory; however, even the strongest liquidity support will not improve the
commercial paper rating of the issuer. The size of the entity may restrict its
flexibility, and its relative position in the industry is not typically as
strong as an "R-1 credit". Profitability trends, past and future, may be less
favorable, earnings not as stable, and there are often negative qualifying
factors present which could also make the entity more vulnerable to adverse
changes in financial and economic conditions.
"R-3 (high)", "R-3 (middle)", "R-3 (low)" - Short-term debt rated "R-3" is
speculative, and within the three subset grades, the capacity for timely payment
ranges from mildly speculative to doubtful. "R-3" credits tend to have weak
liquidity and debt ratios, and the future trend of these ratios is also unclear.
Due to its speculative nature, companies with "R-3" ratings would normally have
very limited access to alternative sources of liquidity. Earnings would
typically be very unstable, and the level of overall profitability of the entity
is also likely to be low. The industry environment may be weak, and strong
negative qualifying factors are also likely to be present.
"D" - A security rated D implies the issuer has either not met a scheduled
payment or the issuer has made it clear that it will be missing such a payment
in the near future. In some cases, DBRS may not assign a D rating under a
bankruptcy announcement scenario, as allowances for grace periods may exist in
the underlying legal documentation. Once assigned, the D rating will continue as
long as the missed payment continues to be in arrears, and until such time as
the rating is suspended, discontinued, or reinstated by DBRS.
Long-Term Credit Ratings
------------------------
The following summarizes the ratings used by Standard & Poor's for
long-term issues:
"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.
A-3
Obligations rated "BB," "B," "CCC," "CC", and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payment will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the ratings used by Moody's for long-term debt:
"Aaa" - Obligations rated "Aaa" are judged to be of the highest quality,
with minimal credit risk.
"Aa" - Obligations rated "Aa" are judged to be of high quality and are
subject to very low credit risk.
"A" - Obligations rated "A" are considered upper-medium grade and are
subject to low credit risk.
"Baa" - Obligations rated "Baa" are subject to moderate credit risk. They
are considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" - Obligations rated "Ba" are judged to have speculative elements and
are subject to substantial credit risk.
"B" - Obligations rated "B" are considered speculative and are subject to
high credit risk.
"Caa" - Obligations rated "Caa" are judged to be of poor standing and are
subject to very high credit risk.
"Ca" - Obligations rated "Ca" are highly speculative and are likely in, or
very near, default, with some prospect of recovery of principal and interest.
"C" - Obligations rated "C" are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or
interest.
A-4
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 that generic rating category.
The following summarizes long-term ratings used by Fitch:
"AAA" - Securities 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" - Securities 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" - Securities considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Securities 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. This is the lowest
investment grade category.
"BB" - Securities considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Securities considered to be 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" - Securities have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Securities are in default. The ratings of obligations
in these categories are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect of repaying all obligations.
PLUS (+) or MINUS (-) may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the "AAA"
category or to categories below "CCC".
The following summarizes the ratings used by DBRS for long-term debt:
A-5
"AAA" - Bonds rated "AAA" are of the highest credit quality, with
exceptionally strong protection for the timely repayment of principal and
interest. Earnings are considered stable, the structure of the industry in which
the entity operates is strong, and the outlook for future profitability is
favorable. There are few qualifying factors present which would detract from the
performance of the entity, the strength of liquidity and coverage ratios is
unquestioned and the entity has established a creditable track record of
superior performance. Given the extremely tough definition which DBRS has
established for this category, few entities are able to achieve a AAA rating.
"AA" - Bonds rated "AA" are of superior credit quality, and protection of
interest and principal is considered high. In many cases, they differ from bonds
rated AAA only to a small degree. Given the extremely tough definition which
DBRS has for the AAA category, entities rated AA are also considered to be
strong credits which typically exemplify above-average strength in key areas of
consideration and are unlikely to be significantly affected by reasonably
foreseeable events.
"A" - Bonds rated "A" are of satisfactory credit quality. Protection of
interest and principal is still substantial, but the degree of strength is less
than with AA rated entities. While a respectable rating, entities in the "A"
category are considered to be more susceptible to adverse economic conditions
and have greater cyclical tendencies than higher rated companies.
"BBB" - Bonds rated "BBB" are of adequate credit quality. Protection of
interest and principal is considered adequate, but the entity is more
susceptible to adverse changes in financial and economic conditions, or there
may be other adversities present which reduce the strength of the entity and its
rated securities.
"BB" - Bonds rated "BB" are defined to be speculative, where the degree of
protection afforded interest and principal is uncertain, particularly during
periods of economic recession. Entities in the BB area typically have limited
access to capital markets and additional liquidity support and, in many cases,
small size or lack of competitive strength may be additional negative
considerations.
"B" - Bonds rated "B" are highly speculative and there is a reasonably high
level of uncertainty which exists as to the ability of the entity to pay
interest and principal on a continuing basis in the future, especially in
periods of economic recession or industry adversity.
"CCC" / "CC" / "C" - Bonds rated in any of these categories are very highly
speculative and are in danger of default of interest and principal. The degree
of adverse elements present is more severe than bonds rated "B". Bonds rated
below "B" often have characteristics which, if not remedied, may lead to
default. In practice, there is little difference between the "C" to "CCC"
categories, with "CC" and "C" normally used to lower ranking debt of companies
where the senior debt is rated in the "CCC" to "B" range.
"D" - This category indicates bonds in default of either interest or
principal.
("high", "low") grades are used to indicate the relative standing of a
credit within a particular rating category. The lack of one of these
designations indicates a rating which is essentially in the middle of the
category. Note that "high" and "low" grades are not used for the AAA category.
Notes to Short-Term and Long-Term Credit Ratings
------------------------------------------------
Standard & Poor's
CreditWatch: CreditWatch highlights the potential direction of a short- or
long-term rating. It focuses on identifiable events and short-term trends that
cause ratings to be placed under special surveillance by Standard & Poor's
analytical staff. These may include mergers, recapitalizations, voter
referendums, regulatory action, or anticipated operating developments. Ratings
appear on CreditWatch when such an event or a deviation from an expected trend
occurs and additional information is necessary to evaluate the current rating. A
listing, however, does not mean a rating change is inevitable, and whenever
possible, a range of alternative ratings will be shown. CreditWatch is not
intended to include all ratings under review, and rating changes may occur
without the ratings
A-6
having first appeared on CreditWatch. The "positive" designation means that a
rating may be raised; "negative" means a rating may be lowered; and "developing"
means that a rating may be raised, lowered or affirmed.
Rating Outlook: A Standard & Poor's Rating Outlook assesses the potential
direction of a long-term credit rating over the intermediate to longer term. In
determining a Rating Outlook, consideration is given to any changes in the
economic and/or fundamental business conditions. An Outlook is not necessarily a
precursor of a rating change or future CreditWatch action.
. Positive means that a rating may be raised.
. Negative means that a rating may be lowered.
. Stable means that a rating is not likely to change.
. Developing means a rating may be raised or lowered.
. N.M. means not meaningful.
Moody's
Watchlist: Moody's uses the Watchlist to indicate that a rating is under
review for possible change in the short-term. A rating can be placed on review
for possible upgrade (UPG), on review for possible downgrade (DNG), or more
rarely with direction uncertain (UNC). A credit is removed from the Watchlist
when the rating is upgraded, downgraded or confirmed.
Rating Outlooks: A Moody's rating outlook is an opinion regarding the
likely direction of a rating over the medium term. Where assigned, rating
outlooks fall into the following four categories: Positive (POS), Negative
(NEG), Stable (STA) and Developing (DEV -- contingent upon an event). In the few
instances where an issuer has multiple outlooks of differing directions, an
"(m)" modifier (indicating multiple, differing outlooks) will be displayed, and
Moody's written research will describe any differences and provide the rationale
for these differences. A RUR (Rating(s) Under Review) designation indicates that
the issuer has one or more ratings under review for possible change, and thus
overrides the outlook designation. When an outlook has not been assigned to an
eligible entity, NOO (No Outlook) may be displayed.
Fitch
Withdrawn: A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
Rating Outlook: A Rating Outlook indicates the direction a rating is likely
to move over a one to two-year period. Outlooks may be positive, stable or
negative. A positive or negative Rating Outlook does not imply a rating change
is inevitable. Similarly, ratings for which outlooks are "stable" could be
upgraded or downgraded before an outlook moves to a positive or negative if
circumstances warrant such an action. Occasionally, Fitch may be unable to
identify the fundamental trend. In these cases, the Rating Outlook may be
described as evolving.
DBRS
Rating Trends
With the exception of ratings in the securitization area, each DBRS rating
is appended with a rating trend. Rating trends give the investor an
understanding of DBRS' opinion regarding the outlook for the rating in question,
with trends falling into one of three categories - Positive, Negative or Stable.
Ratings in the securitization area are not given trends because these ratings
are determined by the parameters on each transaction, for which the issues are
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relatively black and white - these parameters are either met or not. When trends
are used, they give an indication of what direction the rating in question is
headed should the given conditions and tendencies continue.
Although the trend opinion is often heavily based on an evaluation of the
issuing entity or guarantor itself, DBRS also considers the outlook for the
industry or industries in which the entity operates and to varying degrees,
specific terms of an issue or its hierarchy in the capital structure when
assigning trends. DBRS assigns trends to each security, rather than to the
issuing entity, as some rating classification scales are broader than others and
the duration and ranking of securities can impact the strengths and challenges
that affect the entity. As a result, it is not unusual for securities of the
same entity to have different trends; however, the presence of a Positive trend
and a Negative trend on securities issued by the same entity is a rare
occurrence.
Rating Actions
In addition to confirming ratings, releasing new ratings or making rating
changes, other DBRS rating actions include:
Suspended Ratings: Rating opinions are forward looking. Although rating
opinions will consider the historical performance of an issuer, a rating is an
assessment of the issuer's future ability and willingness to meet outstanding
obligations. In order for a complete credit quality assessment, DBRS requires
the cooperation of the issuer so that management strategies and projections may
be evaluated and qualified. Since the availability of such information is
critical to the rating assessment, any changes in management's willingness to
supply such information (either perceived or actual) may cause a rating to be
changed or even suspended. The eventual action will depend upon DBRS's
assessment of the degree of accuracy of a rating possible without the
cooperation of management. DBRS will suspend ratings when the level of concern
reaches a point that an informed rating opinion of the credit quality of the
outstanding obligation cannot be provided.
Discontinued Ratings: When an entity retires all of its outstanding debt
within a particular category and has no plans to re-issue in the near future,
DBRS will normally discontinue its rating on the security in question. Should
the entity ultimately reconsider its decision and re-issue new debt, the rating
will be re-instated pending a full review of the credit quality of the issuer.
It should be noted that there are cases when DBRS will assign a rating even
if there is no outstanding debt obligation and the entity in question has no
firm plans to issue debt in the future. These cases are often driven by the fact
that assigning a rating to the "non-security" provides support to other DBRS
ratings, either in the same entity or within the same family of companies. Such
ratings are generally referred to as "corporate ratings" and are not publicly
disclosed by DBRS.
Ratings "Under Review": DBRS maintains continuous surveillance of all rated
entities; therefore, all ratings are always under review. Accordingly, when a
significant event occurs that may directly impact the credit quality of a
particular entity or group of entities, DBRS will attempt to provide an
immediate rating opinion. If there is high uncertainty regarding the outcome of
the event and DBRS is unable to provide an objective, forward-looking opinion in
a timely manner, then the rating(s) of the issuer(s) will be placed "Under
Review". Ratings may also be placed "Under Review" by DBRS when changes in
credit status occur for any other reason that brings DBRS to the conclusion that
the present ratings may no longer be appropriate.
Ratings which are "Under Review" are qualified with one of the following
three provisional statements: "negative implications", "positive implications",
or "developing implications", indicating DBRS' preliminary evaluation of the
impact on the credit quality of the issuer/security. As such, the ratings that
were in effect prior to the review process can be used as the basis for the
relative credit quality implications. It must be stressed that a rating change
will not necessarily result from the review process.
A-8
Municipal Note Ratings
----------------------
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit a 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 uses three rating categories for short-term municipal obligations
that are considered investment grade. These ratings are designated as Municipal
Investment Grade (MIG) and are divided into three levels - MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade. MIG ratings expire at the maturity of the
obligation. The following summarized the ratings by Moody's for these short-term
obligations:
"MIG-1" - This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
"MIG-2" - This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
"MIG-3" - This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned; a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of the degree of risk
associated with scheduled principal and interest payments. The second element
represents Moody's evaluation of the degree of risk associated with the ability
to receive purchase price upon demand ("demand feature"), using a variation of
the MIG rating scale, the Variable Municipal Investment Grade of VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that
piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
VMIG rating expirations are a function of each issue's specific structural
or credit features.
"VMIG-1" - This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
"VMIG-2" - This designation denotes strong credit quality. Good protection
is afforded by the strong short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
"VMIG-3" - This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
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"SG" - This designation denotes speculative-grade credit quality. Demand
features rated in this category may supported by a liquidity provider that does
not have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
Fitch uses the same ratings for municipal securities as described above for
other short-term credit ratings.
About Credit Ratings
--------------------
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation. Credit ratings may be changed, suspended or withdrawn.
Moody's credit ratings must be construed solely as statements of opinion and not
recommendations to purchase, sell or hold any securities.
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments on a timely basis. Fitch credit
ratings are used by investors as indications of the likelihood of getting their
money back in accordance with the terms on which they invested. However, Fitch
credit ratings are not recommendations to buy, sell or hold any security.
Ratings may be changed or withdrawn.
DBRS credit ratings are not buy, hold or sell recommendations, but rather the
result of qualitative and quantitative analysis focusing solely on the credit
quality of the issuer and its underlying obligations.
A-10
APPENDIX B
----------
As stated in the Prospectuses, the Portfolios (other than the Money Market
Portfolios) may enter into certain futures transactions. Some of these such
transactions are described in this Appendix. The Portfolios may also enter into
futures transactions or other securities and instruments that are available in
the markets from time to time.
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 Portfolio 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 Portfolio 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 Portfolio, by using futures contracts.
Interest rate future contracts can also be used by a Portfolio 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 Portfolio, 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 Portfolio, 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 may 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 Portfolio'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 Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
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. These exchanges
may be either designated by the Commodity Futures Trading Commission ("CFTC") as
a contract market or registered with the CFTC as a derivatives transaction
execution facility ("DTEF"). Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the exchange membership. Interest rate futures also may be traded on electronic
trading facilities or over-the-counter. These various trading facilities are
licensed and/or regulated to varying degrees by the CFTC.
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A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Ginnie Mae
modified pass-through mortgage backed securities; three-month U.S.
B-2
Treasury Bills; and ninety-day commercial paper. The Portfolios may trade in any
interest rate futures contracts for which there exists a public market,
including, without limitation, the foregoing instruments.
II. Index and Security Futures Contracts
General. A stock or bond index assigns relative values to the stocks or
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as the S&P 500 or the New York Stock Exchange
Composite Index. In contrast, certain futures contracts relate to narrower
market indexes, such as the S&P's 100 or indexes based on an industry or market
segment, such as oil and gas stocks. Since 2001, trading has been permitted in
futures based on a single stock and on narrow-based security indexes (as defined
in the Commodity Futures Modernization Act of 2000) (together "security
futures;" broader-based index futures are referred to as "index futures"). Some
futures contracts are traded on organized exchanges regulated by the CFTC. These
exchanges may be either designated by the CFTC as a contract market or
registered with the CFTC as DTEF. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract. Futures contracts also may be traded on electronic trading
facilities or over-the-counter. These various trading facilities are licensed
and/or regulated to varying degrees by the CFTC. To the extent consistent with
its investment objective, a Portfolio 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 Portfolio may sell index futures and security futures contracts in order
to offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. A Portfolio 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 Portfolio will purchase index futures and security futures
contracts in anticipation of purchases of securities. A long futures position
may be terminated without a corresponding purchase of securities.
In addition, a Portfolio may utilize index futures and security futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that a Portfolio 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 Portfolio may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of the portfolio will decline
prior to the time of sale.
Index futures and security futures contracts may also be used by a
Portfolio 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 Portfolio to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
A Portfolio may also use futures contracts on foreign currencies for
non-hedging (speculative) purposes to increase total return.
IV. Margin Payments
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio 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
B-3
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
Portfolio 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 Portfolio 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 Portfolio will
be entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio 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 Portfolio would be required to make a variation margin payment to the
broker. Prior to expiration of the futures contract, the Investment Adviser 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
Portfolio'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 Portfolio, and the Portfolio 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
Portfolio, even if the futures are used for hedging (non-speculative) purposes.
One risk arises because of the imperfect correlation between movements in the
price of the futures and movements in the price of the instruments which are the
subject of the hedge. The price of the future may move more than or less than
the price of the instruments being hedged. If the price of the futures moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Portfolio 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 Portfolio 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 that 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
Portfolio may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by the Investment Adviser. Conversely, a Portfolio may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Investment Adviser. It is also possible that, where a
Portfolio 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
Portfolio may decline. If this occurred, the Portfolio 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 Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio 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
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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.
In general, positions in futures may be closed out only on an exchange,
board of trade or other trading facility which provides a secondary market for
such futures. Although the Portfolios intend to purchase or sell futures only on
trading facilities where there appear to be active secondary markets, there is
no assurance that a liquid secondary market on any trading facility will exist
for any particular contract or at any particular time. In such an event, it may
not be possible to close a futures investment position, and in the event of
adverse price movements, a Portfolio 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 Portfolio is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio 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 Portfolio 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
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Futures purchased or sold by a Portfolio (and related options) may be
traded on foreign exchanges. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or subject
to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, Customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC regulations and the rules of
the National Futures Association and any domestic exchange or other trading
facility (including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the National Futures Association or any
domestic futures exchange), nor the protective measures provided by the
Securities and Exchange Commission's rules relating to security futures. In
particular, the investments of a Portfolio in foreign futures, or foreign
options transactions may not be provided the same protections in respect to
transactions on United States trading facilities. In addition, the price of any
foreign futures or foreign options contract and, therefore the potential profit
and loss thereon may be affected by any variance in the foreign exchange rate
between the time an order is placed and the time it is liquidated, offset or
exercised.
VI. Options on Futures Contracts
A Portfolio 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 of
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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
B-6
person entering into the closing transaction will realize a gain or loss. A
Portfolio will be required to deposit initial margin and variation margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above. Net option premiums
received will be included as initial margin deposits. As an example, in
anticipation of a decline in interest rates, a Portfolio 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 Portfolio intends to purchase. Similarly, if the value of the securities
held by a Portfolio is expected to decline as a result of an increase in
interest rates, the Portfolio might purchase put options or sell call options on
futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). See "Risks of Transactions in
Futures Contracts" above. In addition, the purchase or sale of an option also
entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or such securities.
In general, the market prices of options can be expected to be more volatile
than the market prices on the underlying futures contract. Compared to the
purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
VII. Other Matters
Each Portfolio intends to comply with the regulations of the CFTC exempting
it from registration as a "Commodity Pool Operator." The Portfolios are operated
by persons who have claimed an exclusion from the definition of the term
"Commodity Pool Operator" under the Commodity Exchange Act and, therefore, who
are not subject to registration or regulations as a pool operator under such
act. Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
PART B
STATEMENT OF ADDITIONAL INFORMATION
NORTHERN INSTITUTIONAL FUNDS
PRIME OBLIGATIONS PORTFOLIO
This Statement of Additional Information dated April 1, 2004, (the
"Additional Statement") is not a prospectus. Copies of the prospectus dated
April 1, 2004 for the Prime Obligations Portfolio of Northern Institutional
Funds (the "Prospectus") may be obtained without charge by calling 800/637-1380
(toll-free). Capitalized terms not otherwise defined have the same meaning as in
the Prospectus.
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolio's
shareholders for the period ended November 30, 2003 are incorporated herein by
reference in the section "Financial Statements." No other parts of the annual
report are incorporated by reference. Copies of the annual report may be
obtained upon request and without charge by calling 800/637-1380 (toll-free).
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
An investment in the Portfolio is not a deposit of any bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or
any other government agency. An investment in the Portfolio involves investment
risks, including possible loss of principal. Although the Portfolio seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Portfolio.
2
INDEX
Page
ADDITIONAL INVESTMENT INFORMATION..............................................4
Classification and History..................................................4
Investment Objective and Policies...........................................4
Investment Restrictions....................................................10
ADDITIONAL TRUST INFORMATION..................................................13
Trustees and Officers......................................................13
Standing Board Committees..................................................18
Trustee Ownership of Portfolio Shares......................................19
Trustee and Officer Compensation...........................................20
Code of Ethics.............................................................20
Investment Adviser, Transfer Agent and Custodian...........................21
Proxy Voting...............................................................24
Co-Administrators and Distributor..........................................25
Counsel and Auditors.......................................................26
In-Kind Purchases and Redemptions..........................................26
Third-Party Fees and Requirements..........................................26
Expenses...................................................................26
PERFORMANCE INFORMATION.......................................................27
AMORTIZED COST VALUATION......................................................28
TAXES.........................................................................29
Federal - General Information..............................................29
State and Local Taxes......................................................29
Foreign Investors..........................................................30
DESCRIPTION OF SHARES.........................................................30
SERVICE PLAN..................................................................33
OTHER INFORMATION.............................................................34
FINANCIAL STATEMENTS..........................................................34
APPENDIX A...................................................................A-1
3
ADDITIONAL INVESTMENT INFORMATION
CLASSIFICATION AND HISTORY
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. The Portfolio is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Portfolio is a series of the Trust, which was formed as a Delaware
statutory trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust is the result of a reorganization of a
Massachusetts business trust formerly known as The Benchmark Funds on March 31,
1998. The Trust's name was changed from The Benchmark Funds to Northern
Institutional Funds on July 15, 1998. The Trust also offers other money market,
fixed income, balanced and equity portfolios, which are not described in this
document.
