CLEARWATER INVESTMENT TRUST
CLEARWATER GROWTH FUND
CLEARWATER SMALL CAP FUND
PROSPECTUS
April 30, 1999
The Securities and Exchange Commission has not approved or disapproved of
these securities as an investment or determined whether this prospectus is
accurate or complete. Any statement to the contrary is a crime.
<PAGE>
CONTENTS
Investment objectives, key investments, strategies, risks and expenses:
Things you should know before you invest...............2
Clearwater Growth Fund.................................3
Clearwater Small Cap Fund..............................5
Other investments and investment strategies....................................7
Management.....................................................................8
Buying shares..................................................................9
Exchanging and redeeming shares...............................................10
Other things to know about share transactions.................................11
Dividends, distributions and taxes............................................12
Financial highlights..........................................................13
THINGS YOU SHOULD KNOW BEFORE INVESTING
About the manager
The funds' investment manager is Clearwater Management Co., Inc. The manager has
engaged Parametric Portfolio Associates as subadviser to select investments for
Clearwater Growth Fund and Kennedy Capital Management as subadviser to select
investments for Clearwater Small Cap Fund.
About mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
About each fund's investment objective
Each fund's investment objective is classified as nonfundamental and may be
changed by the fund's trustees without shareholder approval.
Clearwater Investment Trust - 2
<PAGE>
CLEARWATER GROWTH FUND
Investment objectives
The fund seeks long-term growth of capital. Current income, to the extent income
is produced by the stocks included in the Russell 1000 Index, is a secondary
objective.
Key investments and strategies
The fund is passively managed to track but not replicate the Russell 1000 Index,
an unmanaged, capitalization weighted index of the largest 1000 public companies
in the United States. The fund holds a broadly diversified portfolio of common
stocks comparable to stocks in the Index in terms of economic sector weightings,
market capitalization and liquidity.
How the subadviser selects the fund's investments
The subadviser manages the fund so that the fund's holdings match the holdings
of the Index as closely as possible without requiring the fund to realize
taxable gains. This means that the fund will not buy and sell securities to
match changes in the composition of securities in the Index. Instead, the
manager adjusts the fund's portfolio periodically to reflect the holdings and
weightings of the Index but only after consideration of the fund's policy to
minimize realization of taxable gains.
Prior to 1998, the fund was actively managed to meet a different investment
objective. To reduce potential realized capital gain from the sale of portfolio
securities acquired prior to 1998, the subadviser is gradually adjusting the
fund's portfolio to align it with the Index over a period of several years.
Until the fund's portfolio is aligned with the Index, the fund may continue to
hold securities in amounts that do not match Index weightings and will be
subject to the risks of such securities.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if any of the following occurs:
o The Russell 1000 Index declines generally or performs poorly relative to
other U.S. equity indexes or individual stocks.
o An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of one of the larger companies in the
Index.
o The stocks of companies which comprise the Index fall out of favor with
investors.
Even though the fund invests substantially all of its assets in the common
stocks of companies represented in the Russell 1000 Index, the fund will not
mirror the Index perfectly because
o The fund must have an amount of cash or other liquid securities available
tomeet redemption requests; o The subadviser manages the fund to reduce the
tax liability to the fund's shareholders; and o The fund bears certain
expenses the Index does not bear.
Clearwater Investment Trust - 3
<PAGE>
Total return and comparative performance
The bar chart indicates the risks of investing in the fund by showing the
performance of the fund's shares for each of the past 10 calendar years. The
total return table indicates the risk of investing in the fund by comparing the
average annual total return of the fund for the periods shown to that of the
Russell 1000 Index, an unmanaged index of common stocks of the largest 1000
public companies in the United States. The table assumes redemption of shares at
the end of the period and the reinvestment of distributions and dividends. Past
performance does not necessarily indicate how the fund will perform in the
future.
[GRAPHIC OMITTED]
% Total Return
37.2 -4.1 42.8 4.4 2.2 1.2 32.8 21.5 28.4 22.7
89 90 91 92 93 94 95 96 97 98
Calendar years ended December 31
Quarterly returns
Highest: 21.9% in 4th quarter 1998
Lowest: (16.8)% in 3rd quarter 1990
<TABLE>
<CAPTION>
Average Annual Total Returns (Calendar Years Ended December 31, 1998)
<S> <C> <C> <C> <C> <C>
1 Year 5 Years 10 Years Since Inception Inception Date
Clearwater Growth Fund 22.7% 20.8% 17.8% 13.9% 6/19/87
Russell 1000 Index 27.0% 23.4% 19.0% 15.9%
</TABLE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in shares
of the fund.
Shareholder fees (paid directly from your investment) None
Annual fund operating expenses (paid by the fund as a % of fund net assets)
Management fees 0.45%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.45%
=====
Example
This example helps you compare the costs of investin in the fund with other
mutual funds. Your actual costs may be higher or lower.
Number of years you own your shares 1 year* 3 years* 5 years* 10 years*
$ 46 $ 144 $ 252 $ 567
*The example assumes: o You invest $10,000 for the period shown
o You reinvest all distributions and dividends
o The fund's operating expenses remain the same
o Your investment has a 5% return each year
Clearwater Investment Trust - 3
<PAGE>
CLEARWATER SMALL CAP FUND
Investment objectives
The fund seeks long-term growth of capital. Current income is a secondary
objective.