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective, strategies and
risks of the Portfolio as set forth in the Prospectus. The investment objective
of the Portfolio may be changed without the vote of the majority of the
Portfolio's outstanding shares. Except as expressly noted below, the Portfolio's
investment policies may be changed without shareholder approval.
Prime Obligations Portfolio seeks to achieve its objective by investing in a
broad range of government, bank and commercial obligations that are available in
the money markets.
ASSET-BACKED (INCLUDING MORTGAGE-BACKED) SECURITIES. To the extent
described in the Prospectus, the Portfolio may purchase asset-backed securities,
which are securities backed by mortgages, installment contracts, credit card
receivables, municipal securities or other financial assets. The investment
characteristics of asset-backed securities differ from those of traditional
fixed-income securities. Asset-backed securities represent interests in "pools"
of assets in which payments of both interest and principal on the securities are
made periodically, thus in effect "passing through" such payments made by the
individual borrowers on the assets that underlie the securities, net of any fees
paid to the issuer or guarantor of the securities. The average life of
asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security is normally subject to both
call risk and extension risk, and an asset-backed security's stated maturity may
be shortened. In addition, the security's total return may be difficult to
predict precisely.
These differences can result in greater price and yield volatility
than is the case with traditional fixed-income securities.
If an asset-backed security is purchased at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if an asset-backed security is
purchased at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will decrease, yield to maturity. Prepayments
on asset-backed securities generally increase with falling interest rates and
decrease with rising interest rates; furthermore, prepayment rates are
influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Such difficulties are not, however, expected to have a significant
effect on the Portfolio since the remaining maturity of any asset-backed
security acquired, as calculated under applicable Securities and Exchange
Commission ("SEC") regulations, will be 397 days or less.
Asset-backed securities acquired by the Portfolio may include
collateralized mortgage obligations ("CMOs"). 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, and
normally are considered derivative securities. In some cases CMOs may be highly
leveraged and very speculative. The Portfolio will not purchase "residual" CMO
interests, which normally exhibit greater price volatility.
4
There are a number of important differences among the agencies,
instrumentalities and sponsored enterprises of the U.S. government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("Ginnie Mae") include Ginnie Mae Mortgage Pass-Through
Certificates, which are guaranteed as to the timely payment of principal and
interest by Ginnie Mae and backed by the full faith and credit of the United
States, which means that the U.S. government guarantees that the interest and
principal will be paid when due. Ginnie Mae is a wholly-owned U.S. government
corporation within the Department of Housing and Urban Development. Ginnie Mae
certificates also are supported by the authority of Ginnie Mae to borrow funds
from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by the Federal National Mortgage
Association ("Fannie Mae") include Fannie Mae Guaranteed Mortgage Pass-Through
Certificates, which are solely the obligations of Fannie Mae 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 U.S. Treasury. Fannie
Mae is a government-sponsored enterprise owned by private stockholders. Fannie
Mae certificates are guaranteed as to timely payment of the principal and
interest by Fannie Mae. Mortgage-related securities issued by Federal Home Loan
Mortgage Corporation ("Freddie Mac") include Freddie Mac Mortgage Participation
Certificates. Freddie Mac is a corporate instrumentality of the United States,
created pursuant to an Act of Congress. Freddie Mac certificates are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Mac certificates entitle the holder to timely payment of interest,
which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When Freddie Mac does not guarantee timely payment of principal,
Freddie Mac may remit the amount due on account of its guarantee of ultimate
payment of principal after default. While Fannie Mae and Freddie Mac securities
are not backed by the full faith and credit of the U.S. government, they have
generally been viewed by the market as high quality securities with low credit
risks because of their ability to borrow from the U.S. Treasury.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating federal sponsorship of Fannie Mae and
Freddie Mac. The Trust cannot predict what legislation, if any, may be proposed
in the future in Congress as regards to such sponsorship or which proposals, if
any, might be enacted. Such proposals, if enacted, might materially and
adversely affect the availability of government guaranteed mortgage-backed
securities and the Portfolio's liquidity and value.
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.
In addition, privately issued mortgage-backed securities (as well as
other types of asset-backed securities) do not have the backing of any U.S.
government agency, instrumentality or sponsored enterprise. The seller or
servicer of the underlying mortgage obligations will generally make
representations and warranties to certificate-holders as to certain
characteristics of the mortgage loans and as to the accuracy of certain
information furnished to the trustee in respect of each such mortgage loan. Upon
a breach of any representation or warranty that materially and adversely affects
the interests of the related certificate-holders in a mortgage loan, the seller
or servicer generally will be obligated either to cure the breach in all
material respects, to repurchase the mortgage loan or, if the related agreement
so provides, to substitute in its place a mortgage loan pursuant to the
conditions set forth therein. Such a repurchase or substitution obligation may
constitute the sole remedy available to the related certificate-holders or the
trustee for the material breach of any such representation or warranty by the
seller or servicer. To provide additional investor protection, some
mortgage-backed securities may have various types of credit enhancements,
reserve funds, subordination provisions or other features.
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
5
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 rank junior to deposit liabilities of banks 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 FDIC or any other insurer. Deposit notes are insured by the FDIC only to
the extent of $100,000 per depositor per bank.
The Portfolio, to the extent such obligations are U.S.
dollar-denominated, may invest a portion of its 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.
The Portfolio may also invest in high quality commercial paper and
other obligations issued or guaranteed by U.S. and foreign corporations and
other issuers. Commercial paper purchased by the Portfolio may include
asset-backed commercial paper. Asset-backed commercial paper is issued by a
special purpose entity that is organized to issue the commercial paper and to
purchase trade receivables or other financial assets. The credit quality of
asset-backed commercial paper depends primarily on the quality of these assets
and the level of any additional credit support.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Portfolio 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 Portfolio to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the
time the transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
The Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, the
Portfolio may dispose of or negotiate a commitment after entering into it. The
Portfolio also may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. The Portfolio
may realize a capital gain or loss in connection with these transactions.
When the Portfolio purchases securities on a when-issued,
delayed-delivery or forward commitment basis, the Portfolio will segregate
liquid assets having a value (determined daily) at least equal to the amount of
the Portfolio'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 Portfolio will maintain sufficient assets at all times to cover
its obligations under when-issued purchases, forward commitments and
delayed-delivery transactions. For purposes of determining the Portfolio's
average dollar-weighted maturity, the maturity of when-issued, delayed-delivery
or forward commitment securities will be calculated from the commitment date.
ILLIQUID OR RESTRICTED SECURITIES. The Portfolio may invest up to 10%
of its net assets in securities that are illiquid. The Portfolio may purchase
commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "1933 Act") and 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. These securities will not be considered illiquid
so long as the Investment Adviser determines, under guidelines approved by the
Trust's Board of Trustees, that an adequate trading market exists. This practice
could increase the level of illiquidity during any period that qualified
institutional buyers become uninterested in purchasing these securities.
6
INSURANCE FUNDING AGREEMENTS. The Portfolio may invest in insurance
funding agreements ("IFAs"). An 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. 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 the Portfolio's limitation on illiquid investments when the
Portfolio may not demand payment of the principal amount within seven days and a
reliable trading market is absent.
INVESTMENT COMPANIES. With respect to the investments of the Portfolio
in the securities of other investment companies, such investments will be
limited so that, as determined after a purchase is made, either: (a) not more
than 3% of the total outstanding stock of such investment company will be owned
by the Portfolio, the Trust as a whole and its affiliated persons (as defined in
the 1940 Act); or (b) (i) not more than 5% of the value the total assets of the
Portfolio 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 Portfolio. Pursuant to an exemptive order, these limits will not
apply to the investment of securities lending collateral by the Portfolio in
certain investment company portfolios advised by Northern Trust. In addition,
pursuant to the exemptive order the Portfolio may invest its uninvested cash
balances in shares of affiliated money market portfolios to the extent that the
Portfolio's aggregate investment of such balances in such portfolios does not
exceed 25% of the Portfolio's total assets. Investments by the Portfolio in
other investment companies, including exchange-traded funds ("ETFs"), will be
subject to the limitations of the 1940 Act except as permitted by SEC orders.
The Portfolio may rely on SEC orders that permit them to invest in certain ETFs
beyond the limits contained in the 1940 Act, subject to certain terms and
conditions.
Certain investment companies whose securities are purchased by the
Portfolio may not be obligated to redeem such securities in an amount exceeding
1% of the investment company's total outstanding securities during any period of
less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, the Portfolio expects to vote the shares
of other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
The Portfolio may invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially the same
investment objective, policy and restrictions as the Portfolio. However, the
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. The Portfolio may
adhere to other limitations with respect to its investments in securities issued
by other investment companies if required or permitted by the SEC or deemed to
be in the best interests of the Trust.
MUNICIPAL INSTRUMENTS. The Portfolio may invest in municipal
instruments or other securities issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies,
authorities and instrumentalities. 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 Portfolio on
such investments will be taxable to shareholders.
Municipal instruments include both "general" and "revenue"
obligations. General obligations are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue obligations are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as lease revenue
payments from the user of the facility being financed. Industrial development
bonds are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of an
industrial revenue bond is usually directly related to the credit standing of
the private user of the facility involved.
Within the principal classifications of municipal instruments
described above there are a variety of categories, including municipal bonds,
municipal notes, municipal leases, asset-backed securities such as custodial
receipts and participation certificates. Municipal notes include tax, revenue
and bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes.
Municipal leases and participation certificates are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities. Participation certificates may represent participation 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
7
dealers or banks and evidence ownership of future interest payments, principal
payments or both on certain municipal securities. Municipal leases (and
participations in such leases) present the risk that a municipality will not
appropriate funds for the lease payments. The Investment Adviser will determine
the credit quality of any unrated municipal leases on an ongoing basis,
including an assessment of the likelihood that the leases will not be cancelled.
The Portfolio 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 Portfolio may also purchase long-term variable and floating rate
bonds (sometimes referred to as "Put Bonds") where the Portfolio obtains at the
time of purchase the right to put the bond back to the issuer or a third party
at par at least every thirteen months. Put Bonds with conditional puts (that is,
puts which cannot be exercised if the issuer defaults on its payment
obligations) will present risks that are different than those of other municipal
instruments because of the possibility that the Portfolio might hold long-term
Put Bonds on which defaults occur following acquisition by the Portfolio.
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.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the 1940
Act. Securities subject to repurchase agreements are normally held either by the
Trust's custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations. In addition, in the event of a bankruptcy, the Portfolio could
suffer additional losses if a court determines that the Portfolio's interest in
the collateral is unenforceable.
REVERSE REPURCHASE AGREEMENTS. The Portfolio 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 Portfolio may use the proceeds of
reverse repurchase agreements to purchase other securities either maturing, or
under an agreement to resell, on a date simultaneous with or prior to the
expiration of the reverse repurchase agreement. Reverse repurchase agreements
are considered to be borrowings under the 1940 Act. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Portfolio may decline below the repurchase price. The Portfolio will pay
interest on amounts obtained pursuant to a reverse repurchase agreement. While
reverse repurchase agreements are outstanding, the Portfolio will segregate
liquid assets in an amount at least equal to the market value of the securities,
plus accrued interest, subject to the agreement.
SECURITIES LENDING. Collateral for loans of portfolio securities made
by the Portfolio may consist of cash, cash equivalents, securities issued or
guaranteed by the U.S. government or its agencies or irrevocable bank letters of
credit (or any combination thereof). The borrower of securities will be required
to maintain the market value of the collateral at not less than the market value
of the loaned securities, and such value will be monitored on a daily basis.
When the Portfolio lends its securities, it continues to receive payments equal
to the dividends and interest paid on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral. Investing
the collateral subjects it to market depreciation or appreciation, and the
Portfolio is responsible for any loss that may result from its investment in
borrowed collateral. The Portfolio will have the right to terminate a loan at
any time and recall the loaned securities within the normal and customary
settlement time for securities transactions. Although voting rights, or rights
to consent, attendant to securities on loan pass to the borrower, such loans may
be called so that the securities may be voted by the Portfolio if a material
event affecting the investment is to occur. As with other extensions of credit
there are risks of delay in recovering, or even loss of rights in, the
collateral should the borrower of the securities fail financially.
STRIPPED SECURITIES. To the extent consistent with its investment
policies, the Portfolio may purchase stripped securities. The Treasury
Department has facilitated transfers of ownership of zero coupon securities by
accounting
8
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve book-entry
record-keeping system. The Federal Reserve program as established by the
Treasury Department is known as "Separate Trading of Registered Interest and
Principal of Securities" or "STRIPS." The Portfolio may purchase securities
registered in the STRIPS program. Under the STRIPS program, the Portfolio will
be able to have its 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.
Stripped securities may be purchased by the Portfolio, including
stripped mortgage-backed securities ("SMBS"). SMBS are usually structured with
two or more classes that receive different proportions of the interest and
principal distributions from a pool of mortgage-backed obligations. A common
type of SMBS will have one class receiving all of the interest, while the other
class receives all of the principal. However, in some instances, one class will
receive some of the interest and most of the principal while the other class
will receive most of the interest and the remainder of the principal. If the
underlying obligations experience greater than anticipated prepayments of
principal, the Portfolio 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, instrumentality or sponsored
enterprise) may be considered liquid under guidelines established by the Trust's
Board of Trustees if they can be disposed of promptly in the ordinary course of
business at a value reasonably close to that used in the calculation of the net
asset value per share.
SUPRANATIONAL BANK OBLIGATIONS. The Portfolio, to the extent
consistent with its investment policies, 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 between nations (e.g., the World Bank).
Obligations of supranational banks may be supported by appropriated but unpaid
commitments of their member countries and there is no assurance that these
commitments will be undertaken or met in the future.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. government
obligations that may be acquired by the Portfolio 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, Fannie Mae, Ginnie Mae, General Services
Administration, Central Bank for Cooperatives, Freddie Mac, Federal Intermediate
Credit Banks and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S.
government, its agencies, instrumentalities or sponsored enterprises are also
deemed to include (i) securities for which the payment of principal and interest
is backed by an irrevocable letter of credit issued by the U.S. government or
any agency, instrumentality or sponsored enterprise thereof, and (ii)
participations in loans made to foreign government or their agencies that are so
guaranteed.
To the extent consistent with its investment objective, the Portfolio
may invest in a variety of U.S. Treasury obligations and obligations issued by
or guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises. Not all U.S. government obligations carry the same credit
support. No assurance can be given that the U.S. government would provide
financial support to its agencies, instrumentalities or sponsored enterprises if
it were not obligated to do so by law. There is no assurance that these
commitments will be undertaken or complied with in the future. In addition, the
secondary market for certain participations in loans made to foreign governments
or their agencies may be limited.
VARIABLE AND FLOATING RATE INSTRUMENTS. Variable and floating rate
instruments have interest rates that are periodically adjusted either at set
intervals or that float at a margin in relation to a generally recognized index
rate. With respect to the variable and floating rate instruments that may be
acquired by the Portfolio, the investment management team 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. Where necessary to ensure that a variable or floating rate instrument
meets the Portfolio's quality requirements, the issuer's obligation to pay the
principal of the instrument will be backed by an unconditional bank letter or
line of credit, guarantee or commitment to lend.
The Portfolio will invest in variable and floating rate instruments
only when the Investment Adviser deems the investment to involve minimal credit
risk. Unrated variable and floating rate instruments will be determined by the
9
Investment Adviser to be of comparable quality at the time of the purchase to
rated instruments that may be purchased by the Portfolio. In determining
weighted average portfolio maturity, an instrument may, subject to the SEC's
regulations, be deemed to have a maturity shorter than its nominal maturity
based on the period remaining until the next interest rate adjustment or the
time the Portfolio involved can recover payment of principal as specified in the
instrument. Variable and floating rate instruments eligible for purchase by the
Portfolio include variable amount master demand notes, which permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate.
YIELDS AND RATINGS. The yields on certain obligations, including the
instruments in which the Portfolio may invest, are dependent on a variety of
factors, including general market 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 Ratings Services ("S&P"), Dominion Bond Rating Service Limited
("Dominion"), Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings
("Fitch") and other nationally recognized statistical rating organization
("NRSRO") represent their respective opinions as to the quality of the
obligations they undertake to rate. Ratings, however, are general and are not
absolute standards of quality. Consequently, obligations with the same rating,
maturity and interest rate may have different market prices. For a more complete
discussion of ratings, see Appendix A to this Additional Statement.
Subject to the limitations stated in the Prospectus, if a security
held by the Portfolio undergoes a rating revision, the Portfolio may continue to
hold the security if the Investment Adviser determines such retention is
warranted.
ZERO COUPON BONDS. To the extent consistent with its investment
objective, the Portfolio may invest in zero coupon bonds. Zero coupon 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 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.
Zero coupon bonds involve the additional risk that, unlike securities
that periodically pay interest to maturity, the Portfolio will realize no cash
until a specified future payment date unless a portion of such securities is
sold and, if the issuer of such securities defaults, the Portfolio 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 Portfolio is
nonetheless required to accrue income on such investments for each taxable year
and generally is required to distribute such accrued amounts (net of deductible
expenses, if any) to avoid being subject to tax. Because no cash is generally
received at the time of the accrual, the Portfolio may be required to liquidate
other portfolio securities to obtain sufficient cash to satisfy federal tax
distribution requirements applicable to the Portfolio.
INVESTMENT RESTRICTIONS
The Portfolio is subject to the fundamental investment restrictions
enumerated below which may be changed only by a vote of the holders of a
majority of the Portfolio's outstanding shares.
The Portfolio may not:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of
the Portfolio to the extent permitted by law.
(2) Purchase or sell real estate or securities issued by real estate
investment trusts, but this restriction shall not prevent the
Portfolio from investing directly or indirectly in portfolio
instruments secured by real estate or interests therein.
(3) Invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control or
management.
10
(5) Act as underwriter of securities, except as the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the purchase and sale of portfolio instruments in
accordance with its investment objective and portfolio management
policies.
(6) Make any investment inconsistent with the Portfolio's classification
as a diversified investment company under the 1940 Act.
(7) Purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of the Portfolio to
be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that
there is no limitation with respect to, and the Portfolio reserves
freedom of action, when otherwise consistent with its investment
policies, to concentrate its investments in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
obligations (other than commercial paper) issued or guaranteed by U.S.
banks and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by such U.S. government obligations or
such bank obligations. For the purpose 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.
(8) Borrow money, except that to the extent permitted by applicable law
(a) the Portfolio may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts
up to 33-1/3% of its total assets (including the amount borrowed) or
such other percentage permitted by law, (b) the Portfolio may borrow
up to an additional 5% of its total assets for temporary purposes, (c)
the Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio securities, and
(d) the Portfolio may purchase securities on margin. If due to market
fluctuations or other reasons the Portfolio's borrowings exceed the
limitations stated above, the Trust will promptly reduce the
borrowings of such Portfolio in accordance with the 1940 Act. In
addition, as a matter of fundamental policy, the Portfolio will not
issue senior securities to the extent such issuance would violate
applicable law.
(9) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions
relating to issuer diversification, industry concentration and
control), the Portfolio may (a) purchase securities of other
investment companies to the full extent permitted under Section 12 of
the 1940 Act (or any successor provision thereto) or under any
regulation or order of the Securities and Exchange Commission; and (b)
may invest all or substantially all of its assets in a single open-end
investment company or series thereof with substantially the same
investment objective, policies and fundamental restrictions as the
Portfolio.
For the purposes of Restriction Nos. 1 and 8 above, the Portfolio
expects that it would be required to file an exemptive application with the SEC
and receive the SEC's approval of that application prior to entering into
lending or borrowing arrangements with affiliates. As of the date of this
Additional Statement, the Portfolio had not filed such an exemptive application.
In applying Restriction No. 6 above, a security is considered to be
issued by the entity, or entities, whose assets and revenues back the security.
A guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by the Portfolio, does not exceed 10% of the value of the Portfolio's
total assets.
The freedom of action reserved in Restriction No. 7 with respect to
U.S. branches of foreign banks is subject to the requirement that they are
subject to the same regulation as domestic branches of U.S. banks. Obligations
of U.S. branches of foreign banks may include certificates of deposit, bank and
deposit notes, bankers' acceptances and fixed time deposits. These obligations
may be general obligations of the parent bank or may be limited to the issuing
branch. Such obligations will meet the criteria for "Eligible Securities" as
described in the Prospectus.
Except to the extent otherwise provided in Investment Restriction No.
7 for the purpose of such restriction in determining industry classification,
the Trust may use any one or more of the following: the Bloomberg Industry Group
Classification, Standard & Poors, J.J. Kenny Municipal Purpose Codes, FT
Interactive Industrial Codes, Securities Industry Classification Codes or the
Global Industry Classification Standard. For the purpose of determining the
percentage of the Portfolio's total assets invested in securities of issuers
having their principal business activities in a particular industry, an
11
asset-backed security will be classified separately based upon the nature of its
underlying assets.