Key investments and strategies
The fund invests primarily in equity securities of issuers with market
capitalizations no greater than the range of capitalizations of the companies
included in the Russell 2000 Index at the time of investment. Equity securities
consist primarily of exchange traded common and preferred stocks and convertible
securities.
How the subadviser selects the fund's investments
The subadviser uses a "bottom up" investment approach in selecting securities
based on its fundamental analysis of a security's value. In selecting individual
companies for investment, the subadviser looks for companies with:
o Growing and accelerating sales, earnings and cash flow
o Above average growth rates at reasonable market valuation.
o Low valuations relative to long term potential because the market has
overlooked them or because they are temporarily out of favor in the market
due to poor economic conditions, adverse regulatory changes or market
declines.
The subadviser also employs an active sell discipline and will generally sell
stock if it determines:
o The company's future fundamentals have deteriorated
o The company's stock has reached full or excessive valuation levels.
Proceeds are then reinvested in new securities exhibiting desirable investment
characteristics as described above.
Principal risks of investing in the fund
o The stock market goes down. This risk may be greater if you are a
short-term investor.
o Small company stocks fall out of favor with investors.
o The manager's judgment about the attractiveness or relative value of a
particular security proves to be incorrect.
The fund also has risks associated with investing in small companies. Compared
to large companies, small companies, and the market for their common stocks, are
likely to:
o Be more sensitive to changes in the economy, earnings results and investor
expectations.
o Have more limited product lines and capital resources.
o Experience sharper swings in market values.
o Be harder to sell at the times and prices the fund thinks appropriate.
o Offer greater potential for gain and loss .
Clearwater Investment Trust - 5
<PAGE>
Total return and comparative performance
The bar chart indicates the risks of investing in the fund by showing the
performance of the fund's shares for each of the past 10 calendar years. The
total return table indicates the risk of investing in the fund by comparing the
average annual total return of the fund for the periods shown to that of the
Russell 2000 Index, an unmanaged index of small capitalization stocks. The table
assumes redemption of shares at the end of the period and the reinvestment of
distributions and dividends. Past performance does not necessarily indicate how
the fund will perform in the future.
[GRAPHIC OMITTED]
% Total Return
-3.6 24.9 4.9 15.4 -6.7 26.3 15.0 40.2 -7.1
90 91 92 93 94 95 96 97 98
Calendar years ended December 31
Quarterly returns
Highest: 25.5% in 3rd quarter 1997
Lowest: (25.1)% in 3rd quarter 1998
<TABLE>
<CAPTION>
Average Annual Total Returns (Calendar Years Ended December 31, 1998)
<S> <C> <C> <C> <C> <C>
1 Year 5 Years 10 Years Since Inception Inception Date
Clearwater Small Cap Fund (7.1)% 12.0% n/a 12.0% 12/31/93
Russell 2000 Index (2.5)% 11.9% n/a 11.9%
</TABLE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in
shares of the fund.
Shareholder fees (paid directly from your investment) None
Annual fund operating expenses (paid by the fund as a % of fund net assets)
Management fees 1 .35%
Other expenses 0 .00%
------
Total annual fund operating expenses 1 .35%
======
Example
This example helps you compare the costs of investing in the fund with other
mutual funds. Your actual costs may be higher or lower.
Number of years you own your shares 1 year* 3 years* 5 years* 10 years*
$ 137 $ 428 $ 739 $ 1,624
*The example assumes: o You invest $10,000 for the period shown
o You reinvest all distributions and dividends
o The fund's operating expenses remain the same
o Your investment has a 5% return each year
Clearwater Investment Trust - 6
<PAGE>
OTHER INVESTMENTS AND INVESTMENT STRATEGIES
Fixed income securities. Each fund may invest in fixed income securities
including bonds and notes. Clearwater Growth Fund will generally only invest in
fixed income securities represented in the Russell 1000 Index, if any. The
funds' fixed income securities may have all types of interest rate payment and
reset terms, including fixed rate, adjustable rate, zero coupon, deferred,
payment in kind and auction rate features. Each fund will only invest in fixed
income securities rated investment grade. Each fund's fixed income securities
may be of any maturity.
Credit quality and risk. Securities are investment grade if:
o They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
o They have received a comparable short-term or other rating.
o They are unrated securities that the subadviser believes to be of
comparable quality.
The value of a fund's fixed income securities may go down if:
o Interest rates rise, which will make the prices of fixed income securities
go down.
o The issuer of a security owned by the fund has its credit rating downgraded
or defaults on its obligation to pay principal and/or interest.
Derivatives. Each fund may utilize securities, and securities index futures
contracts and options in order to invest cash balances, to maintain liquidity,
to meet shareholder redemptions, or to minimize trading costs. Clearwater Growth
Fund's use of derivatives will be limited by its avoidance of tax liability and
its low turnover rate.