Securities held in escrow or separate accounts in connection with the
Portfolio's investment practices described in this Additional Statement and the
Prospectus are not deemed to be mortgaged, pledged or hypothecated for purposes
of the foregoing restrictions.
Any restriction which involves a maximum percentage (other than the
restriction set forth in Investment Restriction (8)) will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, the
Portfolio. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (8), the
Portfolio 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.
The Portfolio intends, as a non-fundamental policy, to diversify its
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 the Portfolio's
total assets at the time of purchase, except that 25% of the value of the total
assets of the Portfolio 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, the Portfolio
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 the Portfolio may,
subject to certain conditions, invest up to 25% of its total assets in
securities issued or subject to Guarantees of the same person. This percentage
is 100% if the Guarantee is issued by the U.S. government or an agency thereof.
The Portfolio will limit its investments in securities not subject to a
Guarantee that are not rated in the highest short-term rating category as
determined by two NRSROs (or one NRSRO if the security is rated by only one
NRSRO) or, if unrated, are not of comparable quality to such securities ("Second
Tier Securities"), to 5% of its total assets, with investments in any one such
issuer being limited to no more than 1% of the Portfolio's total assets or $1
million, whichever is greater, measured at the time of purchase.
In addition to the foregoing, the Portfolio is subject to additional
diversification requirements imposed by SEC regulations on the acquisition of
securities subject to other types of demand features.
12
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Set forth below is information about the Trustees and Officers of Northern
Institutional Funds. Each Trustee has served in that capacity since he or she
was originally elected or appointed to the Board of Trustees. Each Trustee
oversees a total of 53 portfolios in the Northern Funds Complex - Northern
Institutional Funds offers 23 portfolios and Northern Funds offers 30
portfolios.
NON-INTERESTED TRUSTEES
[Enlarge/Download Table]
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
Richard G. Cline . Chairman and President of Hawthorne Investors, Inc. (a management . PepsiAmericas
Age: 69 advisory services and private investment company) since 1996; (a soft drink
Trustee since 1997 . Managing Partner of Hawthorne Investments, LLC (a management bottling company);
advisory services and private investment company) since 2001; . Ryerson Tull, Inc.
. Chairman and Director of Hussmann International, Inc. (a (a metals
refrigeration company) from 1998 to 2000; distribution
company).
Edward J. Condon, Jr. . Chairman and CEO of The Paradigm Group, Ltd. (a financial . None
Age: 63 adviser) since 1993;
Trustee since 1994 . Principal and Co-Founder of Paradigm Capital since 1996;
. Senior Partner of NewEllis Ventures since 2001;
. Member of the Board of Managers of The Liberty Hampshire
Company, LLC (a receivable securitization company);
. Director of Financial Pacific Company (a small business leasing
company);
. Trustee at Dominican University.
William J. Dolan, Jr. . Financial Consultant at Ernst & Young LLP (an accounting firm) . None
Age: 71 from 1992 to 1993 and 1997;
Trustee since 2000 . Partner of Arthur Andersen LLP (an accounting firm) from
1966 to 1989.
Sharon Gist Gilliam . Executive Vice President of Unison-Maximus, Inc. (aviation and . None
Age: 60 governmental consulting).
Trustee since 2001
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation; Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and because she owns shares of Northern Trust
Corporation; and its affiliates, and Mr. Timbers because he is a former
officer, director, employee, and is a shareholder, of Northern Trust
Corporation and/or its affiliates.
13
NON-INTERESTED TRUSTEES (CONTINUED)
[Enlarge/Download Table]
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
Sandra Polk Guthman . CEO of Polk Bros. Foundation (an Illinois not-for-profit . MBIA of Illinois
Age: 60 corporation) from 1993 to present. (a municipal bond
Trustee since 1997 insurance company)
1999 to 2000;
Richard P. Strubel . Vice Chairman, President and Chief Operating Officer of UNext Inc. . Gildan Activewear,
Age: 64 (a provider of educational services via the Internet) since 2003 Inc. (an athletic
Trustee since 1982 and 1999; respectively; clothing
. Director of Cantilever Technologies (a private software company) marketing and
since 1999; manufacturing
. Trustee at The University of Chicago since 1987; company);
. Managing Director of Tandem Partners, Inc. (a privately held . Goldman Sachs
management services firm) until 1999. Mutual Fund Complex
(64 portfolios).
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation, Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and its affiliates, and because she owns shares
of Northern Trust Corporation; and Mr. Timbers because he is a former
officer, director, employee, and is a shareholder, of Northern Trust
Corporation and/or its affiliates.
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INTERESTED TRUSTEES
[Enlarge/Download Table]
NAME, ADDRESS/(1)/, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE AS OTHER DIRECTORSHIPS
TRUSTEE/(2)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS HELD BY TRUSTEE
----------------------------------------------------------------------------------------------------------------------
Michael E. Murphy/(3)/ . President of Sara Lee Foundation (philanthropic organization) . Coach, Inc.;
Age: 67 from 1997 to 2001; . Payless Shoe
Trustee since 2000 . Vice Chairman and Chief Administrative Officer of Sara Lee Source, Inc. (a
Corporation (a consumer product company) from 1994 to 1997. retail shoe store
business);
. GATX Corporation
(a railroad holding
company);
. Bassett Furniture
Industries, Inc. (a
furniture
manufacturer).
Mary Jacobs Skinner, . Partner in the law firm of Sidley Austin Brown & Wood. . None
Esq./(3)/
Age: 46
Trustee since 2000
Stephen Timbers/(3)/ . Vice Chairman of Northern Trust Corporation and The Northern . USF Corporation.
Age: 59 Trust Company from 2003 to 2004;
Trustee since 2000 . President, Chief Executive Officer of Northern Trust
Investments, N.A. (formerly known and conducting business as
Northern Trust Investments, Inc.) from 2001 to 2004;
. President of Northern Trust Global Investments, a division of
Northern Trust Corporation and Executive Vice President of The
Northern Trust Company from 1998 to 2004;
. Vice Chairman of Northern Trust Corporation from 2003 to 2004.
(1) Each Trustee may be contacted by writing to the Trustee, c/o Jeffrey A.
Dalke, Drinker Biddle & Reath LLP, One Logan Square, 18/th/ and Cherry
Streets, Philadelphia, PA 19103-6996.
(2) Each Trustee will hold office for an indefinite term until the earliest of:
(i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the
election and qualification of his or her successor, if any, elected at such
meeting; (ii) the date a Trustee resigns or retires, or a Trustee is
removed by the Board of Trustees or shareholders, in accordance with the
Trust's Agreement and Declaration of Trust; or (iii) in accordance with the
current resolutions of the Board of Trustees (which may be changed without
shareholder vote) on the last day of the calendar year of the Trust in
which he or she attains the age of 72 years.
(3) An "interested person," as defined by the 1940 Act. Mr. Murphy is deemed to
be an "interested" Trustee because he owns shares of Northern Trust
Corporation; Ms. Skinner because her law firm provides legal services to
Northern Trust Corporation and its affiliates, and because she owns shares
of Northern Trust Corporation; and Mr. Timbers because he is a former
officer, director, employee, and is a shareholder, of Northern Trust
Corporation and/or its affiliates.
15
OFFICERS OF THE TRUST
NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE /(1)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
Lloyd A. Wennlund Executive Vice President since 2003 and Director
Age: 46 since 2001 of Northern Trust Investments, N.A.
50 South LaSalle Street (formerly known and conducting business as
Chicago, IL 60675 Northern Trust Investments, Inc.) since 2001;
President since 2000 Executive Vice President and other positions at
The Northern Trust Company, President of Northern
Trust Securities, Inc., and Managing Executive,
Mutual Funds for Northern Trust Global
Investments since 1989.
Eric K. Schweitzer Senior Vice President at Northern Trust
Age: 42 Investments, N.A. (formerly known and conducting
50 South LaSalle Street business as Northern Trust Investments, Inc.)
Chicago, IL 60675 since 2001 and Senior Vice President at The
Vice President since 2000 Northern Trust Company and the Director of
Distribution, Product Management and Client
Services in the Mutual Fund Group of Northern
Trust Global Investments since 2000; Managing
Director of Mutual Funds for US Bancorp from 1997
to 2000.
Brian Ovaert Senior Vice President and Department Head at The
Age: 42 Northern Trust Company overseeing Fund
50 South LaSalle Street Accounting, Transfer Agent and Fund
Chicago, IL 60675 Administration functions, Division Manager of
Treasurer since 2002 Fund Accounting, 1992-1998; Audit Manager at
Arthur Andersen LLP (an accounting firm) prior
thereto.
Brian R. Curran Vice President and Director of Fund
Age: 36 Administration at PFPC Inc. since 1997.
4400 Computer Drive
Westborough, MA 01581
Vice President since 1999
Stuart Schuldt Senior Vice President and Division Manager of
Age: 42 Fund Administration and Fund Accounting, The
50 South LaSalle Street Northern Trust Company; Senior Vice President and
Chicago, IL 60675 Division Manager, Fund Accounting, Scudder Kemper
Assistant Treasurer since (a mutual fund company), from 1993 to 1998; Audit
2002 Manager, Arthur Andersen & Co., (an accounting
firm) prior thereto.
Jeffrey A. Dalke, Esq. Partner in the law firm of Drinker Biddle & Reath
Age: 53 LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Secretary since 2000
Linda J. Hoard, Esq. Senior Counsel and Vice President at PFPC Inc.
Age: 56 since 1998; Attorney Consultant for Fidelity
4400 Computer Drive Management & Research (a financial service
Westborough, MA 01581 company), Investors Bank & Trust Company (a
Assistant Secretary since financial service provider) and FDISG prior
1999 thereto.
(1) Officers hold office at the pleasure of the Board of Trustees until the
next annual meeting of the Trust or until their successors are duly elected
and qualified, or until they die, resign, are removed or become
disqualified.
16
OFFICERS OF THE TRUST (CONTINUED)
NAME, ADDRESS, AGE,
POSITIONS HELD WITH
TRUST AND LENGTH OF
SERVICE /(1)/ PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
Lori V. Russell Associate Counsel at PFPC Inc. since 2002;
Age: 32 Associate Counsel at Investors Bank & Trust
4400 Computer Drive Company, a financial service provider
Westborough, MA 01581 (2001-2002); Manager in the Regulatory
Assistant Secretary since Administration Department of PFPC Inc.
2003 (2000-2001) and Senior Regulatory Administrator
(1998-2000).
James Grassi Senior Attorney at The Northern Trust Company
Age: 47 since 1994.
50 South LaSalle Street
Chicago, IL 60675
Assistant Secretary since
2003
(1) Officers hold office at the pleasure of the Board of Trustees until the
next annual meeting of the Trust or until their successors are duly elected
and qualified, or until they die, resign, are removed or become
disqualified.
17
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 Corporation, PFPC Inc., Northern Funds
Distributors, LLC and their respective affiliates. The Trust has been advised by
such Trustees and officers that all such transactions have been and are expected
to be in the ordinary course of business and the terms of such transactions,
including all loans and loan commitments by such persons, have been and are
expected to be substantially the same as the prevailing terms for comparable
transactions for other customers. As a result of the responsibilities assumed by
the Trust's service providers, the Trust itself requires no employees.
Each officer holds comparable positions with Northern Funds and
certain officers hold comparable positions with certain other investment
companies of which Northern Trust Corporation, PFPC Inc. or an affiliate thereof
is the investment adviser, custodian, transfer agent, administrator and/or
distributor.
STANDING BOARD COMMITTEES. The Board of Trustees has established three standing
committees in connection with their governance of the Portfolio - Audit,
Committee on Trustees and Valuation.
The Audit Committee consists of four members: Messrs. Condon
(Chairman), Dolan and Strubel and Ms. Gilliam. The Audit Committee oversees the
audit process and provides assistance to the full Board of Trustees with respect
to fund accounting, tax compliance and financial statement matters. In
performing its responsibilities, the Audit Committee selects and recommends
annually to the entire Board of Trustees a firm of independent certified public
auditors to audit the books and records of the Trust for the ensuing year, and
reviews with the firm the scope and results of each audit. The Audit Committee
also is designated as the Qualified Legal Compliance Committee. The Audit
Committee convenes at least four times each year to meet with independent
auditors to review the scope and results of the audit and to discuss other
non-audit matters as requested by the Trust's Chairman, the Committee's Chairman
or the auditors. During the period ended November 30, 2003, the Audit Committee
convened four times.
The Committee on Trustees consists of three members: Ms. Guthman
(Chairperson) and Messrs. Dolan and Strubel. The functions performed by the
Committee on Trustees include, among other things, selecting and nominating
candidates to serve as non-interested Trustees, reviewing and making
recommendations regarding Trustee compensation and developing policies regarding
Trustee education. During the period ended November 30, 2003, the Committee on
Trustees convened four times. As stated above, each Trustee holds office for an
indefinite term until the occurrence of certain events. In filling Board
vacancies, the Committee on Trustees will consider nominees recommended by
shareholders. Nominee recommendations should be submitted to the Trust at its
mailing address stated in the Portfolio's Prospectus and should be directed to
the attention of Northern Institutional Funds Committee on Trustees.
The Valuation Committee consists of three members: Messrs. Murphy
(Chairman) and Timbers and Ms. Skinner. The Valuation Committee is authorized to
act for the Board in connection with the valuation of portfolio securities of
the Trust's non-money market portfolios in accordance with the Trust's valuation
procedures. During the period ended November 30, 2003, the Valuation Committee
convened two times.
18
TRUSTEE OWNERSHIP OF PORTFOLIO SHARES. Shares of the Portfolio are offered to
institutional investors acting on their own behalf or on behalf of their
customers and other beneficial owners ("Customers"). For this reason, the
Trustees may not make direct investments in the Portfolio. The following table
shows the dollar range of shares owned by each Trustee in the Portfolio and
other Portfolios of Northern Institutional Funds and Northern Funds.
Information as of December 31, 2003
Aggregate Dollar Range of
Equity Securities in All
Dollar Range of Equity Portfolios in Mutual Fund
Name of Trustee Securities in the Portfolio Family/*/
--------------------------- -------------------------
Richard G. Cline None Over $100,000
Edward J. Condon, Jr. None Over $100,000
William J. Dolan, Jr. None $50,001 - $100,000
Sharon Gist Gilliam None None
Sandra Polk Guthman None $50,001 - $100,000
Richard P. Strubel None None
Michael E. Murphy None Over $100,000
Mary Jacobs Skinner None Over $100,000
Stephen B. Timbers None Over $100,000
--------
/*/ The Northern Mutual Fund Complex consists of Northern Institutional Funds
and Northern Funds. As of December 31, 2003, Northern Institutional Funds
offered 23 portfolios and Northern Funds offered 30 portfolios.
19
TRUSTEE AND OFFICER COMPENSATION. The Trust pays each Trustee who is not an
officer, director or employee of Northern Trust Corporation or its subsidiaries
annual fees for his or her services as a Trustee of the Trust and as a member of
Board committees, plus additional fees for Board and Committee meetings attended
by such Trustee. In recognition of their services, the fees paid to the Board
and Committee chairpersons are larger than the fees paid to other members of the
Trust's Board and Committees. The Trustees are also reimbursed for travel
expenses incurred in connection with attending such meetings. The Trust may also
pay the incidental costs of a Trustee to attend training or other types of
conferences relating to the investment company industry.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the period ended November 30,
2003:
Total
Prime Obligations Compensation from Fund Complex
Portfolio/(1)/ (including the Portfolio)/(2)/
----------------- ------------------------------
Stephen B. Timbers $ 0 $ 0
Richard G. Cline 130 95,000
Edward J. Condon, Jr. 114 82,000
Sandra Polk Guthman 114 82,000
Sharon Gist Gilliam 109 78,000
Richard P. Strubel 113 79,500
William J. Dolan, Jr. 11 7,950/(3)/
Michael E. Murphy 114 78,000
Mary Jacobs Skinner 54 39,000/(4)/
1 Commenced operations August 21, 2003.
2 As of December 31, 2003, the Northern Mutual Fund Complex consisted of
Northern Institutional Funds (23 portfolios) and Northern Funds (30
portfolios).
3 For the period ended November 30, 2003, Mr. Dolan elected to defer
$71,550 of $79,500 total compensation.
4 For the period ended November 30, 2003, Ms. Skinner elected to defer
$39,000 of $78,000 total compensation.
The Trust does not provide pension or retirement benefits to its
Trustees.
Effective October 29, 2002, each Trustee became entitled to
participate in the Northern Institutional Funds Deferred Compensation Plan (the
"Plan"). Under the Plan, a Trustee may elect to have his or her deferred fees
treated as if they had been invested by the Trust in the shares of the Northern
Institutional Funds Diversified Assets Portfolio and/or at the discretion of the
Trust, another money market fund selected by the Trust that complies with the
provisions of Rule 2a-7 under the 1940 Act or one or more short-term fixed
income instruments selected by the Trust that are "eligible securities" as
defined by that rule. The amount paid to the Trustees under the Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees will not obligate the Trust to retain the service of any Trustee or
obligate the Portfolio to any level of compensation to the Trustee. The Trust
may invest in underlying securities without shareholder approval.
The Trust's officers do not receive fees from the Trust for services
in such capacities, although PFPC, of which certain of the Trust's officers are
also officers (except Messrs. Dalke, Grassi, Ovaert, Schuldt, Schweitzer and
Wennlund), receives fees from the Trust for administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives
fees from the Trust for legal services.
Northern Trust Corporation and/or its affiliates, of which Messrs.
Grassi, Ovaert, Schuldt, Schweitzer and Wennlund are officers, receive fees from
the Trust as Investment Adviser, Co-Administrator, Custodian and Transfer Agent.
CODE OF ETHICS
The Trust, its Investment Adviser and principal underwriter have
adopted codes of ethics (the "Codes of Ethics") under Rule 17j-1 of the 1940
Act. The Codes of Ethics permit personnel, subject to the Codes of Ethics and
their provisions, to invest in securities, including securities that may be
purchased or held by the Trust.
20
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust Investments, N.A. ("NTI" or the "Investment Adviser,"
formerly known and conducting business as Northern Trust Investments, Inc.), a
direct subsidiary of The Northern Trust Company ("TNTC"), an Illinois state
chartered bank, serves as the Investment Adviser of the Portfolio. NTI is
referred to as "Investment Adviser." TNTC is a direct wholly owned subsidiary
of Northern Trust Corporation, a bank holding company. NTI is located at 50
South LaSalle Street, Chicago, IL 60675. Unless otherwise indicated, NTI and
TNTC are referred to collectively in this Additional Statement as "Northern
Trust."
Northern Trust Corporation, through its subsidiaries, has for more
than 100 years managed the assets of individuals, charitable organizations,
foundations and large corporate investors, and as of December 31, 2003,
administered in various capacities approximately $2.2 trillion of assets,
including approximately $478.6 billion of assets for which Northern Trust and
its affiliates had investment management responsibilities.
TNTC is an Illinois state chartered banking organization and a member
of the Federal Reserve System. Formed in 1889, it administers and manages assets
for individuals, personal trusts, defined contribution and benefit plans and
other institutional and corporate clients. It is the principal subsidiary of
Northern Trust Corporation, a bank holding company. NTI is an investment adviser
registered under the Investment Advisers Act of 1940. It primarily manages
assets for defined contribution and benefit plans, investment companies and
other institutional investors.
Under the Advisory Agreements with the Trust, the Investment Adviser,
subject to the general supervision of the Trust's Board of Trustees, makes
decisions with respect to, and places orders for, all purchases and sales of
portfolio securities for the Portfolio. In connection with portfolio
transactions for the Portfolio, which are generally done at a net price without
a broker's commission, the Advisory Agreement with the Trust provides that the
Investment Adviser shall attempt to obtain best net price and execution.
On occasions when the Investment Adviser deems the purchase or sale of
a security to be in the best interests of the Portfolio as well as other
fiduciary or agency accounts managed by it (including any other investment
portfolio, investment company or account for which the Investment Adviser acts
as adviser), the Advisory 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 investment portfolio with those to
be sold or purchased for such other accounts in order to obtain best net price
and execution. 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 the most equitable and
consistent with its fiduciary obligations to the Portfolio and other accounts
involved. In some instances, this procedure may adversely affect the size of the
position obtainable for the Portfolio or the amount of the securities that are
able to be sold for the Portfolio. To the extent the execution and price
available from more than one broker or dealer are believed to be comparable, the
Investment Advisory Agreement permits the Investment Adviser, at its discretion
but subject to applicable law, to select the executing broker or dealer on the
basis of the Investment Adviser's opinion of the reliability and quality of such
broker or dealer.
For the period ended November 30, 2003, all portfolio transactions for
the Portfolio were executed on a principal basis and, therefore, no brokerage
commissions were paid by the Portfolio. Purchases by the Portfolio from
underwriters of portfolio securities, however, normally include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
include the spread between the dealer's cost for a given security and the resale
price of the security.
During the fiscal year ended November 30, 2003, the Prime Obligation
Portfolio acquired and sold securities of Citigroup, Inc., Credit Suisse First
Boston Corp., Goldman Sachs Group, Inc., Merrill Lynch & Co., Inc. and
UBS-Warburg, each a regular broker/dealer. At November 30, 2003, the Prime
Obligation Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Citicorp Securities, Inc., with an approximate aggregate market value of
$14,987,000; Credit Suisse First Boston Corp., with an approximate aggregate
market value of $11,000,000; Goldman Sachs Group, Inc with an approximate
aggregate market value of $10,000,000; and Merrill Lynch & Co., Inc., with an
approximate aggregate market value of $2,004,000.