Even a small investment in derivative contracts can have a big impact on the
funds' market exposure. Therefore, using derivatives can disproportionately
increase losses and reduce opportunities for gains when market prices are
changing. A fund may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value of
the fund's holdings. The other parties to certain derivative contracts present
the same types of credit risk as issuers of fixed income securities. Derivatives
can also make a fund less liquid and harder to value, especially in declining
markets.
Foreign securities. Each fund, may invest up to 25% of its total assets in
securities of foreign issuers from a variety of countries, including emerging
markets. Clearwater Growth Fund's foreign securities will primarily be limited
to those that are represented in the Russell 1000 Index. The fund may, however,
hold foreign securities not contained in the Index. Many foreign countries in
which the funds may invest have markets that are less liquid and more volatile
than markets in the U.S. In some foreign countries, less information is
available about foreign issuers and markets because of less rigorous accounting
and regulatory standards than in the U.S. Currency fluctuations could erase
investment gains or add to investment losses. The risk of investing in foreign
securities is greater in the case of emerging markets.
Portfolio turnover. The subadviser for Clearwater Growth Fund believes that a
passive portfolio management strategy, combined with tax management techniques,
provides the best opportunity for optimal after tax total return. The subadviser
also believes that passive portfolio management will limit the fund's portfolio
turnover rate to a lower level than if the fund were actively managed. Although
the fund does not purchase or sell securities for short-term profits, the fund
will sell portfolio securities without regard to the time they have been held
whenever such action seems advisable.
Although Clearwater Small Cap Fund does not purchase or sell securities for
short-term profits, the fund may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading increases
transaction costs, which could decrease the fund's performance, and may result
in increased net short-term capital gains, distributions of which are taxable to
shareholders as ordinary income.
Temporary defensive investments. When in the judgment of its subadviser, adverse
market conditions warrant, each fund may adopt a temporary defensive position by
investing up to 100% of its assets in cash and cash equivalents.If a fund takes
a temporary defensive position, it may be unable to achieve its investment goal.
Clearwater Investment Trust - 7
<PAGE>
MANAGEMENT
Management services and fees
Clearwater Management Co. serves as the funds' manager. Clearwater is a
privately owned registered investment adviser. The manager has been in the
investment management business since 1987. As of December 31, 1998, Clearwater
had $187 million in assets under management. Clearwater selects and supervises
subadvisers for the funds and administers the funds' business operations. For
these services for the fiscal year ended December 31, 1998, the manager received
a fee from Clearwater Growth Fund and Clearwater Small Cap Fund, equal to 0.45%
and 1.35%, respectively, of each fund's average daily net assets.
<TABLE>
<CAPTION>
The portfolio managers
The portfolio managers are primarily responsible for the day-to-day operation of
the funds indicated beside their names.
<S> <C> <C> <C> <C>
Fund Subadviser Portfolio Since Past 5 years' business experience
Manager
Growth Fund Parametric Portfolio David Stein 1997 Managing director and chief investment officer of Associates
Parametric since 1996. Prior to that, director of investment
research, GTE Investment Management, 1995-1996. Prior to
that, director of active equity strategies, the Vanguard
Group, 1994-1995. Prior to that, director of quantitative
portfolio management and research, IBM Retirement Funds,
1977-1994
Small Cap Fund Kennedy Capital Richard Sinise 1994 Chief Investment Officer of Kennedy Capital since 1999 and
Management Vice President since 1979.
</TABLE>
Year 2000
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. That
failure could have a negative impact on handling securities trades, pricing and
account services. Companies in which a fund invests may also be affected by the
Year 2000 problem. The investment manager and the funds' service providers have
taken steps that they believe are reasonably designed to address the Year 2000
problem with respect to the computer systems that they use and expect that their
systems will be adapted in time for that event.
Clearwater Investment Trust - 8
<PAGE>
BUYING SHARES
Investment minimums
Initial and subsequent investments in either fund must be at least $1,000.
Buying shares by mail
Initial purchases
o For initial purchases of each fund's shares, complete the Purchase Order
and Account Application and send it with your check to Fiduciary
Counselling, Inc., the funds' transfer agent. An account application is
included with this prospectus. If you need additional copies, call
1-888-228-0935.
o Send completed purchase application together with a check for the amount of
the investment to:
Clearwater Investment Trust
(specify fund)
c/o Fiduciary Counselling, Inc.
332 Minnesota Street, Suite 2100
St. Paul, MN 55101-1394
o Checks drawn on foreign banks must be payable in U.S. dollars and have the
routing number of the U.S. bank encoded on the check.
o All purchase orders must include a date on which the order is to be
effective. If no date is specified, the purchase order will be filled at
the net asset value next computed.
Subsequent purchases
o Send a check for the amount of the subsequent purchase by mail directly to
the transfer agent at the address above.
o Be sure to include your fund and account number on checks for subsequent
investments.
Clearwater Investment Trust - 9
<PAGE>
EXCHANGING AND REDEEMING SHARES
Exchange privilege
Contact the transfer agent to exchange into other Clearwater funds. An exchange
of shares from one fund to another is a taxable transaction.
o You may exchange shares only for shares of another Clearwater fund
o You must meet the minimum investment amount for each fund unless you are
exchanging into a fund you already own.
o Your fund may suspend or terminate your exchange privilege if you engage in
an excessive pattern of exchanges.
To learn more about the exchange privilege contact the transfer agent or consult
the statement of additional information.
Exchanging and redeeming shares by phone
You may exchange or redeem shares by telephone. Redemption proceeds can be sent
by check to your address of record. You may be asked to provide proper
identification information. Telephone exchange and redemption requests may be
made by calling the transfer agent at (888) 228-0935 between 9:00 a.m. and [4:00
p.m.] Eastern time on any day the New York Stock Exchange is open. If telephone
exchange or redemptions are not available for any reason, you may use the fund's
exchange or redemption by mail procedure described elsewhere in this prospectus.
Redemptions by mail
You may redeem some or all of your shares by sending a written request to:
Clearwater Investment Trust
(specify fund)
c/o Fiduciary Counselling, Inc.
332 Minnesota Street, Suite 2100
St. Paul, MN 55101-1394
The written request for redemption must be in good order. A request in good
order means that you have provided the following information. Your request will
not be processed without this information.
o Name of the fund
o Account number
o Dollar amount or number of shares being redeemed o Signature of each owner
exactly as account is registered
o Other documentation required by Fiduciary Counselling, Inc. including, if
applicable, endorsed share certificates
o To be in good order, your request must include a signature guarantee. You
can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loans, but not from a notary public.
Redemption payments
In all cases, your redemption price is the net asset value per share next
determined after your request is received in good order. Redemption proceeds
normally will be sent within seven days. However, if you recently purchased your
shares by check, your redemption proceeds will not be sent to you until your
original check clears. Your redemption proceeds will be sent by check to your
address of record. Redemption proceeds may be sent to an address other than that
of record if the request includes a signature guarantee.
Clearwater Investment Trust - 10
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
Each fund has the right to:
o Suspend the offering of shares
o Waive or change minimum and additional investment amounts
o Reject any purchase or exchange order
o Change, revoke or suspend the exchange privilege
o Suspend telephone transactions
o Suspend or postpone redemptions of shares on any day when trading on the
New York Stock Exchange is restricted, or as otherwise permitted by the
Securities and Exchange Commission
o Pay redemption proceeds consisting of portfolio securities or non-cash
assets for redemptions of greater than $1 million
Small account balances
If your account falls below $1,000 because of a redemption of fund shares, the
fund may ask you to bring your account up to the minimum requirement. If your
account is still below $1,000 after 30 days, the fund may close your account and
send you the redemption proceeds.
Share price
You may buy, exchange or redeem shares at the net asset value per share next
determined after receipt of your request in good order. Each fund's net asset
value per share is the value of its assets minus its liabilities divided by the
total shares outstanding. Each fund calculates its net asset value when regular
trading closes on the New York Stock Exchange (normally 4:00 p.m., Eastern time)
if such calculation is then required to properly process a purchase order,
redemption request or exchange request for shares of the fund. The New York
Stock Exchange is closed on weekends and certain holidays listed in the
Statement of Additional Information.
Each fund generally values its securities based on market prices or quotations.
When market prices are not available, or when the manager believes they are
unreliable or that the value of a security has been materially affected by
events occurring after a foreign exchange closes, the funds may price those
securities at fair value. Fair value is determined in accordance with procedures
approved by the funds' board. A fund that uses fair value to price securities
may value those securities higher or lower than another fund using market
quotations to price the same securities. International markets may be open on
days when U.S. markets are closed and the value of foreign securities owned by a
fund could change on days when you cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with the transfer agent before the New York Stock Exchange closes. If
the New York Stock Exchange closes early, you must place your order prior to the
actual closing time. Otherwise, you will receive the next business day's price.
Clearwater Investment Trust - 11
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds normally pay dividends and distribute capital gain, if any, as
follows:
Dividends and distributions
Annual distributions of income and capital gain are made at the end of the year
in which the income or gain is realized, or the beginning of the next year.
Each fund expects to make annual distributions primarily from capital gain. The
funds may pay additional distributions and dividends at other times if necessary
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares. Alternatively, you can instruct the transfer agent to
have your distributions and/or dividends paid in cash. You can change your
choice at any time to be effective as of the next distribution or dividend,
except that any change given to the transfer agent less than five days before
the payment date will not be effective until the next distribution or dividend
is made.
Taxes
In general, redeeming and exchanging shares and receiving distributions
(whether in cash or additional shares) are all taxable events.
Transaction Federal income tax status
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned more
than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a fund is about to declare a capital gain distribution or a
dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.
After the end of each year, the funds will provide you with information about
the distributions and dividends that you received and any redemptions of shares
during the previous year. If you do not provide a fund with your correct
taxpayer identification number and any required certifications, you may be
subject to back-up withholding of 31% of your distributions, dividends and
redemption proceeds. Because each shareholder's circumstances are different and
special tax rules may apply, you should consult your tax adviser about your
investment in a fund.
Clearwater Investment Trust - 12
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years. Certain information reflects
financial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment of
all dividends and distributions. The information in the following tables was
audited by KPMG Peat Marwick LLP, independent auditors, whose report, along with
the fund's financial statements, are included in the annual report (available
upon request).