The Advisory Agreement provides that the Investment Adviser may render
similar services to others so long as its services under the Advisory Agreement
are not impaired thereby. The Advisory Agreement also provides that the Trust
will indemnify the Investment Adviser against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Advisory Agreement) or, in lieu thereof, contribute to resulting losses.
21
The Advisory Agreement most recently was approved with respect to the
Portfolio by the Trustees, including a majority of the Trustees who are not
parties to the Advisory Agreement or "interested persons" (as such term is
defined in the 1940 Act) of any party thereto (the "non-interested trustees"),
on February 13, 2004. At that meeting, the Board of Trustees reviewed the
written and oral presentations provided by the Investment Adviser in connection
with the Trustees' consideration of the Advisory Agreement. The Trustees also
reviewed, with the advice of legal counsel, their responsibilities under
applicable law. The Trustees considered, in particular, the Portfolio's
contractual advisory fee rates; the Portfolio's operating expense ratios; and
the Investment Adviser's voluntary fee waivers and expense reimbursements for
the Portfolio. The information on these matters was also compared to similar
information for other mutual funds. The Trustees also considered the investment
performance of the Portfolios; the personnel and resources of the Investment
Adviser; the types of services provided to the Portfolio under the Investment
Advisory Agreement; and the nature of the Portfolio's institutional investors.
In addition, the Trustees considered fees payable by the Portfolio, and the
Portfolio's anticipated total expense ratio, in light of the institutional
investor base the Portfolio is intended to serve; the minimum investment amount
for shareholders; and the anticipated operations of the Portfolio. The Trustees
reviewed at length the information comparing the Portfolios' total expense
ratios (after fee waivers and expense reimbursements) to those of other mutual
funds as compiled by a third party consultant. After consideration of the
Investment Adviser's presentation, the Trustees determined that the Advisory
Agreements should be approved.
Unless sooner terminated, the Advisory Agreement will continue in
effect with respect to the Portfolio until April 30, 2005, and the Custodian
Agreement and the Transfer Agency Agreement (discussed below) will continue in
effect with respect to the Portfolio until April 30, 2005, and thereafter for
successive 12-month periods, provided that the continuance is approved at least
annually (i) by the vote of a majority of the Trustees who are not parties to
the agreement or "interested persons" (as such term is defined in the 1940 Act)
of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Trustees or by the vote of a majority
of the outstanding shares of the Portfolio (as defined below under "Other
Information"). Each agreement is terminable at any time without penalty by
either the Trust (by specified Trustee or shareholder action) or by the
Investment Adviser, Custodian or Transfer Agent, as the case may be, on 60 days'
written notice.
For the period ended November 30, 2003, the amount of advisory fees
incurred by the Portfolio (after fee waivers) was $95,406. If such waiver were
not in effect, the advisory fees incurred by the Portfolio would have been
$143,109.
Under its Transfer Agency Agreement with the Trust, TNTC has
undertaken to (i) answer Customer inquiries regarding the current yield of, and
certain other matters (e.g., account status information) pertaining to, the
Trust, (ii) process purchase and redemption transactions, including transactions
generated by any service provided outside of the Agreement by the Transfer
Agent, its affiliates or correspondent banks whereby Customer account cash
balances are automatically invested in shares of the Portfolio, and the
disbursement of the proceeds of redemptions, (iii) establish and maintain
separate omnibus accounts with respect to shareholders investing through TNTC or
any of its affiliates and correspondent banks and act as transfer agent and
perform sub-accounting services with respect to each such account, (iv) provide
periodic statements showing account balances, (v) mail reports and proxy
materials to shareholders, (vi) provide information in connection with the
preparation by the Trust of various regulatory reports and prepare reports to
the Trustees and management, (vii) answer inquiries (including requests for
prospectuses and statements of additional information, and assistance in the
completion of new account applications) from investors and respond to all
requests for information regarding the Trust (such as current price, recent
performance, and yield data) and questions relating to accounts of investors
(such as possible errors in statements, and transactions), (viii) respond to and
seek to resolve all complaints of investors with respect to the Trust or their
accounts, (ix) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend, distribution and tax notices to investors,
(x) furnish the Trust with all pertinent Blue Sky information, (xi) perform all
required tax withholding, (xii) preserve records, and (xiii) furnish necessary
office space, facilities and personnel. The Transfer Agent may appoint one or
more sub-transfer agents in the performance of its services.
As compensation for the services rendered by the Transfer Agent under
the Transfer Agency Agreement with respect to the Shares Class of the Portfolio
described in this Additional Statement and the assumption by the Transfer Agent
of related expenses, TNTC is entitled to a fee from the Trust, calculated daily
and payable monthly, at an annual rate equal to $18 for each subaccount relating
to such Shares of the Portfolio. This fee, which is borne solely by the Shares
described in this Additional Statement and not by the Portfolio's other share
classes, is subject to annual upward adjustments based on increases in the
Consumer Price Index for All Urban Consumers, provided that the Transfer Agent
may permanently or temporarily waive all or any portion of any upward
adjustment. The Transfer Agent's affiliates and correspondent banks may receive
compensation for performing the services described in the preceding paragraph
that the Transfer Agent would otherwise receive. Conflict-of-interest
restrictions under state and federal law (including the Employee Retirement
Income Security Act of 1974) may apply to the receipt by such affiliates or
correspondent banks of such compensation in connection with the investment of
fiduciary funds in Shares of the Portfolio.
22
As compensation for the services rendered by the Transfer Agent under
the Transfer Agency Agreement with respect to Service Shares and Premier Shares
of the Portfolio described in this Additional Statement and the assumption by
the Transfer Agent of related expenses, TNTC is entitled to a fee from the
Trust, calculated daily and payable monthly, at the following annual rates: (i)
0.01% of the average daily net asset value of the outstanding Service Shares of
the Portfolio; and (ii) 0.02% of the average daily net asset value of the
outstanding Premier Shares of the Portfolio. The transfer agency fee
attributable to each class of shares is borne solely by that class. The Transfer
Agent's affiliates and correspondent banks may receive compensation for
performing the services described in the preceding paragraph that the Transfer
Agent would otherwise receive. Conflict-of-interest restrictions under state and
federal law (including the Employee Retirement Income Security Act of 1974) may
apply to the receipt by such affiliates or correspondent banks of such
compensation in connection with the investment of fiduciary funds in Service
Shares and Premier Shares of the Portfolio.
For the period ended November 30, 2003, the amount of transfer agency
fees incurred by the Portfolio was $10,795.
Under its Custodian Agreement with the Trust, TNTC (i) holds the
Portfolio's cash and securities, (ii) maintains such cash and securities in
separate accounts in the name of the Portfolio, (iii) makes receipts and
disbursements of funds on behalf of the Portfolio, (iv) receives, delivers and
releases securities on behalf of the Portfolio, (v) collects and receives all
income, principal and other payments in respect of the Portfolio's investments
held by the Custodian, and (vi) maintains the accounting records of the Trust.
The Custodian may employ one or more subcustodians, provided that the Custodian,
subject to certain monitoring responsibilities, shall have no more
responsibility or liability to the Trust on account of any action or omission of
any subcustodian so employed than such subcustodian has to the Custodian. In
addition, the Trust's custodial arrangements provide, with respect to foreign
securities, that the Custodian shall not be: (i) responsible for the solvency of
any subcustodian appointed by it with reasonable care; (ii) responsible for any
act, omission, default or for the solvency of any eligible foreign securities
depository; and (iii) liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism or any loss where the subcustodian has otherwise
exercised reasonable care. The Custodian may also appoint agents to carry out
such of the provisions of the Custodian Agreement as the Custodian may from time
to time direct. The Custodian has entered into agreements with financial
institutions and depositories located in foreign countries with respect to the
custody of the Portfolio's foreign securities.
As compensation for the services rendered to the Trust by the
Custodian with respect to the Portfolio and the assumption by the Custodian of
certain related expenses, the Custodian is entitled to payment from the Trust as
follows: (i) $18,000 annually for the Portfolio, plus (ii) 1/100th of 1%
annually of the Portfolio's average daily net assets to the extent they exceed
$100 million, plus (iii) a fixed dollar fee for each trade in portfolio
securities, plus (iv) a fixed dollar fee for each time that the Custodian
receives or transmits funds via wire, plus (v) reimbursement of expenses
incurred by the Custodian for telephone, postage, courier fees, office supplies
and duplicating. The fees referred to in clauses (iii) and (iv) are subject to
annual upward adjustments based on increases in the Consumer Price Index for All
Urban Consumers, provided that the Custodian may permanently or temporarily
waive all or any portion of any upward adjustment.
The Custodian's fees under the Custodian Agreement are subject to
reduction based on the Portfolio's daily uninvested U.S. dollar cash balances
(if any).
For the period ended November 30, 2003, the amount of custodian fees
incurred by the Portfolio was $18,151.
Northern Trust and its affiliates may act as an underwriter of various
securities. Under the 1940 Act, the Portfolio is precluded, subject to certain
exceptions, from purchasing in the primary market those securities with respect
to which Northern Trust or an affiliate is serving as a principal underwriter.
In the opinion of Northern Trust, this limitation will not significantly affect
the ability of the Portfolio to pursue its investment objective.
Under a Service Mark License Agreement with the Trust, Northern Trust
Corporation has agreed that the name "Northern Institutional Funds" may be used
in connection with the Trust's business on a royalty-free basis. Northern Trust
Corporation has reserved to itself the right to grant the non-exclusive right to
use the name "Northern Institutional Funds" to any other person. The Agreement
provides that at such time as the Agreement is no longer in effect, the Trust
will cease using the name "Northern Institutional Funds."
23
PROXY VOTING
The Trust, on behalf of the Portfolio, has delegated the voting of
portfolio securities to Northern Trust in its capacity as Investment Adviser.
Northern Trust has adopted proxy voting policies and procedures (the "Proxy
Voting Policy") for the voting of proxies on behalf of client accounts for which
Northern Trust has voting discretion, including the Portfolio. Under the Proxy
Voting Policy, shares are to be voted in the best interests of the Portfolio.
Normally, Northern Trust exercises proxy voting discretion on
particular types of proposals in accordance with guidelines (the "Proxy
Guidelines") set forth in the Proxy Voting Policy. The Proxy Guidelines address,
for example, proposals to classify the board of directors, to eliminate
cumulative voting, to limit management's ability to alter the size of the board,
to require shareholder ratification of poison pills, to require a supermajority
shareholder vote for charter or bylaw amendments and mergers or other
significant business combinations, to provide for director and officer
indemnification and liability protection, to increase the number of authorized
shares, to create or abolish preemptive rights, to approve executive and
director compensation plans, to limit executive and director pay, to opt in or
out of state takeover statutes and to approve mergers, acquisitions, corporate
restructuring, spin-offs, assets sales or liquidations.
A Proxy Committee comprised of senior Northern Trust investment and
compliance officers has the responsibility for the content, interpretation and
application of the Proxy Guidelines. In addition, Northern Trust has retained an
independent third party (the "Service Firm") to review proxy proposals and to
make voting recommendations to the Proxy Committee in a manner consistent with
the Proxy Guidelines. The Proxy Committee may apply these Proxy Guidelines with
a measure of flexibility. Accordingly, except as otherwise provided in the Proxy
Voting Policy, the Proxy Committee may vote proxies contrary to the
recommendations of the Service Firm if it determines that such action is in the
best interests of a Portfolio. In exercising its discretion, the Proxy Committee
may take into account a variety of factors relating to the matter under
consideration, the nature of the proposal and the company involved. As a result,
the Proxy Committee may vote in one manner in the case of one company and in a
different manner in the case of another where, for example, the past history of
the company, the character and integrity of its management, the role of outside
directors, and the company's record of producing performance for investors
justifies a high degree of confidence in the company and the effect of the
proposal on the value of the investment. Similarly, poor past performance,
uncertainties about management and future directions, and other factors may lead
the Proxy Committee to conclude that particular proposals present unacceptable
investment risks and should not be supported. The Proxy Committee also evaluates
proposals in context. A particular proposal may be acceptable standing alone,
but objectionable when part of an existing or proposed package. Special
circumstances may also justify casting different votes for different clients
with respect to the same proxy vote.
Northern Trust may occasionally be subject to conflicts of interest in
the voting of proxies due to business or personal relationships with persons
having an interest in the outcome of certain votes. For example, Northern Trust
may provide trust, custody, investment management, brokerage, underwriting,
banking and related services to accounts owned or controlled by companies whose
management is soliciting proxies. Occasionally, Northern Trust may also have
business or personal relationships with other proponents of proxy proposals,
participants in proxy contests, corporate directors or candidates for
directorships. Northern Trust may also be required to vote proxies for
securities issued by Northern Trust Corporation or its affiliates or on matters
in which Northern Trust has a direct financial interest, such as shareholder
approval of a change in the advisory fees paid by a Portfolio. Northern Trust
seeks to address such conflicts of interest through various measures, including
the establishment, composition and authority of the Proxy Committee and the
retention of the Service Firm to perform proxy review and vote recommendation
functions. The Proxy Committee has the responsibility of determining whether a
proxy vote involves a potential conflict of interest and how the conflict should
be addressed in conformance with the Proxy Voting Policy. The Proxy Committee
may resolve such conflicts in any of a variety of ways, including the following:
voting in accordance with the vote recommendation of the Service Firm; voting in
accordance with the recommendation of an independent fiduciary appointed for
that purpose; voting pursuant to client direction by seeking instructions from
the Board of Trustees of the Trust; or by voting pursuant to a "mirror voting"
arrangement under which shares are voted in the same manner and proportion as
shares over which Northern Trust does not have voting discretion. The method
selected by the Proxy Committee may vary depending upon the facts and
circumstances of each situation.
Northern Trust may choose not to vote proxies in certain situations or
for a Portfolio. This may occur, for example, in situations where the exercise
of voting rights could restrict the ability to freely trade the security in
question (as is the case, for example, in certain foreign jurisdictions known as
"blocking markets").
24
CO-ADMINISTRATORS AND DISTRIBUTOR
NTI and PFPC Inc. ("PFPC"), 4400 Computer Drive, Westborough,
Massachusetts 01581, act as Co-Administrators for the Portfolio under a
Co-Administration Agreement with the Trust. Subject to the general supervision
of the Trust's Board of Trustees, the Co-Administrators provide supervision of
all aspects of the Trust's non-investment advisory operations and perform
various corporate secretarial, treasury and blue sky services, including but not
limited to: (i) maintaining office facilities and furnishing corporate officers
for the Trust; (ii) furnishing data processing services, clerical services, and
executive and administrative services and standard stationery and office
supplies; (iii) performing all functions ordinarily performed by the office of a
corporate treasurer, and furnishing the services and facilities ordinarily
incident thereto, such as expense accrual monitoring and payment of the Trust's
bills, preparing monthly reconciliation of the Trust's expense records, updating
projections of annual expenses, preparing materials for review by the Board of
Trustees and compliance testing; (iv) preparing and submitting reports to the
Trust's shareholders and the SEC; (v) preparing and printing financial
statements; (vi) preparing monthly Portfolio profile reports; (vii) preparing
and filing the Trust's federal and state tax returns (other than those required
to be filed by the Trust's custodian and transfer agent) and providing
shareholder tax information to the Trust's transfer agent; (viii) assisting in
marketing strategy and product development; (ix) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (x) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (xi) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (xii) monitoring
the Trust's arrangements with respect to services provided by Servicing Agents
to their Customers who are the beneficial owners of shares, pursuant to
servicing agreements between the Trust and such Servicing Agents.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the
Co-Administrators are entitled to a fee from the Portfolio, computed daily and
payable monthly, at an annual rate of 0.10% of the average daily net assets of
the Portfolio. The Co-Administrators are also entitled to additional fees for
special legal services. The Co-Administrators will reimburse the Portfolio for
its expenses (including administration fees payable to the Co-Administrators,
but excluding advisory fees, transfer agency fees, servicing fees and
extraordinary expenses) which exceed on an annualized basis 0.10% of the
Portfolio's average daily net assets.
Unless sooner terminated, the Co-Administration Agreement will
continue in effect until April 30, 2005, and thereafter for successive one-year
terms with respect to the Portfolio, provided that the Agreement is approved
annually (i) by the Board of Trustees or (ii) by the vote of a majority of the
outstanding shares of such Portfolio (as defined below under "Other
Information"), 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 without penalty by the
Trust on at least 120 days' written notice to the Co-Administrators. Each
Co-Administrator may terminate the Co-Administration Agreement with respect to
itself at any time without penalty on at least 120 days' written notice to the
Trust and the other Co-Administrator.
For the period ended November 30, 2003, the Co-Administrators received
fees under the Co-Administration Agreement, with respect to the Prime
Obligations Portfolio, in the amount of $95,406.
Additionally, for the period ended November 30, 2003, the
Co-Administrators voluntarily waived/ reimbursed the Prime Obligations Portfolio
for its expenses reducing administration fees in the amount of $119,694.
The Trust has entered into a Distribution Agreement under which
Northern Funds Distributors, LLC, ("NFD") as agent, sells shares of the
Portfolio on a continuous basis. NFD pays the cost of printing and distributing
prospectuses to persons who are not shareholders of the Trust (excluding
preparation and typesetting expenses) and of certain other distribution efforts.
No compensation is payable by the Trust to NFD for such distribution services.
NFD is a wholly-owned subsidiary of PFPC Distributors, Inc. ("PFPC
Distributors"). PFPC Distributors, based in King of Prussia, Pennsylvania, is a
wholly-owned subsidiary of PFPC, a co-administrator for the Trust. Prior to
January 2, 2001, NFD was a wholly-owned subsidiary of Provident Distributors,
Inc. ("PDI"), an independently owned and operated broker-dealer. Effective
January 2, 2001, PDI was acquired by PFPC Distributors and NFD became a
wholly-owned subsidiary of PFPC Distributors.
The Co-Administration Agreement provides that the Co-Administrators
may render similar services to others so long as their services under such
Agreement are not impaired thereby. The Co-Administration Agreement also
provides that the Trust will indemnify each Co-Administrator against all claims
except those resulting from the willful misfeasance, bad faith or negligence of
such Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions
25
of material fact except those resulting from the reliance on information
furnished to the Trust by NFD, or those resulting from the willful misfeasance,
bad faith or negligence of NFD's, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with
NFD, Northern Trust Corporation agrees that the name "Northern Funds" may be
used in connection with Northern Institutional 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
License Agreement provides that at such time as the License Agreement is no
longer in effect NFD will cease using the name "Northern Funds."
COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serves as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
IN-KIND PURCHASES AND REDEMPTIONS
Payment for shares of the Portfolio may, in the discretion of Northern
Trust, be made in the form of securities that are permissible investments for
the Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern Trust. In connection with an in-kind
securities payment, the Portfolio will require, among other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by the Portfolio and that the Portfolio 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
Portfolio; and that adequate information be provided concerning the basis and
other tax matters relating to the securities.
Although the Portfolio generally will redeem shares in cash, the
Portfolio reserves the right to pay redemptions by a distribution in-kind of
securities (instead of cash) from such Portfolio. The securities distributed
in-kind would be readily marketable and would be valued for this purpose using
the same method employed in calculating the Portfolio'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.
THIRD-PARTY FEES AND REQUIREMENTS
Shares of the Portfolio are sold and redeemed without any purchase or
redemption charge imposed by the Trust, although Northern Trust and other
institutions may charge their Customers for services provided in connection with
their investments.
The exercise of voting rights and the delivery to Customers of
shareholder communications from the Trust will be governed by the Customers'
account agreements with the Institutions. Customers should read the Prospectus
in connection with any relevant agreement describing the services provided by an
Institution and any related requirements and charges, or contact the Institution
at which the Customer maintains its account for further information.
EXPENSES
Except as set forth above and in this Additional Statement, the
Portfolio is responsible for the payment of its expenses. These expenses
include, without limitation, the fees and expenses payable to the Investment
Adviser, Co-Administrators, Transfer Agent and Custodian; brokerage fees and
commissions, fees for the registration or qualification of Portfolio shares
under federal or state securities laws; expenses of the organization of the
Trust; taxes; interest; costs of liability insurance, fidelity bonds,
indemnification or contribution, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against the
Trust for violation of any law; legal, tax and auditing fees and expenses;
expenses of preparing and printing prospectuses, statements of additional
information, proxy materials, reports and notices and distributing of the same
to the Portfolio's shareholders and regulatory authorities; compensation and
expenses of its Trustees; fees of industry organizations such as the Investment
Company Institute; and miscellaneous and extraordinary expenses incurred by the
Trust.
26
The Investment Adviser has voluntarily agreed to waive a portion of
its management fee during the current period. The voluntary fee waiver may be
modified or terminated at any time at the option of the Investment Adviser.
Under the Co-Administration Agreement, which may be amended without shareholder
approval, the Co-Administrators have agreed to reimburse expenses (including
fees payable to the Co-Administrators, but excluding management fees, transfer
agent fees, service agent fees, taxes, interest and other extraordinary
expenses) which exceed on an annualized basis 0.10% of the Portfolio's average
daily net assets. The result of these fee waivers and reimbursements will be to
increase the performance of the Portfolio during the periods for which the
waivers and reimbursements are made.