For a share of capital stock outstanding throughout each year ended December
31:
<TABLE>
<CAPTION>
Clearwater Growth Fund
<S> <C> <C> <C> <C> <C>
1998 1997(a) 1996 1995 1994
Net asset value, beginning of year $21.17 $17.88 $17.01 $13.62 $14.49
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Income from investment operations
Net investment income (loss) 0.09 (0.01) (0.01) 0.01 0.06
Net realized and unrealized gain (loss) 4.71 5.08 3.68 4.43 0.11
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Total from investment operations 4.80 5.07 3.67 4.44 0.17
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Less distributions:
Dividends from net investment income (0.05) 0.00 0.00 (0.01) (0.06)
Distributions from realized gains 0.00 (1.78) (2.80) (1.04) (0.98)
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Total distributions (0.05) (1.78) (2.80) (1.05) (1.04)
Net asset value, end of year $25.92 $21.17 $17.88 $17.01 $13.62
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Total return(b) 22.7% 28.4% 21.6% 32.6% 1.2%
Net assets, end of period (000's) 134,773 106,859 93,922 84,775 65,999
- ------------------------------------------------------------- ----------- ------------- ------------ ----------- -----------
Ratio of expenses to average net assets(c) 0.45% 0.98% 1.08% 1.08% 1.07%
Ratio of net investment income (loss) to average net 0.39% (0.06)% (0.07)% 0.06% 0.39%
assets
Portfolio turnover rate (excluding short-term securities) 3.65% 38.16% 75.90% 58.64% 70.69%
<FN>
(a) Effective November 1, 1997, Parametric Portfolio Associates became the
subadviser to the fund.
(b) Total return figures are based on the change in net asset value of a share
during the period and assumes reinvestment of istributions at net asset
value.
(c) The year 1996 includes federal and state taxes of 0.01%.
</FN>
</TABLE>
Clearwater Investment Trust - 13
<PAGE>
For a share of capital stock outstanding throughout each year ended December
31:
<TABLE>
<CAPTION>
Clearwater Small Cap Fund
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994(a)
Net asset value, beginning of year $15.24 $12.74 $11.47 $9.89 $12.26
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Income from investment operations
Net investment income (loss) (0.04) (0.02) 0.00 0.04 0.17
Net realized and unrealized gain (loss) (1.04) 5.14 1.71 2.56 (0.99)
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Total from investment operations (1.08) 5.12 1.71 2.60 (0.82)
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income 0.00 0.00 0.00 (0.04) (0.17)
Excess distributions from net investment income 0.00 0.00 (0.01) 0.00 0.00
Distributions from realized gains (1.08) (2.62) (0.42) (0.98) (1.38)
Tax return of capital 0.00 0.00 (0.01) 0.00 0.00
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Total distributions (1.08) (2.62) (0.44) (1.02) (1.55)
Net asset value, end of year $13.08 $15.24 $12.74 $11.47 $9.89
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Total return(b) (7.1)% 40.2% 15.0% 26.3% (6.7)%
Net assets, end of period (000's) 39,217 40,838 32,774 26,826 17,998
- --------------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Ratio of expenses to average net assets(c) 1.36% 1.35% 1.37% 1.35% 1.40%
Ratio of net investment income (loss) to average net assets 0.26% (0.17)% 0.00% 0.36% 1.61%
Portfolio turnover rate (excluding short-term securities) 88.27% 92.22% 89.25% 77.46% 122.88%
<FN>
(a) Effective January 1, 1994, Kennedy Capital Management became the subadviser
to the fund.
(b) Total return figures are based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value.
( c) Includes federal and state taxes of .01% in 1998 and .04% in 1996.
</FN>
</TABLE>
Clearwater Investment Trust - 14
<PAGE>
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Additional Information About the Funds
Shareholder Reports. Annual and semiannual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
Statement of Additional Information. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
How to Obtain Additional Information.
o You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the
transfer agent, by calling 1-888-228-0935 or writing the funds at 332
Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394.
o You can also review the funds' shareholder reports, prospectus and
statement of additional information at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. Information about
the public reference room may be obtained by calling 1-800-SEC-0330. Copies
of these materials may be obtained, upon payment of a duplicating fee, by
writing to the Public Reference Section of the Commission, Washington, D.C.
20549-60019. You can get the same reports and information free from the
Commission's internet web site--http://www.sec.gov.
<TABLE>
<CAPTION>
<S> <C> <C>
EXECUTIVE OFFICERS TRUSTEES
Philip W. Pascoe Philip W. Pascoe
Chairman of the Board Samuel B. Carr, Jr. Robert J. Phares
Treasurer Stanley R. Day, Jr. Frederick T. Weyerhaeuser
INVESTMENT MANAGER CLEARWATER GROWTH FUND SUBADVISER
Clearwater Management Co., Inc. Parametric Portfolio Associates
332 Minnesota Street, Suite 2100 701 Fifth Avenue, Suite 7
St. Paul, MN 55101 Seattle, WA 98104-7090
CUSTODIAN CLEARWATER SMALL CAP FUND SUBADVISER
Investors Fiduciary Trust Company Kennedy Capital Management
801 Pennsylvania 10829 Olive Boulevard
Kansas City, MO 64105 St. Louis, MO 63141-7739
COUNSEL TRANSFER AGENT AND SHAREHOLDER SERVICES
Hale and Dorr LLP Fiduciary Counselling, Inc.
60 State Street 332 Minnesota Street, Suite 2100
Boston, MA 02109 St. Paul, MN 55101-1394
(612) 228-0935
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, MN 55402
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If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. The funds are not offering to sell shares
of the funds to any person to whom the funds may not lawfully sell their shares.
(Investment Company Act file no. 811-05038)
<PAGE>
April 30, 1999
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (SAI) is not a Prospectus, but should
be read in conjunction with the Prospectus dated April 30,1999 of Clearwater
Growth Fund ("Growth Fund") and Clearwater Small Cap Fund, formerly named
Clearwater Value Fund ("Small Cap Fund"). A copy of the Prospectus can be
obtained free of charge by calling Fiduciary Counselling, Inc. at 888-228-0935
or by written request to Fiduciary Counselling, Inc. at 332 Minnesota Street,
Suite 2100, St. Paul, Minnesota 55101-1394 (Attention: Clearwater Investment
Trust). The most recent Annual Report to Shareholders accompanies this SAI and
is incorporated herein.
CONTENTS
Investment Objectives And Policies 2
Risk Factors 5
Investment Restrictions 8
Brokerage 9
Management, Advisory and Other Services 10
Executive Officers and Trustees 13
Net Asset Value 14
How Are Shares Purchased? 15
Exchange of Shares 15
How Are Shares Redeemed? 16
Taxes 17
Performance Data 19
More Information About the Funds 20
Financial Statements 22
Appendix A - Descriptions of Ratings 23
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
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INVESTMENT OBJECTIVES AND POLICIES INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives and Policies
General. Clearwater Growth Fund ("Growth Fund") and Clearwater Small Cap Fund
("Small Cap Fund") (each, a "fund") are each separate, diversified investment
portfolios of Clearwater Investment Trust (the "trust"), an open-end, management
investment company organized under the laws of the Commonwealth of
Massachusetts. Under normal circumstances, Growth Fund will invest substantially
all of its assets in the common stocks of companies represented in the Russell
1000 Index. The fund may invest in certain short-term fixed income securities
such as cash equivalents, although cash and cash equivalents are normally
expected to represent less than 1% of the fund's total assets. The Prospectus of
Growth Fund and Small Cap Fund dated April 30, 1999, identifies the investment
objectives and principal investment policies of the funds. Under normal market
conditions, Small Cap Fund invests at least 65% of its total assets in equity
and fixed income securities of companies that have total equity market
capitalizations no greater than the range of capitalizations of companies
contained in the Russell 2000 Index. Other policies of the funds are set forth
below.
EQUITY SECURITIES
Each fund's portfolio of equity securities may consist of common and preferred
stocks that trade on national securities exchanges or are quoted on the National
Association of Securities Dealers' NASDAQ National Market and either have the
potential for capital appreciation or pay dividends or both, as well as
securities convertible into such common or preferred stocks.
Common Stocks. Each fund invests primarily in common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other shareholder or class of shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
Preferred Stocks and Convertible Securities. Each fund may invest in convertible
debt and preferred stocks. Convertible debt securities and preferred stock
entitle the holder to acquire the issuer's stock by exchange or purchase at a
predetermined rate. Convertible securities are subject both to the credit and
interest rate risks associated with fixed income securities and to the stock
market risk associated with equity securities.
Warrants. Each fund may invest in warrants. Warrants acquired entitle the fund
to buy common stock from the issuer at a specified price and time. Warrants are
subject to the same market risks as stocks, but may be more volatile in price.
Each fund's investment in warrants will not entitle it to receive dividends or
exercise voting rights and will become worthless if the warrants cannot be
profitably exercised before the expiration dates.
Foreign Securities. Each fund may invest up to 25% of its total assets in equity
and fixed income securities of foreign issuers from developed and developing
countries throughout the world. Growth Fund may invest in these securities to
the extent that foreign securities are represented in the Russell 1000 Index.
Changes in foreign currency exchange rates will affect the value of foreign
securities that are denominated in foreign currencies and investment in such
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securities may result in higher expenses due to costs associated with converting
U.S. dollars to foreign currencies.
FIXED INCOME SECURITIES
Corporate Debt Obligations. Each fund may invest in corporate debt obligations
and zero coupon securities issued by financial institutions and corporations.
Small Cap Fund may invest in long-term fixed income securities (with maturities
exceeding ten years) and intermediate-term fixed income securities (with
maturities ranging from one to ten years) and each fund may invest in short-term
fixed income securities (with maturities of less than one year). Growth Fund
invests in short term fixed income securities primarily for temporary defensive
purposes. Because fixed income securities tend to decrease in value when
interest rates rise and increase in value when interest rates fall, each fund's
performance may be affected by its subadviser's ability to anticipate and
respond to fluctuations in market interest rates.