PERFORMANCE INFORMATION
The performance of a class of shares of the Portfolio may be compared
to the performance of other money market funds with similar investment
objectives 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 class of shares
may be compared to data prepared by iMoneyNet, Inc. or other independent mutual
fund reporting services. Performance data as reported in national financial
publications such as Money Magazine, Morningstar, 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 class of shares of
the Portfolio.
From time to time, the Portfolio may advertise its "yields" and
"effective yields." Yield and effective yield are computed separately for each
class of shares. Each class of shares has different fees and expenses, and
consequently, may have different yields for the same period. 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 Portfolio over a seven-day period identified
in the advertisement. This net investment income is then "annualized." That is,
the amount of net investment income generated by the investment during that week
is assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment.
In arriving at such quotations as to "yield," the Trust first
determines the net change, exclusive of capital changes, during the seven-day
period in the value of a hypothetical pre-existing account having a balance of
one Share, Service Share or Premier 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 Portfolio 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, Service Shares and Premier Shares of the
Portfolio 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.
Quotations of yield and effective yield provided by the Trust are
carried to at least the nearest hundredth of one percent. Any fees imposed by
Northern Trust, its affiliates or correspondent banks on their Customers in
connection with investments in Shares, Service Shares and Premier Shares of the
Portfolio are not reflected in the calculation of yields for the Portfolio.
The annualized yield of the Portfolio for the seven-day period ended
November 30, 2003 was as follows:
Yield Effective Yield
----- ---------------
Prime Obligations Portfolio /(1)/ 1.05% 1.06%
(1) Commenced operations on August 21, 2003.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information -
Co-Administrators and Distributor" and "Additional Trust Information -
Investment Adviser, Transfer Agent and Custodian." In the absence of such fee
reductions and expense limitations, the annualized yield of the Portfolio for
the same seven-day period would have been as follows:
Yield Effective Yield
----- ---------------
Prime Obligations Portfolio /(1)/ 0.88% 0.89%
(1) Commenced operations on August 21, 2003.
27
The Portfolio's yields may not provide a basis for comparison with
bank deposits and other investments which provide a fixed yield for a stated
period of time. The Portfolio's yields fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. The
annualization of one week's income is not necessarily indicative of future
actual yields. Actual yields will depend on such variables as portfolio quality,
average portfolio maturity, the type of portfolio instruments acquired, changes
in money market interest rates, portfolio expenses and other factors. Yields are
one basis investors may use to analyze a class of shares of the Portfolio as
compared to comparable classes of shares of other money market funds and other
investment vehicles. However, yields of other money market 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 yield.
The Portfolio may also quote from time to time the total return of its
Shares, Service Shares or Premier Shares in accordance with SEC regulations.
AMORTIZED COST VALUATION
As stated in the Prospectus, the Portfolio seeks to maintain a net
asset value of $1.00 per share and, in this connection, values its instruments
on the basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This
method values a security at its cost on the date of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Portfolio would receive if the Portfolio sold the
instrument. During such periods the yield to investors in the Portfolio 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 Portfolio
value on a particular day, a prospective investor in the Portfolio would be able
to obtain a somewhat higher (lower) yield and ownership interest than would
result from investment in such similar entity and existing investors would
receive less (more) investment income and ownership interest. However, the Trust
expects that the procedures and limitations referred to in the following
paragraphs of this section will tend to minimize the differences referred to
above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the
Trust's operations and delegating special responsibilities involving portfolio
management to the Investment Adviser, has established procedures that are
intended, taking into account current market conditions and the Portfolio's
investment objective, to stabilize the net asset value of the Portfolio, as
computed for the purposes of purchases and redemptions, at $1.00 per share. The
Trustees' procedures include periodic monitoring of the difference (the "Market
Value Difference") between the amortized cost value per share and the net asset
value per share based upon available indications of market value. Available
indications of market value used by the Trust consist of actual market
quotations or appropriate substitutes which reflect current market conditions
and include (i) quotations or estimates of market value for individual portfolio
instruments and/or (ii) values for individual portfolio instruments derived from
market quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference of the Portfolio exceeds
certain limits or NTI believes that the Market Value Difference may result in
material dilution or other unfair results to investors or existing shareholders,
the Trust will take action in accordance with the 1940 Act and 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 the Portfolio, 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
Portfolio'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 Portfolio.
Rule 2a-7 requires that the Portfolio limit its investments to
instruments which the Investment Adviser determines (pursuant to guidelines
established by the Board of Trustees) to present minimal credit risks and which
are "Eligible Securities" as defined by the SEC and described in the Prospectus.
The Rule also requires that the Portfolio maintains 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
calendar days (as calculated pursuant to Rule 2a-7). Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Rule requires the Portfolio to invest its available cash
in such a manner as to reduce such maturity to the prescribed limit as soon as
reasonably practicable.
28
TAXES
The following summarizes certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
The discussions of the federal tax consequences in the Prospectus and
this Additional Statement are based on the Internal Revenue Code of 1986, as
amended (the "Code") and the laws and regulations issued thereunder as in effect
on the date of this Additional Statement. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
The Portfolio intends to qualify as a regulated investment company
under Subtitle A, Chapter 1, of Subchapter M of the Code. As a regulated
investment company, the Portfolio is generally exempt from federal income tax on
its net investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
The Portfolio intends to make sufficient distributions or deemed distributions
each year to avoid liability for corporate income tax. If the Portfolio were to
fail to make sufficient distributions, it could be liable for corporate income
tax and for excise tax in respect of the shortfall or, if the shortfall is large
enough, the Portfolio could be disqualified as a registered investment company.
In addition to satisfaction of the Distribution Requirement, the
Portfolio 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 income derived with respect to its business of
investing in such stock, securities, or currencies (the "Income Requirement").
Also, at the close of each quarter of its taxable year, at least 50% of the
value of the Portfolio's assets must generally consist of cash and cash items,
U.S. government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Portfolio has not invested more
than 5% of the value of its total assets in securities of such issuer and as to
which the Portfolio does not hold more than 10% of the outstanding voting
securities of such issuer), and no more than 25% of the value of the Portfolio'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 Portfolio controls and which
are engaged in the same or similar trades or businesses. The Portfolio intends
to comply with these requirements.
If for any taxable year any Portfolio 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, the shareholders would recognize dividend income on distributions to the
extent of the Portfolio's current and accumulated earnings and profits and
corporate shareholders may be eligible for the dividends received deduction.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Portfolio 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.
The Trust will be required in certain cases to withhold and remit to
the U.S. Treasury 28% of the dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of taxable interest or
dividend income properly, or (iii) who has failed to certify to the Trust, when
required to do so, that he or she is not subject to backup withholding or that
he or she is an "exempt recipient."
STATE AND LOCAL TAXES
Although the Portfolio 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
29
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Portfolio may be
subject to the tax laws of such states or localities.
FOREIGN INVESTORS
Foreign shareholders generally will be subject to U.S. withholding tax at a rate
of 30% (or a lower treaty rate, if applicable) on distributions by the Portfolio
of net investment income, other ordinary income, and the excess, if any, of net
short-term capital gain over net long-term capital loss for the year, regardless
of the extent, if any, to which the income or gain is derived from non-U.S.
investments of the Portfolio. For this purpose, foreign shareholders include
individuals other than U.S. citizens, residents and certain nonresident aliens,
and foreign corporations, partnerships, trusts and estates. A foreign
shareholder generally will not be subject to U.S. income or withholding tax in
respect of proceeds from or gain on the redemption of shares or in respect of
capital gain dividends (i.e., dividends attributable to long-term capital gains
of the Portfolio), provided such shareholder submits a statement, signed under
penalties of perjury, attesting to such shareholder's exempt status. Different
tax consequences apply to a foreign shareholder engaged in a U.S. trade or
business or present in the U.S. for 183 days or more in a year. Foreign
shareholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of investing in the Portfolio.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Additional Statement. Such laws and
regulations may be changed by legislative or administrative action. No attempt
is made to present a detailed explanation of the tax treatment of the Portfolio
or its shareholders, and the discussion here and in the Prospectus is not
intended as a substitute for careful tax planning. Shareholders are advised to
consult their tax advisers with specific reference to their own tax situation,
including the application of state and local taxes.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in one or more investment
portfolios. The Trustees or Trust may hereafter create series in addition to the
Portfolio and the Trust's twenty-three offered series, which represent interests
in the Trust's twenty-three offered portfolios and are discussed in a separate
Statement of Additional Information. The Trust Agreement also permits the Board
of Trustees to classify or reclassify any unissued shares into classes within a
series. Pursuant to such authority, the Trustees have authorized the issuance of
unlimited number of shares of beneficial interest in three separate classes of
shares in the Portfolio: Shares, Service Shares and Premier Shares.
Under the terms of the Trust Agreement, each share of each Portfolio
is without par value, represents an equal proportionate interest in the
particular Portfolio with each other share of its class in the same Portfolio
and is entitled to such dividends and distributions out of the income belonging
to the Portfolio as are declared by the Trustees. Upon any liquidation of the
Portfolio, shareholders of each class of the Portfolio 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 "About Your Account" in the Prospectus. In addition, pursuant
to the terms of the 1940 Act, the right of a shareholder to redeem shares and
the date of payment by the Portfolio may be suspended for more than seven days
(i) for any period during which the New York Stock Exchange is closed, other
than the customary weekends or holidays, or trading in the markets the Portfolio
normally utilizes is closed or is restricted as determined by the SEC, (ii)
during any emergency, as determined by the SEC, as a result of which it is not
reasonably practicable for the Portfolio to dispose of instruments owned by it
or fairly to determine the value of its net assets, or (iii) for such other
period as the SEC may by order permit for the protection of the shareholders of
the Portfolio. The Trust may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.
In addition, shares of each Portfolio are redeemable at the unilateral option of
the Trust if the Trustees determine in their sole discretion that failure to so
redeem may have material adverse consequences to the shareholders of the
Portfolio. Shares when issued as described in the Prospectus are validly issued,
fully paid and nonassessable, except as stated in the Prospectus and this
Additional Statement. In the interests of economy and convenience, certificates
representing shares of the Portfolio are not issued.
The proceeds received by the Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of the Portfolio. The underlying assets
of the Portfolio will be segregated on the books of account, and will be charged
with the liabilities in respect to the Portfolio and with a share of the general
liabilities of the Trust. General liabilities of the Trust are normally
allocated in proportion to the net asset values of the Portfolio and the Trust's
other series except where allocations of direct expenses can otherwise be fairly
made.
30
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement 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. In addition,
shareholders of each of the classes in a particular investment portfolio have
equal voting rights except that only shares of a particular class of an
investment portfolio will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing expenses and transfer
agency fees that are payable by that class.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees without the vote or consent of shareholders, either to one vote for
each share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders, including the election of
Trustees (this method of voting being referred to as "dollar-based voting").
However, to the extent required by the 1940 Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees and, accordingly, the holders of more than 50% of the aggregate
voting power of the Trust may elect all of the Trustees, irrespective of the
vote of the other shareholders. Meetings of shareholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the shares entitled to vote at
such meeting. To the extent required by law, the Trust will assist in
shareholder communications in connection with a meeting called by shareholders.
The shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder
approval (except as stated in the next paragraph), to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust, or any series thereof. In addition, the
Trustees, without shareholder approval, may adopt a "master-feeder" structure by
investing substantially all of the assets of a series of the Trust in the
securities of another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with
the merger, consolidation, termination or other reorganization of the Trust or
any series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
The Trust Agreement permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Statutory Trust Act (the "Delaware Act"),
shareholders are not personally liable for obligations of the Trust. The
Delaware Act entitles shareholders of the Trust to the same limitation of
liability as is available to shareholders of private for-profit corporations.
However, no similar statutory or other authority limiting statutory trust
shareholder liability exists in many other states. As a result, to the extent
that the Trust or a shareholder is subject to the jurisdiction of courts in such
other states, those courts may not apply Delaware law and may subject the
shareholders to liability. To offset this risk, the Trust Agreement (i) contains
an express disclaimer of shareholder liability
31
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation and instrument entered into or executed
by the Trust or its Trustees and (ii) provides for indemnification out of the
property of the applicable series of the Trust of any shareholder held
personally liable for the obligations of the Trust solely by reason of being or
having been a shareholder and not because of the shareholder's acts or omissions
or for some other reason. Thus, the risk of a shareholder incurring financial
loss beyond his or her investment because of shareholder liability is limited to
circumstances in which all of the following factors are present: (i) a court
refuses to apply Delaware law; (ii) the liability arises under tort law or, if
not, no contractual limitation of liability is in effect; and (iii) the
applicable series of the Trust is unable to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to
any person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, by virtue of
becoming such, will be held to have expressly assented and agreed to the terms
of the Trust Agreement and to have become a party thereto.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of the date of this Additional Statement, the Trust's Trustees and
officers as a group owned beneficially less than 1% of the outstanding shares of
each class of the Portfolio.
As of March 1, 2004, substantially all of the Portfolio's outstanding
shares were held of record by Northern Trust for the benefit of its Customers
and the Customers of its affiliates and correspondent banks that have invested
in the Portfolio. As of the same date, Northern Trust possessed sole or shared
voting and/or investment power for its Customer accounts with respect to less
than 10% of the Trust's outstanding shares. As of the same date, the Trust's
Trustees and officers as a group owned beneficially less than 1% of the
outstanding shares of each class of the Portfolio. Northern Trust has advised
the Trust that the following persons (whose mailing address is: c/o The Northern
Trust Company, 50 South LaSalle, Chicago, IL 60675) beneficially owned five
percent or more of the outstanding shares of the Portfolio's classes as of March
1, 2004:
Number of Shares % of Fund
---------------- ---------
Prime Obligations Portfolio- Shares
Community First National Bank -FARGO 58,831,872.94 11.3%
Archipelago Holdings LLC 50,130,736.13 9.6%
Trust Co. of Toledo-Local & CO 43,679,415.98 8.4%
Old Second National Bank 41,263,132.80 7.9%
Belden Technologies Inc. 40,003,975.72 7.7%
Archipelago Exchange LLC 39,499,665.73 7.6%
Trust Company of the Ozarks 37,207,784.81 7.1%
Alerus Financial 29,249,403.35 5.6%
32
Number of Shares % of Fund
---------------- ---------
Prime Obligations Portfolio- Service
Simmons First Trust Co. NA 28,369,908.12 75.0%
Old Second National Bank 9,467,823.00 25.0%
SERVICE PLAN
The Trust has adopted a Service Plan (the "Plan") with respect to the
Service Shares and Premier Shares of the Portfolio. Under the Plan, the Trust,
on behalf of the Service Shares and the Premier Shares of the Portfolio, is
authorized to pay to TNTC monthly or quarterly fees in respect of (i)
administrative support services performed and expenses incurred in connection
with such Portfolio's Service Shares and Premier Shares and (ii) personal and
account maintenance services performed and expenses incurred in connection with
such Portfolio's Premier Shares as set forth below. The fee paid for
administrative support services during any one year shall not exceed 0.25% of
the average daily net asset value of the Service Shares and Premier Shares of
such Portfolio. The fee paid for personal and account maintenance services
during any one year shall not exceed an additional 0.25% of the average daily
net asset value of the Premier Shares of such Portfolio. Northern Trust will
determine the amount of the servicing agent fees to be paid to one or more
brokers, dealers, other financial institutions or other industry professionals
(collectively, "Servicing Agents") and the basis on which such payments will be
made. Payments to a Servicing Agent will be subject to compliance by the
Servicing Agent with the terms of the related Plan agreement entered into by the
Servicing Agent. The servicing agent fees payable pursuant to this Plan shall
not pertain to services or expenses which are primarily intended to result in
the sales of Service Shares and Premier Shares.
Payments of the servicing agent fees with respect to Service Shares
and Premier Shares will be used to compensate or reimburse Northern Trust and
the Servicing Agents for administrative support services and expenses, which may
include without limitation: (i) acting or arranging for another party to act, as
recordholder and nominee of Service Shares and Premier Shares of the Portfolio
beneficially owned by Customers; (ii) establishing and maintaining individual
accounts and records with respect to Service Shares and Premier Shares of the
Portfolio owned by Customers; (iii) processing and issuing confirmations
concerning Customer orders to purchase, redeem and exchange Service Shares and
Premier Shares of the Portfolio; (iv) receiving and transmitting funds
representing the purchase price or redemption proceeds of Service Shares and
Premier Shares of the Portfolio; (v) processing dividend payments on behalf of
Customers; and (vi) performing other related administrative support services
that do not constitute "personal and account maintenance services" within the
meaning of the National Association of Securities Dealers, Inc.'s Conduct Rules.
Payments of the servicing agent fees with respect to the Premier Shares will
also be used to compensate or reimburse Northern Trust and the Servicing Agents
for personal and account maintenance services and expenses, which may include,
without limitation: (i) providing facilities to answer inquiries and respond to
correspondence with Customers and other investors about the status of their
accounts or about other aspects of the Trust or the applicable Portfolio; (ii)
assisting Customers in completing application forms, selecting dividend and
other account options and opening custody accounts with the Servicing Agents;
(iii) providing services to Customers intended to facilitate, or improve their
understanding of the benefits and risks of, the Portfolio to Customers,
including asset allocation and other similar services; (iv) acting as liaison
between Customers and the Trust, including obtaining information from the Trust
and assisting the Trust in correcting errors and resolving problems; and (v)
performing any similar personal and account maintenance services.
For the fiscal years or periods ended November 30 as indicated, the
aggregate amount of the Shareholder Service Fee incurred by each class of the
Portfolio then in existence was as follows:
----------------------------------
2003 2002 2001
-------------------------------------------------------------------
Prime Obligations Portfolio/1/
Service Class $ 12,106 N/A N/A
Premier Class N/A N/A N/A
-------------------------------------------------------------------
/1/ The Service Class commenced operations on September 2, 2003.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Servicing Agent's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in Service or Premier Shares. Servicing Agents, including banks regulated
by the Comptroller of the Currency, the Federal Reserve Board or the FDIC, and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the
33
Department of Labor or state securities commissions, are urged to consult legal
advisers before investing fiduciary assets in Service or Premier Shares.
The Trustees, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such Plan or the related agreements, approved the
Plan and the related agreements for the Portfolio at a meeting called for the
purpose of voting on such Plan and related agreements on February 13, 2004.
The Plan and related agreements will remain in effect until April 30,
2005 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Board of Trustees in the manner
described above.
The Plan may not be amended to increase materially the amount to be
spent for the services described therein without approval of the Board of
Trustees in the manner described above. The Plan may be terminated as to Service
Shares and Premier Shares at any time by a majority of the non-interested
Trustees. A service agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the Trustees as described above or by any
party to the agreement on not more than sixty (60) days' written notice to any
other party to the agreement. Each service agreement will terminate
automatically if assigned. While the Plan is in effect, the selection and
nomination of those Trustees who are not interested persons will be committed to
the non-interested members of the Board of Trustees. The Board of Trustees has
determined that, in its judgment, there is a reasonable likelihood that the Plan
will benefit the Portfolio and holders of Service and Premier Shares of the
Portfolio. The Plan provides that the Board of Trustees will review, at least
quarterly, a written report of the amount expended under the Plan and the
purposes of the expenditures.
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
Securities Act of 1933 with respect to the securities offered by the Trust's
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
The term "majority of the outstanding shares" of either the Trust or
the Portfolio means, with respect to the approval of an investment advisory
agreement or a change in a fundamental investment policy, the vote of the lesser
of (i) 67% or more of the shares of the Trust or the Portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the Trust
or the Portfolio are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of the Trust or the Portfolio.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolio's
shareholders for the period ended November 30, 2003 (the "Annual Report") are
hereby incorporated herein by reference and attached hereto. No other parts of
the Annual Report, including without limitation, "Management's Discussion of
Portfolio Performance," are incorporated by reference herein. Copies of the
Annual Report may be obtained upon request and without charge by calling 800/
637-1380 (toll-free).
34
APPENDIX A
----------
DESCRIPTION OF SECURITIES RATINGS
Short-Term Credit Ratings
-------------------------
A Standard & Poor's short-term issue credit rating is a current
opinion of the creditworthiness of an obligor with respect to a specific
financial obligation having an original maturity of no more than 365 days. The
following summarizes the rating categories used by Standard & Poor's for
short-term issues:
"A-1" - Obligations are rated in the highest category and indicate
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 have significant speculative characteristics. The
obligor currently has the capacity to meet its financial commitment on the
obligation. However, it faces major ongoing uncertainties which could lead to
the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating 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.
Local Currency and Foreign Currency Risks - Country risk
considerations are a standard part of Standard & Poor's analysis for credit
ratings on any issuer or issue. Currency of repayment is a key factor in this
analysis. An obligor's capacity to repay foreign currency obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those instances
where sovereign risks make them different for the same issuer.
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. These obligations have an original
maturity not exceeding thirteen months, unless explicitly noted. The following
summarizes the rating categories used by Moody's for short-term obligations:
"P-1" - Issuers (or supporting institutions) rated Prime-1 have a
superior ability to repay short-term debt obligations.
"P-2" - Issuers (or supporting institutions) rated Prime-2 have a
strong ability to repay short-term debt obligations.
A-1
"P-3" - Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term debt obligations.
"NP" - Issuers (or supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
Fitch Ratings, Inc. ("Fitch") short-term ratings apply to time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities, and thus place greater emphasis on the liquidity
necessary to meet financial commitments in a timely manner. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. Default is a real
possibility. This designation indicates a capacity for meeting financial
commitments which is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
The following summarizes the ratings used by Dominion Bond Rating
Service Limited ("DBRS") for commercial paper and short-term debt:
R-1 Prime Credit Quality
R-2 Adequate Credit Quality
R-3 Speculative
D In Arrears
All three DBRS rating categories for short-term debt use "high",
"middle" or "low" as subset grades to designate the relative standing of the
credit within a particular rating category. The following comments provide
separate definitions for the three grades in the Prime Credit Quality area.
"R-1 (high)" - Short-term debt rated "R-1 (high)" is of the highest
credit quality, and indicates an entity which possesses unquestioned ability to
repay current liabilities as they fall due. Entities rated in this category
normally maintain strong liquidity positions, conservative debt levels and
profitability which is both stable and above average. Companies achieving an
"R-1 (high)" rating are normally leaders in structurally sound industry segments
with proven track records, sustainable positive future results and no
substantial qualifying negative factors. Given the extremely tough definition
which DBRS has established for an "R-1 (high)", few entities are strong enough
to achieve this rating.
A-2
"R-1 (middle)" - Short-term debt rated "R-1 (middle)" is of superior
credit quality and, in most cases, ratings in this category differ from "R-1
(high)" credits to only a small degree. Given the extremely tough definition
which DBRS has for the "R-1 (high)" category, entities rated "R-1 (middle)" are
also considered strong credits which typically exemplify above average strength
in key areas of consideration for debt protection.
"R-1 (low)" - Short-term debt rated "R-1 (low)" is of satisfactory
credit quality. The overall strength and outlook for key liquidity, debt and
profitability ratios is not normally as favorable as with higher rating
categories, but these considerations are still respectable. Any qualifying
negative factors which exist are considered manageable, and the entity is
normally of sufficient size to have some influence in its industry.
"R-2 (high)", "R-2 (middle)", "R-2 (low)" - Short-term debt rated
"R-2" is of adequate credit quality and within the three subset grades, debt
protection ranges from having reasonable ability for timely repayment to a level
which is considered only just adequate. The liquidity and debt ratios of
entities in the "R-2" classification are not as strong as those in the "R-1"
category, and the past and future trend may suggest some risk of maintaining the
strength of key ratios in these areas. Alternative sources of liquidity support
are considered satisfactory; however, even the strongest liquidity support will
not improve the commercial paper rating of the issuer. The size of the entity
may restrict its flexibility, and its relative position in the industry is not
typically as strong as an "R-1 credit". Profitability trends, past and future,
may be less favorable, earnings not as stable, and there are often negative
qualifying factors present which could also make the entity more vulnerable to
adverse changes in financial and economic conditions.
"R-3 (high)", "R-3 (middle)", "R-3 (low)" - Short-term debt rated
"R-3" is speculative, and within the three subset grades, the capacity for
timely payment ranges from mildly speculative to doubtful. "R-3" credits tend to
have weak liquidity and debt ratios, and the future trend of these ratios is
also unclear. Due to its speculative nature, companies with "R-3" ratings would
normally have very limited access to alternative sources of liquidity. Earnings
would typically be very unstable, and the level of overall profitability of the
entity is also likely to be low. The industry environment may be weak, and
strong negative qualifying factors are also likely to be present.
"D" - A security rated D implies the issuer has either not met a
scheduled payment or the issuer has made it clear that it will be missing such a
payment in the near future. In some cases, DBRS may not assign a D rating under
a bankruptcy announcement scenario, as allowances for grace periods may exist in
the underlying legal documentation. Once assigned, the D rating will continue as
long as the missed payment continues to be in arrears, and until such time as
the rating is suspended, discontinued, or reinstated by DBRS.
Long-Term Credit Ratings
------------------------
The following summarizes the ratings used by Standard & Poor's for
long-term issues:
"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
A-3
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payment will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the ratings used by Moody's for long-term
debt:
"Aaa" - Obligations rated "Aaa" are judged to be of the highest
quality, with minimal credit risk.
"Aa" - Obligations rated "Aa" are judged to be of high quality and are
subject to very low credit risk.
"A" - Obligations rated "A" are considered upper-medium grade and are
subject to low credit risk.
"Baa" - Obligations rated "Baa" are subject to moderate credit risk.
They are considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" - Obligations rated "Ba" are judged to have speculative elements
and are subject to substantial credit risk.
"B" - Obligations rated "B" are considered speculative and are subject
to high credit risk.
"Caa" - Obligations rated "Caa" are judged to be of poor standing and
are subject to very high credit risk.
"Ca" - Obligations rated "Ca" are highly speculative and are likely
in, or very near, default, with some prospect of recovery of principal and
interest.
"C" - Obligations rated "C" are the lowest rated class of bonds and
are typically in default, with little prospect for recovery of principal or
interest.
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
A-4
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that generic rating category.
The following summarizes long-term ratings used by Fitch:
"AAA" - Securities 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" - Securities 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" - Securities considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Securities 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. This is the lowest
investment grade category.
"BB" - Securities considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Securities considered to be 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" - Securities have high default risk. Default is a
real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Securities are in default. The ratings of
obligations in these categories are based on their prospects for achieving
partial or full recovery in a reorganization or liquidation of the obligor.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect of repaying all obligations.
PLUS (+) or MINUS (-) may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the "AAA"
category or to categories below "CCC".
The following summarizes the ratings used by DBRS for long-term debt:
"AAA" - Bonds rated "AAA" are of the highest credit quality, with
exceptionally strong protection for the timely repayment of principal and
interest. Earnings are considered stable, the structure of the industry in which
the entity operates is strong, and the outlook for future profitability is
favorable. There are few qualifying factors present which would detract from the
performance of the entity, the strength of liquidity and coverage ratios is
unquestioned
A-5
and the entity has established a creditable track record of superior
performance. Given the extremely tough definition which DBRS has established for
this category, few entities are able to achieve a AAA rating.
"AA" - Bonds rated "AA" are of superior credit quality, and protection
of interest and principal is considered high. In many cases, they differ from
bonds rated AAA only to a small degree. Given the extremely tough definition
which DBRS has for the AAA category, entities rated AA are also considered to be
strong credits which typically exemplify above-average strength in key areas of
consideration and are unlikely to be significantly affected by reasonably
foreseeable events.
"A" - Bonds rated "A" are of satisfactory credit quality. Protection
of interest and principal is still substantial, but the degree of strength is
less than with AA rated entities. While a respectable rating, entities in the
"A" category are considered to be more susceptible to adverse economic
conditions and have greater cyclical tendencies than higher rated companies.
"BBB" - Bonds rated "BBB" are of adequate credit quality. Protection
of interest and principal is considered adequate, but the entity is more
susceptible to adverse changes in financial and economic conditions, or there
may be other adversities present which reduce the strength of the entity and its
rated securities.
"BB" - Bonds rated "BB" are defined to be speculative, where the
degree of protection afforded interest and principal is uncertain, particularly
during periods of economic recession. Entities in the BB area typically have
limited access to capital markets and additional liquidity support and, in many
cases, small size or lack of competitive strength may be additional negative
considerations.
"B" - Bonds rated "B" are highly speculative and there is a reasonably
high level of uncertainty which exists as to the ability of the entity to pay
interest and principal on a continuing basis in the future, especially in
periods of economic recession or industry adversity.
"CCC" / "CC" / "C" - Bonds rated in any of these categories are very
highly speculative and are in danger of default of interest and principal. The
degree of adverse elements present is more severe than bonds rated "B". Bonds
rated below "B" often have characteristics which, if not remedied, may lead to
default. In practice, there is little difference between the "C" to "CCC"
categories, with "CC" and "C" normally used to lower ranking debt of companies
where the senior debt is rated in the "CCC" to "B" range.
"D" - This category indicates bonds in default of either interest or
principal.
("high", "low") grades are used to indicate the relative standing of a
credit within a particular rating category. The lack of one of these
designations indicates a rating which is essentially in the middle of the
category. Note that "high" and "low" grades are not used for the AAA category.
Notes to Short-Term and Long-Term Credit Ratings
------------------------------------------------
Standard & Poor's
CreditWatch: CreditWatch highlights the potential direction of a
short- or long-term rating. It focuses on identifiable events and short-term
trends that cause ratings to be placed under special surveillance by Standard &
Poor's analytical staff. These may include mergers, recapitalizations, voter
referendums, regulatory action, or anticipated operating developments. Ratings
appear on CreditWatch when such an event or a deviation from an expected trend
occurs and additional information is necessary to evaluate the current rating. A
listing, however, does not mean a rating change is inevitable, and whenever
possible, a range of alternative ratings will be shown. CreditWatch is not
intended to include all ratings under review, and rating changes may occur
without the ratings having first appeared on CreditWatch. The "positive"
designation means that a rating may be raised; "negative" means a rating may be
lowered; and "developing" means that a rating may be raised, lowered or
affirmed.
Rating Outlook: A Standard & Poor's Rating Outlook assesses the
potential direction of a long-term credit rating over the intermediate to longer
term. In determining a Rating Outlook, consideration is given to any changes
A-6
in the economic and/or fundamental business conditions. An Outlook is not
necessarily a precursor of a rating change or future CreditWatch action.
. Positive means that a rating may be raised.
. Negative means that a rating may be lowered.
. Stable means that a rating is not likely to change.
. Developing means a rating may be raised or lowered.
. N.M. means not meaningful.
Moody's
Watchlist: Moody's uses the Watchlist to indicate that a rating is
under review for possible change in the short-term. A rating can be placed on
review for possible upgrade (UPG), on review for possible downgrade (DNG), or
more rarely with direction uncertain (UNC). A credit is removed from the
Watchlist when the rating is upgraded, downgraded or confirmed.
Rating Outlooks: A Moody's rating outlook is an opinion regarding the
likely direction of a rating over the medium term. Where assigned, rating
outlooks fall into the following four categories: Positive (POS), Negative
(NEG), Stable (STA) and Developing (DEV -- contingent upon an event). In the few
instances where an issuer has multiple outlooks of differing directions, an
"(m)" modifier (indicating multiple, differing outlooks) will be displayed, and
Moody's written research will describe any differences and provide the rationale
for these differences. A RUR (Rating(s) Under Review) designation indicates that
the issuer has one or more ratings under review for possible change, and thus
overrides the outlook designation. When an outlook has not been assigned to an
eligible entity, NOO (No Outlook) may be displayed.
Fitch
Withdrawn: A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
Rating Outlook: A Rating Outlook indicates the direction a rating is
likely to move over a one to two-year period. Outlooks may be positive, stable
or negative. A positive or negative Rating Outlook does not imply a rating
change is inevitable. Similarly, ratings for which outlooks are "stable" could
be upgraded or downgraded before an outlook moves to a positive or negative if
circumstances warrant such an action. Occasionally, Fitch may be unable to
identify the fundamental trend. In these cases, the Rating Outlook may be
described as evolving.
DBRS
Rating Trends
With the exception of ratings in the securitization area, each DBRS
rating is appended with a rating trend. Rating trends give the investor an
understanding of DBRS' opinion regarding the outlook for the rating in question,
with trends falling into one of three categories - Positive, Negative or Stable.
Ratings in the securitization area are not given trends because these ratings
are determined by the parameters on each transaction, for which the issues are
relatively black and white - these parameters are either met or not. When trends
are used, they give an indication of what direction the rating in question is
headed should the given conditions and tendencies continue.
Although the trend opinion is often heavily based on an evaluation of
the issuing entity or guarantor itself, DBRS also considers the outlook for the
industry or industries in which the entity operates and to varying degrees,
specific terms of an issue or its hierarchy in the capital structure when
assigning trends. DBRS assigns trends to each security, rather than to the
issuing entity, as some rating classification scales are broader than others and
the duration
A-7
and ranking of securities can impact the strengths and challenges that affect
the entity. As a result, it is not unusual for securities of the same entity to
have different trends; however, the presence of a Positive trend and a Negative
trend on securities issued by the same entity is a rare occurrence.
Rating Actions
In addition to confirming ratings, releasing new ratings or making
rating changes, other DBRS rating actions include:
Suspended Ratings: Rating opinions are forward looking. Although
rating opinions will consider the historical performance of an issuer, a rating
is an assessment of the issuer's future ability and willingness to meet
outstanding obligations. In order for a complete credit quality assessment, DBRS
requires the cooperation of the issuer so that management strategies and
projections may be evaluated and qualified. Since the availability of such
information is critical to the rating assessment, any changes in management's
willingness to supply such information (either perceived or actual) may cause a
rating to be changed or even suspended. The eventual action will depend upon
DBRS's assessment of the degree of accuracy of a rating possible without the
cooperation of management. DBRS will suspend ratings when the level of concern
reaches a point that an informed rating opinion of the credit quality of the
outstanding obligation cannot be provided.
Discontinued Ratings: When an entity retires all of its outstanding
debt within a particular category and has no plans to re-issue in the near
future, DBRS will normally discontinue its rating on the security in question.
Should the entity ultimately reconsider its decision and re-issue new debt, the
rating will be re-instated pending a full review of the credit quality of the
issuer.
It should be noted that there are cases when DBRS will assign a rating
even if there is no outstanding debt obligation and the entity in question has
no firm plans to issue debt in the future. These cases are often driven by the
fact that assigning a rating to the "non-security" provides support to other
DBRS ratings, either in the same entity or within the same family of companies.
Such ratings are generally referred to as "corporate ratings" and are not
publicly disclosed by DBRS.
Ratings "Under Review" : DBRS maintains continuous surveillance of all
rated entities; therefore, all ratings are always under review. Accordingly,
when a significant event occurs that may directly impact the credit quality of a
particular entity or group of entities, DBRS will attempt to provide an
immediate rating opinion. If there is high uncertainty regarding the outcome of
the event and DBRS is unable to provide an objective, forward-looking opinion in
a timely manner, then the rating(s) of the issuer(s) will be placed "Under
Review". Ratings may also be placed "Under Review" by DBRS when changes in
credit status occur for any other reason that brings DBRS to the conclusion that
the present ratings may no longer be appropriate.
Ratings which are "Under Review" are qualified with one of the
following three provisional statements: "negative implications", "positive
implications", or "developing implications", indicating DBRS' preliminary
evaluation of the impact on the credit quality of the issuer/security. As such,
the ratings that were in effect prior to the review process can be used as the
basis for the relative credit quality implications. It must be stressed that a
rating change will not necessarily result from the review process.
Municipal Note Ratings
----------------------
A Standard & Poor's note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit a satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
A-8
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's uses three rating categories for short-term municipal
obligations that are considered investment grade. These ratings are designated
as Municipal Investment Grade (MIG) and are divided into three levels - MIG 1
through MIG 3. In addition, those short-term obligations that are of speculative
quality are designated SG, or speculative grade. MIG ratings expire at the
maturity of the obligation. The following summarized the ratings by Moody's for
these short-term obligations:
"MIG-1" - This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
"MIG-2" - This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
"MIG-3" - This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
In the case of variable rate demand obligations (VRDOs), a
two-component rating is assigned; a long or short-term debt rating and a demand
obligation rating. The first element represents Moody's evaluation of the degree
of risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
ability to receive purchase price upon demand ("demand feature"), using a
variation of the MIG rating scale, the Variable Municipal Investment Grade of
VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated,
that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
VMIG rating expirations are a function of each issue's specific
structural or credit features.
"VMIG-1" - This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
"VMIG-2" - This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
"VMIG-3" - This designation denotes acceptable credit quality.
Adequate protection is afforded by the satisfactory short-term credit strength
of the liquidity provider and structural and legal protections that ensure the
timely payment of purchase price upon demand.
"SG" - This designation denotes speculative-grade credit quality.
Demand features rated in this category may supported by a liquidity provider
that does not have an investment grade short-term rating or may lack the
structural and/or legal protections necessary to ensure the timely payment of
purchase price upon demand.
Fitch uses the same ratings for municipal securities as described
above for other short-term credit ratings.
About Credit Ratings
--------------------
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation. Credit ratings may be changed, suspended or withdrawn.
A-9
Moody's credit ratings must be construed solely as statements of opinion and not
recommendations to purchase, sell or hold any securities.
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments on a timely basis. Fitch credit
ratings are used by investors as indications of the likelihood of getting their
money back in accordance with the terms on which they invested. However, Fitch
credit ratings are not recommendations to buy, sell or hold any security.
Ratings may be changed or withdrawn.
DBRS credit ratings are not buy, hold or sell recommendations, but rather the
result of qualitative and quantitative analysis focusing solely on the credit
quality of the issuer and its underlying obligations.
A-10
PART C.
OTHER INFORMATION
ITEM 23. EXHIBITS
-----------------
The following exhibits are incorporated herein by reference to Post-Effective
Amendment No. 31 to Registrant's Registration Statement on Form N-1A (the
"Registration Statement") (Accession No. 0000950130-96-001086), Post-Effective
Amendment No. 34 to such Registration Statement (Accession No.
0000950130-97-002471), Post-Effective Amendment No. 35 to such Registration
Statement (Accession No. 0000950131-97-005862), Post-Effective Amendment No. 36
to such Registration Statement (Accession No. 0000950131-98-00216),
Post-Effective Amendment No. 38 to such Registration Statement (Accession No.
0000950131-98-002030), Post-Effective Amendment No. 39 to such Registration
Statement (Accession No. 0000950131-99-000461), Post-Effective Amendment No. 41
to such Registration Statement (Accession No. 0000927405-99-000333),
Post-Effective Amendment No. 43 to such Registration Statement (Accession No.
0000927405-00-000027), Post-Effective Amendment No. 44 to such Registration
Statement (Accession No. 0000950131-00-002147), Post-Effective Amendment No. 46
to such Registration Statement (Accession No. 0000950131-01-000262),
Post-Effective Amendment No. 47 to such Registration Statement (Accession No.
0000950131-01-000510), Post-Effective Amendment No. 48 to such Registration
Statement (Accession No. 0000950131-01-001670), Post-Effective Amendment No. 49
to such Registration Statement (Accession No. 0000940180-02-000170), Amendment
No. 50 under the Investment Company Act of 1940 to the Registration filing
(Accession No. 0000950131-01-502545), Post-Effective Amendment No. 50 to such
Registration Statement (Accession No. 0000940180-02-000671, Amendment No. 52
under the Investment Company Act of 1940 to the Registration Statement
(Accession No. 0000940180-02-000620), Post-Effective Amendment No. 51 to such
Registration Statement (Accession No. 0000950131-03-001758) and Post-Effective
Amendment No. 52 to such Registration Statement (Accession No.
0000950131-03-002944):
(a) (1) Agreement and Declaration of Trust dated July 1, 1997 filed as
Exhibit 1 to Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A, filed on January 16, 1998
(Accession No.0000950131-98-00216) ("PEA No. 36").
(2) Amendment No. 1 dated February 25, 1998 to the Agreement and
Declaration of Trust filed as Exhibit (a)(2) to Post-Effective
Amendment No. 39 to Registrant's Registration Statement on Form
N-1A, filed on February 1, 1999 (Accession No.
0000950131-99-000461) ("PEA No. 39").
(3) Amendment No. 2 dated May 15, 1998 to the Agreement and
Declaration of Trust filed as Exhibit (a)(3) to PEA No. 39.
(4) Amendment No. 3 dated October 5, 1999 to the Agreement and
Declaration of Trust filed as Exhibit (a)(4) to Post-Effective
Amendment No. 41 to
1
Registrant's Registration Statement on Form N-1A, filed on
October 14, 1999 (Accession No. 0000927405-99-000333) ("PEA No.
41").
(5) Amendment No. 4 dated January 24, 2000 to the Agreement and
Declaration of Trust filed as Exhibit (a)(5) to Post-Effective
Amendment No. 43 to Registrant's Registration Statement on Form
N-1A, filed on January 28, 2000 (Accession No.
0000927405-00-000027) ("PEA No. 43").
(6) Amendment No. 5 dated May 2, 2000 to the Agreement and
Declaration of Trust filed as Exhibit (a)(6) to Post-Effective
Amendment No. 46 to Registrant's Registration Statement on Form
N-1A, filed on January 17, 2001 (Accession No.
0000950131-01-000262) ("PEA No. 46").
(7) Amendment No. 6 dated November 1, 2000 to the Agreement and
Declaration of Trust filed as Exhibit (a)(7) to PEA No. 46.
(8) Amendment No. 7 dated July 26, 2001 to the Agreement and
Declaration of Trust filed as Exhibit (a)(8) to Amendment No. 50
under the Investment Company Act of 1940 to the Registration
Statement, filed on July 31, 2001 (Accession No.
0000950131-01-502545) ("Amendment No. 50").
(9) Amendment No. 8 dated April 29, 2003 to the Agreement and
Declaration of Trust filed as Exhibit (a)(9) is filed herewith.
(b) (1) Amended and Restated By-Laws adopted August 2, 2000 filed as
Exhibit (b)(2) to PEA No. 46.
(2) Amendment No. 1 dated July 29, 2003 to the Amended and Restated
By-Laws is filed herewith.
(c) Articles IV, V, VI, VII and IX of the Agreement and Declaration
of Trust dated July 1, 1997 filed as Exhibit 4 to PEA No. 36.
(d) (1) Investment Advisory Agreement dated March 31, 1998 between
the Registrant and The Northern Trust Company (the "Investment
Advisory Agreement") filed as Exhibit (d)(1) to PEA No. 39.