In order to reduce the risk of nonpayment of principal or interest on fixed
income securities, each fund will invest in such securities only if they are
rated, at the time of investment, BBB or better by Standard & Poor's Ratings
Group ("Standard & Poor's") or Baa or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, determined to be of equivalent quality by the
subadviser (i.e., investment grade). Fixed income securities in the lowest
investment grade category (i.e., BBB or Baa) may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade securities. Neither fund is required
to dispose of securities whose ratings drop below investment grade, but a fund
may do so if considered appropriate by its portfolio subadviser. See Appendix A
for a description of the corporate bond ratings assigned by Moody's and Standard
& Poor's.
U.S. Government Securities (each fund). U.S. Government securities in which each
fund may invest include (1) U.S. Treasury obligations, which differ only in
their interest rates, maturities and dates of issuance and include U.S. Treasury
bills (maturities of one year or less), U.S. Treasury notes (maturities of one
to ten years) and U.S. Treasury bonds (generally maturities of greater than ten
years); and (2) obligations of varying maturities issued or guaranteed by
agencies or instrumentalities of the U.S. Government. Although the payment when
due of interest and principal on U.S. Treasury securities is backed by the full
faith and credit of the United States, such guarantee does not extend to the
market value of such securities and, accordingly, each fund's investments in
such securities will cause its net asset value to fluctuate.
DERIVATIVES
Options on Securities and Securities Indices (each fund). Growth Fund may write
(sell) covered call and put options and purchase call and put options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. Growth Fund's use of derivatives will be
limited by its avoidance of tax liability and its low turnover rate.
Small Cap Fund may write (sell) covered call options in standard contracts
traded on national securities exchanges or those which may be traded
over-the-counter ("OTC") and quoted in a NASDAQ market, provided that Small Cap
Fund continues to own the securities covering each call until the call has been
exercised or has expired, or until Small Cap Fund has purchased a closing call
to offset its obligations to deliver securities pursuant to the call it has
written.
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Neither fund may write covered call options on more than 25% of the market value
of any single portfolio security. In addition, neither fund has a present
intention of writing covered call options on portfolio securities with an
aggregate market value exceeding 5% of the fund's net assets.
Futures Contracts and Options on Futures Contracts (Growth Fund). To seek to
increase total return or to hedge against changes in interest rates or
securities prices, Growth Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The fund may also enter into closing purchase and sale transactions
with respect to any such contracts and options. The futures contracts may be
based on various securities and securities indices. The fund will engage in
futures and related options transactions for bona fide hedging purposes as
defined in regulations of the Commodity Futures Trading Commission or to seek to
increase total return to the extent permitted by such regulations. Growth Fund
may not purchase or sell futures contracts or purchase or sell related options
to seek to increase total return, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of initial margin
deposits and premiums paid on the fund's outstanding positions in futures and
related options entered into for the purpose of seeking to increase total return
would exceed 5% of the market value of the fund's net assets. These transactions
involve brokerage costs, require margin deposits and, in the case of contracts
and options obligating the fund to purchase securities, require the fund to
segregate and maintain cash or liquid assets with a value equal to the amount of
the fund's obligations.
OTHER INVESTMENT TECHNIQUES
Repurchase Agreements (each fund). In order to earn income for periods as short
as overnight, each fund may enter into repurchase agreements with commercial and
investment banks that furnish collateral at least equal in value or market price
to the amount of their repurchase obligations. Under a repurchase agreement, a
fund acquires a money market instrument (generally a U.S. Government security)
which is subject to resale by the fund on a specified date (within one week) at
a specified price (which price reflects an agreed-upon interest rate effective
for the period of time the fund holds the investment and is unrelated to the
interest rate on the instrument). Repurchase agreements entered into by a fund
will be fully collateralized by obligations with a market value, monitored daily
by the portfolio manager, of not less than 100% of the obligation plus accrued
interest. Collateral will be held in a segregated, safekeeping account for the
benefit of the fund. The staff of the SEC has taken the position that repurchase
agreements of more than seven days' duration are illiquid securities.
Lending of Portfolio Securities (each fund). Each fund may earn additional
income by lending portfolio securities to broker/dealers that are members of the
New York Stock Exchange and other financial institutions under agreements which
require that the loans be secured continuously by collateral in cash, cash
equivalents or United States Treasury bills maintained on a current basis at an
amount at least equal to the market value of the securities loaned. However,
neither fund will make loans of portfolio securities that represent more than 5%
of its net assets. A fund will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and also will
receive compensation based on investment of the collateral. A fund will not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but will attempt to call the loan in anticipation of an
important vote to be taken among holders of the securities or of an opportunity
to give or withhold consent on a material matter affecting the investment.
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Temporary Defensive Investments (each fund). When in the judgment of its
subadviser adverse market conditions warrant, each fund may adopt a temporary
defensive position by investing up to 100% of its assets in cash, repurchase
agreements and money market instruments, including short-term U.S. Government
securities, bankers' acceptances, commercial paper rated at least A3 by Standard
& Poor's, Prime by Moody's or, if not rated, determined to be of equivalent
quality by the fund's subadviser.
Short Sales Against the Box (each fund). Each fund may engage in short sales
against the box. In a short sale against the box, the fund agrees to sell at a
future date a security that it either contemporaneously owns or has the right to
acquire at no extra cost. If the price of the security has declined at the time
the fund is required to deliver the security, the fund will benefit from the
difference in the price. If the price of the security has increased, the fund
will be required to pay the difference.