(2) Addendum No. 1 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(2) to PEA No. 39.
(3) Addendum No. 2 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(3) to PEA No. 39.
(4) Addendum No. 3 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(4) to PEA No. 39.
2
(5) Addendum No. 4 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(5) to PEA No. 39.
(6) Addendum No. 5 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(6) to PEA No. 39.
(7) Addendum No. 6 dated March 31, 1998 to the Investment Advisory
Agreement filed as Exhibit (d)(7) to PEA No. 39.
(8) Addendum No. 7 dated October 5, 1999 to the Investment Advisory
Agreement filed as Exhibit (d)(8) to Post-Effective Amendment No.
49 to Registrant's Registration Statement on Form N-1A, filed on
January 29, 2002 (Accession No. 0000940180-02-000170) ("PEA No.
49").
(9) Assumption Agreement dated April 1, 1998 between The Northern
Trust Company and Northern Trust Quantitative Advisors, Inc.
filed as Exhibit (d)(8) to PEA No. 39.
(10) Assumption Agreement dated January 1, 2001 between the
Registrant, The Northern Trust Company and Northern Trust
Investments, Inc. filed as Exhibit (d)(9) to Post-Effective
Amendment No. 47 to the Registrant's Registration Statement on
Form N-1A, filed on January 29, 2001 (Accession No.
0000950131-01-000510) ("PEA No. 47").
(11) Investment Advisory Agreement dated March 1, 2001 between the
Registrant and Northern Trust Investments, Inc. filed as Exhibit
(d)(10) to Post-Effective Amendment No. 48 to the Registrant's
Registration Statement on Form N-1A, filed on March 30, 2001
(Accession No. 0000950131-01-001670) ("PEA No. 48").
(12) Assumption Agreement dated May 2, 2001 between Registrant,
Northern Trust Investments, Inc. and Northern Trust Global
Investments (Europe) Limited filed as Exhibit (d)(12) to PEA No.
49.
(13) Fee Reduction Commitment dated April 1, 2002 by Northern Trust
Investments, Inc. and Northern Trust Global Investments (Europe)
Limited filed as Exhibit (d)(13) to Post-Effective Amendment No.
50 to Registrant's Registration Statement on Form N-1A, filed on
March 29, 2002 (Accession No. 0000940180-02-000671) ("PEA No.
50").
(14) Fee Reduction Commitment dated April 1, 2002 by Northern Trust
Investments, Inc. filed as Exhibit (d)(14) to PEA No. 50.
(15) Assumption Agreement dated April 1, 2002 between Northern Trust
Investments, Inc. and Northern Trust Global Investments (Europe)
Limited filed as Exhibit (d)(15) to PEA No. 50.
3
(16) Addendum No. 1 dated August 20, 2003 to the Investment Advisory
Agreement between the Registrant and Northern Trust Investments,
N.A. is filed herewith.
(e) (1) Distribution Agreement dated December 31, 2000 between the
Registrant and Northern Funds Distributors, LLC filed as Exhibit
(e) to PEA No. 48.
(2) Amended and Restated Schedule A dated August 21, 2003 to the
Distribution Agreement by and between Registrant and Northern
Funds Distributors, LLC is filed herewith.
(f) Not Applicable.
(g) (1) Custodian Agreement dated June 8, 1992 between the Registrant
and The Northern Trust Company filed as Exhibit 8 to
Post-Effective Amendment No. 38 to Registrant's Registration
Statement on Form N-1A, filed on March 27, 1998 (Accession No.
0000950131-98-002030) ("PEA No. 38").
(2) Addendum No. 1 dated January 8, 1993 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit 8(a) to Post-Effective Amendment No. 31 to Registrant's
Registration Statement on Form N-1A, filed on March 29, 1996
(Accession No. 0000950130-96-001086) ("PEA No. 31").
(3) Addendum No. 2 dated July 1, 1993 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit 8(b) to PEA No. 31.
(4) Addendum No. 3 dated October 8, 1996 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit 8(c) to Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A, filed on May 16, 1997
(Accession No. 0000950130-97-002471) ("PEA No. 34").
(5) Addendum No. 4 dated April 22, 1997 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit 8(d) to Post-Effective Amendment No. 35 to Registrant's
Registration Statement on Form N-1A, filed on September 29, 1997
(Accession No. 0000950131-97-005862) ("PEA No. 35").
(6) Addendum No. 5 dated December 1, 1997 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit 8(e) to PEA No. 38.
4
(7) Addendum No. 6 dated January 27, 1998 to the Custodian Agreement
between the Registrant and The Northern Trust filed as Exhibit
8(f) to PEA No. 38.
(8) Addendum No. 7 dated March 31, 1998 to the Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit (g)(8) to PEA No. 39.
(9) Addendum No. 8 dated October 5, 1999 to Custodian Agreement
between the Registrant and The Northern Trust Company filed as
Exhibit (g)(14) to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-1A, filed on March
29, 2000. (Accession No. 0000950131-00-002147) ("PEA No. 44").
(10) Addendum No. 9 dated March 1, 2001 to the Custodian Agreement
between the Registrant and the Northern Trust Company filed as
Exhibit (g)(15) to PEA No. 48.
(11) Addendum No. 10 dated July 31, 2001 to the Custodian Agreement
between the Registrant and the Northern Trust Company filed as
Exhibit (g)(11) to PEA No. 49.
(12) Addendum 11 dated October 30, 2001 to the Custodian Agreement
between the Registrant and the Northern Trust Company filed as
Exhibit (g)(12) to PEA No. 49.
(13) Foreign Custody Agreement between the Registrant and The Northern
Trust Company dated March 1, 1994 filed as Exhibit 8(g) to PEA
No. 38.
(14) Addendum No. 1 dated January 22, 1997 to the Foreign Custody
Agreement between the Registrant and The Northern Trust Company
filed as Exhibit 8(f) to PEA No. 34.
(15) Addendum No. 2 dated January 27, 1998 to the Foreign Custody
Agreement between the Registrant and The Northern Trust Company
filed as Exhibit 8(i) to PEA No. 38.
(16) Addendum No. 3 dated March 31, 1998 to the Foreign Custody
Agreement between the Registrant and The Northern Trust Company
filed as Exhibit (g)(12) to PEA No. 39.
(17) Addendum No. 4 dated October 30, 2001 to the Foreign Custody
Agreement between the Registrant and The Northern Trust Company
filed as Exhibit (g)(17) to PEA No. 49.
5
(18) Foreign Custody Monitoring Agreement dated May 1, 2001 between
the Registrant and The Northern Trust Company filed as Exhibit
(g)(18) to Post-Effective Amendment No. 51 to Registrant's
Registration Statement on Form N-1A, filed on March 28, 2003
(Accession No. 0000950131-03-001758) ("PEA No. 51").
(19) Addendum No. 12 dated April 29, 2003 to the Custodian Agreement
between the Registrant and The Northern Trust Company is filed
herewith.
(20) Addendum No. 13 dated July 29, 2003 to the Custodian Agreement
between the Registrant and The Northern Trust Company is filed
herewith.
(21) Addendum No. 5 dated July 29, 2003 to the Foreign Custody
Agreement between Registrant and The Northern Trust Company is
filed herewith.
(h) (1) Revised and Restated Transfer Agency Agreement dated January
8, 1993 between the Registrant and The Northern Trust Company
filed as Exhibit 9(a) to PEA No. 38.
(2) Addendum No. 1 dated July 1, 1993 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit 9(b) to PEA No. 31.
(3) Addendum No. 2 dated March 25, 1994 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit 9(c) to PEA No. 31.
(4) Addendum No. 3 dated January 22, 1997 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit 9(d) to PEA No. 34.
(5) Addendum No. 4 dated April 22, 1997 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit 9(e) to PEA No. 35.
(6) Addendum No. 5 to the Revised and Restated Transfer Agency
Agreement between the Registrant and The Northern Trust Company
filed as Exhibit 9(f) to PEA No. 38.
(7) Addendum No. 6 dated March 31, 1998 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit (h)(8) to PEA No. 39.
(8) Addendum No. 7 dated October 5, 1999 to Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit (h)(12) to PEA No. 44.
6
(9) Addendum No. 8 dated March 1, 2001 to Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company filed as Exhibit (h)(13) to PEA No. 48.
(10) Addendum No. 9 dated July 31, 2001 to the Revised and Restated
Transfer Agency Agreement between the Registrant and Northern
Trust Company filed as Exhibit (h)(12) to Amendment No. 50.
(11) Addendum No. 10 dated October 30, 2001 to the Revised and
Restated Transfer Agency Agreement between the Registrant and
Northern Trust Company filed as Exhibit (h)(11) to PEA No. 49.
(12) Addendum No. 11 dated August 20, 2003 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company is filed herewith.
(13) Shareholder Servicing Plan for Class C and D Shares dated April
27, 1993 as amended on October 5, 1999 and filed as Exhibit (9)
to PEA No. 43 and Related Forms of Servicing Agreement as amended
on February 13, 2004 are filed herewith.
(14) Service Plan for the Service and Premier Classes of Shares dated
January 27, 1998 as amended on February 2, 2001 and filed as
Exhibit (h)(10) to PEA No. 48 and Related Forms of Servicing
Agreement as amended on February 13, 2004 are filed herewith.
(15) Assignment and Assumption Agreement dated January 1, 2001 among
the Registrant, The Northern Trust Company, Northern Trust
Investments, Inc. and PFPC Inc. filed as Exhibit (h)(14) to PEA
No. 48.
(16) Amended and Restated Co-Administration Agreement dated October 5,
1999 among the Registrant, Northern Trust Company and First Data
Investor Services Group, Inc. (now known as PFPC Inc.) filed as
Exhibit (h)(11) to PEA No. 43.
(17) Schedule A to Amended and Restated Co-Administration Agreement
dated October 5, 1999 among the Registrant, Northern Trust
Company and First Data Investor Services Group, Inc. (now known
as PFPC Inc.) filed as Exhibit (h)(13) to Amendment No. 50.
(18) Amended and Restated Schedule A dated August 15, 2001 to the
Amended and Restated Co-Administration Agreement among the
Registrant, The Northern Trust Company and PFPC Inc. filed as
Exhibit (h)(17) to PEA No. 51.
7
(19) Amendment dated February 8, 2002 to Amended and Restated
Co-Administration Agreement between the Registrant and PFPC Inc.
filed as Exhibit (h)(15) to Amendment No. 52 under the Investment
Company Act of 1940 to the Registration Statement filed on March
28, 2002 (Accession No. 0000940180-02-000620) ("Amendment No.
52").
(20) Amended and Restated Schedule A dated August 20, 2003 to the
Amended and Restated Co-Administration Agreement between
Registrant, Northern Trust Investments, N.A. and PFPC Inc. is
filed herewith.
(i) Opinion of Drinker Biddle & Reath LLP filed as Exhibit (i) to
Post-Effective Amendment No. 52 to Registrant's Registration
Statement on Form N-1A, filed on May 15, 2003 (Accession No.
0000950131-03-002944) ("PEA No. 52").
(j) (1) Consent of Drinker Biddle & Reath LLP is filed herewith.
(2) Consent of Independent Auditors is filed herewith.
(k) Not Applicable.
(l) (1) Subscription Agreement with Goldman, Sachs & Co. filed as
Exhibit 13 to PEA No. 38.
(2) Amendment No. 1 to Subscription Agreement with Goldman, Sachs &
Co. filed as Exhibit 13(a) to PEA No. 38.
(3) Amendment No. 2 to Subscription Agreement with Goldman, Sachs &
Co. filed as Exhibit 13(b) to PEA No. 38.
(4) Amendment No. 3 to Subscription Agreement with Goldman, Sachs &
Co. filed as Exhibit 13(c) to PEA No. 38.
(m) Not Applicable.
(n) (1) Amended and Restated Plan pursuant to Rule 18f-3 for
Operation of a Multi-Class System filed as Exhibit (n)(1) to PEA
No. 52.
(p) (1) Code of Ethics of Trust filed as Exhibit (o)(1) to PEA No.
46. (2) Amended Code of Ethics of Adviser filed as Exhibit (o)(2)
to PEA No.49.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
----------------------------------------------------------------------
Registrant is controlled by its Board of Trustees.
8
ITEM 25. INDEMNIFICATION
------------------------
Section 3 of Article IV of the Registrant's Agreement and Declaration of Trust
provides for indemnification of the Registrant's Trustees and officers under
certain circumstances. A copy of such Agreement and Declaration of Trust was
filed as Exhibit 1 to Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A.
Paragraph 7 of the Investment Advisory Agreement between the Registrant and The
Northern Trust Company, the related Assumption Agreements between The Northern
Trust Company and Northern Trust Investments, Inc. (now known as Northern Trust
Investments, N.A.), and the Registrant, The Northern Trust Company and Northern
Trust Investments, N.A., and Paragraph 7 of the Investment Advisory Agreement
between the Registrant and Northern Trust Investments, Inc. (now known as
Northern Trust Investments, N.A.) provide for indemnification of Northern Trust
Investments, N.A. and Northern Trust Global Investments (Europe) Limited or, in
lieu thereof, contribution by the Registrant, under certain circumstances.
Copies of the Investment Advisory Agreements are incorporated herein by
reference.
Article 10 of the Amended and Restated Co-Administration Agreement dated October
5, 1999 among the Registrant, Northern Trust Company and First Data Investor
Services Group, Inc. (now known as PFPC Inc.) and the related Assignment and
Assumption Agreement between the Registrant, The Northern Trust Company,
Northern Trust Investments, Inc. (now known as Northern Trust Investments, N.A.)
and PFPC provides that the Registrant will indemnify Northern Trust Investments,
N.A. and First Data Investor Services Group, Inc. (now known as PFPC 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 Amended and Restated
Co-Administration Agreement, Assignment and Assumption Agreement and the
Amendment to the Amended and Restated Co-Administration Agreement are
incorporated herein by reference.
Paragraph 3 of the Distribution Agreement dated December 31, 2000 between the
Registrant and Northern Funds Distributors, LLC ("NFD") provides that the
Registrant will indemnify NFD against certain liabilities relating to untrue
statements or omissions of material fact except those resulting from the
reliance on information furnished to the Registrant by NFD, or those resulting
from the willful misfeasance, bad faith or negligence of NFD, or NFD's breach of
confidentiality. A copy of the Distribution Agreement is incorporated herein by
reference.
A mutual fund trustee and officer liability policy purchased by the Registrant
insures the Registrant and its Trustees and officers, subject to the policy's
coverage limits and exclusions and varying deductibles, against loss resulting
from claims by reason of any act, error, omission, misstatement, misleading
statement, neglect or breach of duty.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
-------------------------------------------------------------
Northern Trust Investments, N.A. ("NTI," formerly known and conducting business
as Northern Trust Investments, Inc.) and Northern Trust Global Investments
(Europe) Limited ("NTGIE"), each
9
a direct or indirect wholly-owned subsidiary of The Northern Trust Company
("TNTC"), an Illinois state chartered bank, serve as the co-investment advisers
of the International Growth Portfolio, Balanced Portfolio, International Bond
Portfolio, Bond Portfolio, Short-Intermediate Bond Portfolio and Intermediate
Bond Portfolio, and NTI serves as the investment adviser of each of the other
Portfolios. NTI and NTGIE are each referred to as an "Investment Adviser." TNTC
is a wholly-owned subsidiary of Northern Trust Corporation, a bank holding
company. NTI is located at 50 South LaSalle Street, Chicago, IL 60675-5986 and
NTGIE is located at 6 Devonshire Square, London, EC2A 4YE, United Kingdom.
Unless otherwise indicated, NTI, NTGIE and TNTC are referred to collectively as
"Northern Trust." Set forth below is a list of officers and directors of NTI and
NTGIE, together with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such officers and directors
during the past two years. Most officers and directors of NTI hold comparable
positions with TNTC (other than as director), as indicated below, and certain
other officers of NTI hold comparable positions with Northern Trust Bank, N.A.,
a wholly-owned subsidiary of Northern Trust Corporation.
--------------------------------------------------------------------------------
Connection
Name and Position Business Address with
with Investment Adviser (NTI) of Other Company Other Company
--------------------------------------------------------------------------------
Abendroth, John D. The Northern Trust Company Vice President
Vice President
Adams, Bradford S. The Northern Trust Company Senior Vice President
Senior Vice President
Aitcheson, James A. The Northern Trust Company Vice President
Vice President
Alongi, David M. The Northern Trust Company Vice President
Vice President
Andersen, Brian E. The Northern Trust Company Vice President
Vice President
Anwar, Raheela Gill The Northern Trust Company Senior Vice President
Senior Vice President
Aronson, Jennifer Ann The Northern Trust Company Vice President
Vice President
Ayres, Scott R. The Northern Trust Company Vice President
Vice President
Baras, Ellen G. The Northern Trust Company Vice President
Vice President.
10
Barker, Sheri D. The Northern Trust Company Vice President
Vice President
Barrett, James J. The Northern Trust Company Senior Vice President
Senior Vice President
Barry, Susan M. The Northern Trust Company Vice President
Vice President
Baskin, Jeremy M. The Northern Trust Company Senior Vice President
Senior Vice President
Beard, Catherine Sinclair The Northern Trust Company Vice President
Vice President
Beaudoin, Keith J. The Northern Trust Company Vice President
Vice President
Beckman, Carl P. The Northern Trust Company Senior Vice President
Senior Vice President &
Treasurer
Belden III, William H. The Northern Trust Company Vice President
Vice President
Bell, Gregory A. The Northern Trust Company Vice President
Vice President
Benzmiller, Thomas A. The Northern Trust Company Senior Vice President
Senior Vice President
Bergin, Kathryn L. The Northern Trust Company Vice President
Vice President
Bergson, Robert H. The Northern Trust Company Vice President
Vice President
Blanchard, Jeffrey L. The Northern Trust Company Senior Vice President
Senior Vice President
Boeckmann, Eric Vonn The Northern Trust Company Vice President
Vice President
Boyer, Deborah Lynn The Northern Trust Company Vice President
Vice President
11
Breckel, Theodore The Northern Trust Company Senior Vice President
Senior Vice President
Bridgman, James Carey The Northern Trust Company Vice President
Vice President
Britton, Alan R. The Northern Trust Company Vice President
Vice President
Bukoll, Martin B. The Northern Trust Company Senior Vice President
Senior Vice President
Campbell, Jr., Richard C. The Northern Trust Company Senior Vice President
Senior Vice President
Cannon, Patrick Northern Trust Bank, N.A. Senior Vice President
Senior Vice President
Carberry, Craig R. The Northern Trust Company Senior Attorney
Secretary
Carlson, Marc E. The Northern Trust Company Vice President
Vice President
Carlson, Mark D. The Northern Trust Company Vice President
Vice President
Carlson, Robert A. The Northern Trust Company Vice President
Vice President
Chavez, Oscar A. The Northern Trust Company Vice President
Vice President
Clarke-Czochara, Susan The Northern Trust Company Vice President
Vice President
Connellan, Kevin Anthony The Northern Trust Company Senior Vice President
Senior Vice President
Cozine, Mark E. The Northern Trust Company Vice President
Vice President
Creighton, James A. Northern Trust Bank, N.A. Senior Vice President
Senior Vice President
D'Arienzo, Louis R. Northern Trust Bank, N.A. Vice President
12
Vice President
Dennehy II, William The Northern Trust Company Vice President
Vice President
Detroy, Timothy J. The Northern Trust Company Vice President
Vice President
Dow, Robert John The Northern Trust Company Vice President
Vice President
Driscoll, Peter John The Northern Trust Company Vice President
Vice President
Dudley, Jr., Orie Leslie The Northern Trust Company Executive Vice
Director and Executive and Northern Trust President and Chief
Vice President Corporation Investment Officer
Egizio, Michael P. The Northern Trust Company Vice President
Vice President
Everett, Steven R. The Northern Trust Company Vice President
Vice President
Flood, Peter J. The Northern Trust Company Senior Vice President
Senior Vice President
Flynn, Andrew G. The Northern Trust Company Vice President
Vice President
Ford, Kristine L. The Northern Trust Company Vice President
Vice President
Frechette, Timothy J. The Northern Trust Company Senior Vice President
Senior Vice President
Free, David J. The Northern Trust Company Vice President
Vice President
Fronk, Christopher A. The Northern Trust Company Vice President
Vice President
Gautham, Ravi A. The Northern Trust Company Senior Vice President
Senior Vice President
Geller, Stephanie L. The Northern Trust Company Vice President
Vice President
13
Geraghty, Kim Marie The Northern Trust Company Former Vice President
Vice President
Gerlach, Jennifer Ann The Northern Trust Company Vice President
Vice President
Gilbert, George J. The Northern Trust Company Senior Vice President
Senior Vice President
Gomez, Anastasia The Northern Trust Company Vice President
Vice President
Gonzalez, Edwardo Northern Trust Bank, N.A. Vice President
Vice President
Gougler, Frederick A. The Northern Trust Company Vice President
Vice President
Greenberg, Karen H. The Northern Trust Company Vice President
Vice President
Griffin, Michelle D. The Northern Trust Company Vice President
Vice President
Hammer, Alice S. The Northern Trust Company Vice President
Vice President
Hance, Geoffrey M. The Northern Trust Company Senior Vice President
Senior Vice President
Hankins, Terry Anthony The Northern Trust Company Vice President
Vice President
Hare, William A. The Northern Trust Company Vice President
Vice President
Harmon, Christine M. The Northern Trust Company Vice President
Vice President
Hausken, Philip Dale The Northern Trust Company Senior Vice President
Senior Vice President
Hiemenz, Kent C. The Northern Trust Company Senior Vice President
Senior Vice President
14
Hill, Susan The Northern Trust Company Vice President
Vice President
Hockley, Jackson L. The Northern Trust Company Vice President
Vice President
Hogan, James F. The Northern Trust Company Vice President
Vice President
Hogan, John T. The Northern Trust Company Vice President
Vice President
Holland, Jean-Pierre The Northern Trust Company Vice President
Vice President
Honig, Bruce S. The Northern Trust Company Vice President
Vice President
Houghtaling, David J. The Northern Trust Company Vice President
Vice President
Hyatt, William E. The Northern Trust Company Vice President
Vice President
Iscra, Daniel P. The Northern Trust Company Vice President
Vice President
Johnson, Amy L. The Northern Trust Company Vice President
Vice President
Johnston, Barbara M. The Northern Trust Company Vice President
Vice President
Jones, Scott Craven The Northern Trust Company Senior Vice President
Senior Vice President
Joseph, Robert E. The Northern Trust Company Senior Vice President
Senior Vice President
Joves, Evangeline Mendoza The Northern Trust Company Vice President
Vice President
Kane, James P. The Northern Trust Company Vice President
Vice President
Kelliher, Michael A. Northern Trust Bank, N.A. Vice President
15
Vice President
Kent, Stephen Krider The Northern Trust Company Vice President
Vice President
Kenzer, David T. The Northern Trust Company Vice President
Vice President
Kim, June H. Northern Trust Bank, N.A. Vice President
Vice President
King III, Archibald E. The Northern Trust Company Senior Vice President
Senior Vice President
Knapp, William M. The Northern Trust Company Senior Vice President
Senior Vice President
Koch, Deborah L. The Northern Trust Company Vice President
Vice President
Korytowski, Donald H. The Northern Trust Company Vice President
Vice President
Kotsogiannis, Nikolas The Northern Trust Company Vice President
Vice President
Krieg, John L. The Northern Trust Company Vice President
Vice President
Krisko, Denise M. Northern Trust Bank, N.A. Vice President
Vice President
Krull, Gerald M. The Northern Trust Company Vice President
Vice President
Kuhl, Gregory M. The Northern Trust Company Vice President
Vice President
Kuntz, Peter J. Northern Trust Bank, N.A. Senior Vice President
Senior Vice President
Lamphier, Matthew E. The Northern Trust Company Vice President
Vice President
Laughlin, Roberta J. The Northern Trust Company Vice President
Vice President
16
Lee, Susan E. The Northern Trust Company Vice President
Vice President
Leo, John B. The Northern Trust Company Senior Vice President
Senior Vice President
Lorenz, Philip D. The Northern Trust Company Vice President
Vice President
Lucas, Michael L. The Northern Trust Company Vice President
Vice President
Lyons, William A. The Northern Trust Company Vice President
Vice President
Marchese, Peter The Northern Trust Company Vice President
Vice President
Marshe, Daniel J. The Northern Trust Company Vice President
Vice President
Matturi, Alexander J. Northern Trust Bank, N.A. Vice President
Vice President
McCart, Jane The Northern Trust Company Senior Vice President
Senior Vice President
McClintic, Corinne The Northern Trust Company Senior Vice President
Senior Vice President
McDonald, James D. The Northern Trust Company Senior Vice President
Senior Vice President
McGowan Gannon, Shannon The Northern Trust Company Vice President
Vice President
McGregor, Timothy T. The Northern Trust Company Senior Vice President
Senior Vice President
McInerney, Joseph W. The Northern Trust Company Vice President
Vice President
Mecca, Melinda S. The Northern Trust Company Senior Vice President
Senior Vice President
17
Mehta, Ashish R. The Northern Trust Company Vice President
Vice President
Mendel, Roger A. The Northern Trust Company Vice President
Vice President
Meservey, Marilyn J. The Northern Trust Company Vice President
Vice President
Michaels, Peter M. The Northern Trust Company Vice President
Vice President
Misenheimer, Eric The Northern Trust Company Senior Vice President
Senior Vice President
Missil, Kristin A. Northern Trust Bank, N.A. Vice President
Vice President
Mitchell, Robert G. The Northern Trust Company Vice President
Vice President
Miyashita, Taku The Northern Trust Company Vice President
Vice President
Muench, Scott O. Northern Trust Bank, N.A. Vice President
Vice President
Muiznieks, Katrina M. The Northern Trust Company Vice President
Vice President
Musial, Tim The Northern Trust Company Vice President
Vice President
Myre, Matthew L. The Northern Trust Company Vice President
Vice President
Nellans, Charles J. The Northern Trust Company Vice President
Vice President
Nelligan, Barbara The Northern Trust Company Vice President
Vice President
Novicki, Amy D. The Northern Trust Company Senior Vice President
Senior Vice President
18
O'Donnell, Kevin Joseph The Northern Trust Company Vice President
Vice President
O'Shaughnessy, Kevin J. The Northern Trust Company Vice President
Vice President
Owens, Rosalind Ora The Northern Trust Company Vice President
Vice President
Pero, Perry R. The Northern Trust Company Vice Chairman/
Director and Northern Trust Head of Corporate
Corporation Risk Management
Pollak, Donald R. The Northern Trust Company Senior Vice President
Senior Vice President
Potter, Stephen N. The Northern Trust Company Executive Vice
Director President
Pries, Katie D. The Northern Trust Company Vice President
Vice President
Quinn, Patrick D. The Northern Trust Company Vice President
Vice President
Quintana, Maria E. The Northern Trust Company Vice President
Vice President
Rakowski, Andrew F. The Northern Trust Company Vice President
Vice President
Ranaldi, Anna Maria The Northern Trust Company Vice President
Vice President
Reeder, Brent D. The Northern Trust Company Vice President
Vice President
Ringo, Wesley L. The Northern Trust Company Senior Vice President
Senior Vice President
Rivera, Maria Northern Trust Bank, N.A. Vice President
Vice President
Roberts, M. David The Northern Trust Company Vice President
Vice President
19
Robertson, Alan W. The Northern Trust Company Senior Vice President
Director & Senior Vice
President
Robertson, Colin A. The Northern Trust Company Senior Vice President
Senior Vice President
Rochford, Kevin J. The Northern Trust Company Senior Vice President
Director & Senior Vice
President
Rose, Henry Peter The Northern Trust Company Vice President
Vice President
Runquist, Lori Rae The Northern Trust Company Senior Vice President
Senior Vice President
Salata, Timothy J. The Northern Trust Company Vice President
Vice President
Sanchez, Vanessa M. The Northern Trust Company Vice President
Vice President
Santiccioli, Steven J. Northern Trust Bank, N.A. Vice President
Vice President
Schoenberger, Michael The Northern Trust Company Vice President
Vice President
Schweitzer, Eric K. The Northern Trust Company Senior Vice President
Senior Vice President
Seward, Richard Raymond The Northern Trust Company Vice President
Vice President
Shank, Ken M. The Northern Trust Company Vice President
Vice President
Short, Robert C. The Northern Trust Company Vice President
Vice President
Skleney, Ronald J. The Northern Trust Company Vice President
Vice President
Skowron, Gail A. The Northern Trust Company Vice President
Vice President
20
Southworth, Theodore T. The Northern Trust Company Senior Vice President
Senior Vice President
Spears, Curtis L. The Northern Trust Company Vice President
Vice President
Sperrazza, Daniel A. The Northern Trust Company Senior Vice President
Senior Vice President
Streed, Robert N. The Northern Trust Company Senior Vice President
Senior Vice President
Sullivan, Carol H. The Northern Trust Company Vice President
Vice President
Syring, Ann F. The Northern Trust Company Vice President
Vice President
Szaflik, Carolyn B. Northern Trust Bank, N.A. Vice President
Vice President
Szymanek, Frank D. The Northern Trust Company Vice President
Vice President
Taylor, Brad L. The Northern Trust Company Vice President
Vice President
Temple, Jan The Northern Trust Company Senior Vice President
Senior Vice President
Tetrault, Jr., William J. The Northern Trust Company Vice President
Vice President
Toth, Terence J. The Northern Trust Company President
Director and President
Treccia, Stephanie S. The Northern Trust Company Vice President
Vice President
Trethaway, Jennifer Kamp The Northern Trust Company Executive Vice
Executive Vice President President
Turner, Betsy Licht The Northern Trust Company Vice President
Vice President
21
Van Liew, Kristina Marie The Northern Trust Company Vice President
Vice President
Waddell, Frederick H. The Northern Trust Company President
Director
Walker, Sharon M. Northern Trust Bank, N.A. Vice President
Vice President
Wennlund, Lloyd A. The Northern Trust Company Executive Vice
Director and Executive President
Vice President
Wetter, Steven R. The Northern Trust Company Vice President
Vice President
Wilke, Heather Ryan The Northern Trust Company Vice President
Vice President
Wilkins, Anthony E. The Northern Trust Company Senior Vice President
Senior Vice President
Wing, James M. The Northern Trust Company Vice President
Vice President
Winters, Marie C. The Northern Trust Company Vice President
Vice President
Wong, Kai Yee Northern Trust Bank, N.A. Vice President
Vice President
Wright, Mary Kay The Northern Trust Company Vice President
Vice President
Zutshi, Ajay The Northern Trust Company Vice President
Vice President
22
Name and Principal
Name and Position with Business Address Connection with
Investment Adviser (NTGIE) of Other Company Other Company
----------------------------- -------------------------- ---------------------
Bowers, Wayne George
Vice President
Cooke, Lucy
Vice President
Davidson, Ian Graham
Vice President
Dudley, Jr., Orie Leslie The Northern Trust Company Executive Vice
Director President
Northern Trust Investments Director and
Executive
Vice President
Hogarth, Gordon N.
Senior Vice President
Jones, Diane
Vice President
Oliver, Edmund James
Vice President
Popat, Amit
Vice President
Potter, Stephen N. The Northern Trust Company Executive Vice
Director & Chief Executive President
Officer Northern Trust Investments Director
Rebelo, Bert
Vice President
Ring, Nicholas
Director & Senior Vice
President
Rochford, Kevin The Northern Trust Company Senior Vice President
Director
Rothwell, Richard Farrar
Vice President
23
Sagraves, Barry
Director & Senior
Vice President
Watson, Stephen D.
Vice President
White, Antony K.
Vice President
Wright, Simon
Vice President
ITEM 27. PRINCIPAL UNDERWRITERS
-------------------------------
(a) Northern Funds Distributors, LLC (the "Distributor"), acts as
distributor for Northern Institutional Funds pursuant to a
distribution agreement dated December 31, 2000. The Distributor also
acts as underwriter for Northern Funds.
(b) The information required by this Item 27(b) with respect to each
director, officer, or partner of Northern Funds Distributors, LLC is
incorporated by reference to Schedule A of Form BD filed by Northern
Funds Distributors, LLC with the Securities and Exchange Commission
pursuant to the Securities Act of 1934 (File No. 8-51242).
(c) Not Applicable.
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 PFPC Inc., 99 High Street, 27/th/
Floor, Boston, Massachusetts 02110. Records for Northern Funds Distributors,
LLC, the distributor, are located at 760 Moore Road, King of Prussia, PA 19406.
All other accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
there under are in the physical possession of The Northern Trust Company, 50 S.
LaSalle Street, Chicago, Illinois 60675 and NTI, 50 S. LaSalle Street, Chicago
Illinois 60690.
ITEM 29. MANAGEMENT SERVICES
-----------------------------
Not Applicable.
ITEM 30. UNDERTAKINGS
----------------------
24
Not Applicable.
25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all the requirements for the effectiveness of this
Post-Effective Amendment No. 53 pursuant to Rule 485(b) under the Securities Act
of 1933, as amended, and has duly caused this Post-Effective Amendment No. 53 to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Chicago and State of Illinois on the
29th day of March, 2004.
NORTHERN INSTITUTIONAL FUNDS
By: /s/ Lloyd A. Wennlund
------------------------------------
Lloyd A. Wennlund
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 53 to Registrant's Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
Name Title Date
-------------------------------- -------------- ----------------------------
/s/ Lloyd A. Wennlund
-------------------------------- President March 29, 2004
Lloyd A. Wennlund
/s/ Brian Ovaert March 29, 2004
-------------------------------- Vice President
and Treasurer
Brian Ovaert
/s/ Richard G. Cline
-------------------------------- Trustee March 29, 2004
Richard G. Cline
/s/ Edward J. Condon, Jr.
-------------------------------- Trustee March 29, 2004
Edward J. Condon, Jr.
/s/ William J. Dolan, Jr.
-------------------------------- Trustee March 29, 2004
William J. Dolan, Jr.
/s/ Sharon Gist Gilliam
-------------------------------- Trustee March 29, 2004
Sharon Gist Gilliam
/s/ Sandra Polk Guthman
-------------------------------- Trustee March 29, 2004
Sandra Polk Guthman
/s/ Michael E. Murphy
-------------------------------- Trustee March 29, 2004
Michael E. Murphy
/s/ Mary Jacobs Skinner
-------------------------------- Trustee March 29, 2004
Mary Jacobs Skinner
/s/ Richard P. Strubel
-------------------------------- Trustee March 29, 2004
Richard P. Strubel
/s/ Stephen B. Timbers
-------------------------------- Trustee March 29, 2004
Stephen B. Timbers
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(a)(9) Amendment No. 8 dated April 29, 2003 to the Agreement and
Declaration of Trust
(b)(2) Amendment No. 1 dated July 29, 2003 to the Amended and Restated
By-Laws
(d)(16) Addendum No. 1 dated August 20, 2003 to the Investment Advisory
Agreement between the Registrant and Northern Trust Investments,
N.A.
(e)(2) Amended and Restated Schedule A dated August 21, 2003 to the
Distribution Agreement by and between Registrant and Northern
Funds Distributors, LLC
(g)(19) Addendum No. 12 dated April 29, 2003 to the Custodian Agreement
between the Registrant and The Northern Trust Company
(g)(20) Addendum No. 13 dated July 29, 2003 to the Custodian Agreement
between the Registrant and The Northern Trust Company
(g)(21) Addendum No. 5 dated July 29, 2003 to the Foreign Custody
Agreement between Registrant and The Northern Trust Company
(h)(12) Addendum No. 11 dated August 20, 2003 to the Revised and Restated
Transfer Agency Agreement between the Registrant and The Northern
Trust Company
(h)(13) Forms of Servicing Agreement for Class C and D Shares
(h)(14) Forms of Servicing Agreement for Service and Premier Classes
(h)(22) Amended and Restated Schedule A dated August 20, 2003 to the
Amended and Restated Co-Administration Agreement by and between
Registrant, Northern Trust Investments, N.A. and PFPC Inc.
(j)(1) Consent of Drinker Biddle & Reath LLP
(j)(2) Consent of Independent Auditors
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘485BPOS’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 4/30/05 | | 343 | | 442 |
| | 3/31/05 | | 46 | | 285 |
| | 6/1/04 | | 29 | | 44 |
| | 5/2/04 | | 44 |
| | 4/1/04 | | 2 | | 409 |
| Filed on / Effective on: | | 3/29/04 | | 1 | | 479 | | | POS AMI |
| | 3/1/04 | | 383 | | 440 |
| | 2/13/04 | | 342 | | 459 |
| | 12/31/03 | | 19 | | 429 |
| | 11/30/03 | | 7 | | 442 | | | 24F-2NT, N-CSR, NSAR-B |
| | 9/2/03 | | 296 | | 441 |
| | 8/21/03 | | 275 | | 480 |
| | 8/20/03 | | 456 | | 480 |
| | 7/29/03 | | 454 | | 480 |
| | 5/15/03 | | 453 | | 460 | | | 485APOS |
| | 4/29/03 | | 454 | | 480 |
| | 3/28/03 | | 453 | | 458 | | | 485BPOS, POS AMI |
| | 12/31/02 | | 50 |
| | 11/30/02 | | 73 | | 342 | | | 24F-2NT, N-30D, NSAR-B |
| | 10/29/02 | | 336 | | 428 |
| | 9/5/02 | | 149 | | 374 |
| | 9/4/02 | | 149 | | 374 |
| | 6/13/02 | | 73 | | 368 |
| | 4/1/02 | | 455 | | | | | 497J |
| | 3/29/02 | | 453 | | 455 | | | 485BPOS |
| | 3/28/02 | | 453 | | 460 | | | POS AMI |
| | 2/8/02 | | 460 |
| | 1/29/02 | | 453 | | 455 | | | 485APOS, NSAR-B |
| | 12/1/01 | | 85 | | 161 |
| | 11/30/01 | | 77 | | 342 | | | 24F-2NT, N-30D, NSAR-B |
| | 10/30/01 | | 457 | | 459 |
| | 9/26/01 | | 223 |
| | 8/15/01 | | 459 |
| | 7/31/01 | | 453 | | 459 | | | NSAR-A, POS AMI |
| | 7/26/01 | | 454 |
| | 7/11/01 | | 223 |
| | 6/15/01 | | 69 |
| | 6/14/01 | | 19 | | 367 |
| | 5/2/01 | | 455 |
| | 5/1/01 | | 458 |
| | 4/4/01 | | 77 | | 368 | | | 497 |
| | 3/30/01 | | 453 | | 455 | | | 485BPOS |
| | 3/29/01 | | 153 | | 351 |
| | 3/1/01 | | 455 | | 459 |
| | 2/2/01 | | 459 |
| | 2/1/01 | | 255 | | 262 |
| | 1/29/01 | | 77 | | 455 | | | 485APOS, NSAR-B |
| | 1/17/01 | | 453 | | 454 | | | 485APOS |
| | 1/2/01 | | 350 | | 433 |
| | 1/1/01 | | 348 | | 459 |
| | 12/31/00 | | 456 | | 476 |
| | 11/30/00 | | 73 | | 262 | | | 24F-2NT, N-30D, NSAR-B |
| | 11/1/00 | | 454 |
| | 8/2/00 | | 454 |
| | 5/2/00 | | 454 |
| | 3/29/00 | | 453 | | 457 | | | 485BPOS |
| | 2/11/00 | | 262 |
| | 1/28/00 | | 453 | | 454 | | | 485APOS |
| | 1/24/00 | | 454 |
| | 12/31/99 | | 77 | | 368 |
| | 12/1/99 | | 73 | | 368 |
| | 11/30/99 | | 69 | | 261 | | | 24F-2NT, 497, N-30D, NSAR-B |
| | 10/14/99 | | 453 | | 454 | | | 485BPOS |
| | 10/5/99 | | 453 | | 461 |
| | 9/30/99 | | 259 |
| | 9/29/99 | | 226 | | 259 |
| | 9/22/99 | | 351 |
| | 8/23/99 | | 19 | | 374 |
| | 8/22/99 | | 69 | | 374 |
| | 7/21/99 | | 226 | | 259 |
| | 7/20/99 | | 259 |
| | 6/30/99 | | 368 |
| | 6/20/99 | | 351 |
| | 5/28/99 | | 259 |
| | 5/13/99 | | 261 |
| | 4/1/99 | | 255 | | 257 |
| | 2/10/99 | | 352 | | 374 |
| | 2/1/99 | | 453 | | | | | 485APOS |
| | 1/1/99 | | 54 | | 136 |
| | 12/15/98 | | 257 |
| | 10/6/98 | | 374 |
| | 10/5/98 | | 367 |
| | 10/2/98 | | 374 |
| | 7/15/98 | | 301 | | 412 | | | 497 |
| | 5/15/98 | | 453 | | | | | 497 |
| | 4/1/98 | | 455 |
| | 3/31/98 | | 301 | | 458 |
| | 3/27/98 | | 453 | | 456 | | | 485BPOS |
| | 2/25/98 | | 453 |
| | 1/27/98 | | 457 | | 459 |
| | 1/16/98 | | 453 | | | | | 485APOS |
| | 1/8/98 | | 351 |
| | 12/1/97 | | 456 |
| | 9/29/97 | | 453 | | 456 | | | 485BPOS |
| | 8/1/97 | | 374 |
| | 7/1/97 | | 301 | | 454 |
| | 5/16/97 | | 453 | | 456 | | | 485APOS |
| | 4/22/97 | | 456 | | 458 |
| | 4/1/97 | | 367 |
| | 1/22/97 | | 457 | | 458 |
| | 10/8/96 | | 456 |
| | 6/14/96 | | 367 |
| | 3/29/96 | | 453 | | 456 | | | 485BPOS |
| | 2/20/96 | | 367 |
| | 12/29/95 | | 367 |
| | 11/20/95 | | 374 |
| | 9/28/95 | | 367 |
| | 7/3/95 | | 374 |
| | 12/8/94 | | 367 |
| | 11/16/94 | | 367 | | 374 |
| | 9/15/94 | | 374 |
| | 9/14/94 | | 367 | | 374 |
| | 3/28/94 | | 367 |
| | 3/25/94 | | 458 |
| | 3/1/94 | | 457 |
| | 7/1/93 | | 367 | | 458 |
| | 4/27/93 | | 459 |
| | 4/5/93 | | 374 |
| | 1/11/93 | | 367 | | 374 |
| | 1/8/93 | | 456 | | 458 |
| | 6/8/92 | | 456 |
| List all Filings |
14 Subsequent Filings that Reference this Filing
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