When-Issued Securities (each fund). Each fund may purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. These terms refer to securities that have been created and for which a
market exists, but which are not available for immediate delivery.
RISK FACTORS
Foreign Securities (each fund). Changes in foreign currency exchange rates will
affect the value of foreign securities that are denominated in foreign
currencies and investment in such securities may result in higher expenses due
to costs associated with converting U.S. dollars to foreign currencies. In
addition, investment in foreign securities generally presents a greater degree
of risk than investment in domestic securities because of the possibility of
less publicly-available financial and other information, more volatile and less
liquid securities markets, less securities regulation, higher brokerage costs,
imposition of foreign withholding and other taxes, war, expropriation or other
adverse governmental actions.
Fixed Income Securities (each fund). Corporate debt obligations are subject to
the risk of an issuer's inability to meet principal and interest payments on
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of creditworthiness of the issuer and
general market liquidity. Zero coupon securities are securities sold at a
discount to par value and on which interest payments are not made during the
life of the security. Each fund's investments in zero coupon, stripped or
certain other fixed income securities with original issue discount or market
discount could require the fund to sell certain of its portfolio securities in
order to generate sufficient cash to satisfy certain income distribution
requirements.
Derivative Instruments (each fund). In accordance with its investment policies,
each fund may invest in certain derivative instruments which are securities or
contracts that provide for payments based on or "derived" from the performance
of an underlying asset, index or other economic benchmark. Essentially, a
derivative instrument is a financial arrangement or a contract between two
parties (and not a true security like a stock or a bond). Transactions in
derivative instruments can be, but are not necessarily, riskier than investments
in conventional stocks, bonds and money market instruments. A derivative
instrument is more accurately viewed as a way of reallocating risk among
different parties or substituting one type of risk for another. Every investment
by a fund, including an investment in conventional securities, reflects
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an implicit prediction about future changes in the value of that investment.
Every fund investment also involves a risk that the subadviser's expectations
will be wrong. Transactions in derivative instruments often enable a fund to
take investment positions that more precisely reflect the subadviser's
expectations concerning the future performance of the various investments
available to the fund. Derivative instruments can be a legitimate and often
cost-effective method of accomplishing the same investment goals as could be
achieved through other investment in conventional securities.
Derivative contracts include options, futures contracts, forward contracts,
forward commitment and when-issued securities transactions, forward foreign
currency exchange contracts and interest rate, mortgage and currency swaps. The
following are the principal risks associated with derivative instruments.
Market risk: Market risk is the risk that the instrument will decline
in value or that an alternative investment would have appreciated more, but this
is no different from the risk of investing in conventional securities.
Leverage and associated price volatility: Leverage causes increased
volatility in the price and magnifies the impact of adverse market changes, but
this risk may be consistent with the investment objective of even a conservative
fund in order to achieve an average portfolio volatility that is within the
expected range for that type of fund.
Credit risk: The issuer of the instrument may default on its obligation
to pay interest and principal.
Liquidity and valuation risk: Many derivative instruments are traded in
institutional markets rather than on an exchange. Nevertheless, many derivative
instruments are actively traded and can be priced with as much accuracy as
conventional securities. Derivative instruments that are custom designed to meet
the specialized investment needs of a relatively narrow group of institutional
investors such as the funds are not readily marketable and are subject to a
fund's restrictions on illiquid investments.
Correlation risk: There may be imperfect correlation between the price
of the derivative and the underlying asset. For example, there may be price
disparities between the trading markets for the derivative contract and the
underlying asset.
Each derivative instrument purchased for a fund is reviewed and analyzed by the
fund's subadviser to assess the risk and reward of each such instrument in
relation the fund's investment strategy. The decision to invest in derivative
instruments or conventional securities is made by measuring the respective
instrument's ability to provide value to the fund and its shareholders.
Options on Securities and Securities Indices (each fund). The writing and
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The use of options to seek to increase total return
involves the risk of loss if the subadviser is incorrect in its expectation of
fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
subadviser to manage future price fluctuations and the degree of correlation
between the options and securities markets. If the subadviser is incorrect in
its expectation of changes in securities prices or determination of the
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correlation between the securities indices on which options are written and
purchased and the securities in a fund's investment portfolio, the investment
performance of the fund will be less favorable than it would have been in the
absence of such options transactions.
As the writer of a call option, a fund receives a premium less commission and,
in exchange, forgoes the opportunity to profit from increases in the market
value of the security covering the call above the sum of the premium and the
exercise price of the option during the life of the option. The purchaser of
such a call has the ability to purchase the security from the fund's portfolio
at the option price at any time during the life of the option. Portfolio
securities on which options may be written are purchased solely on the basis of
investment considerations consistent with the fund's investment objectives.
Futures Contracts and Options on Futures Contracts (each fund). While
transactions in futures contracts and options on futures may reduce certain
risks, such transactions themselves entail certain risks. Thus, while a fund may
benefit from the use of futures and options on futures, unanticipated changes in
securities prices may result in poorer overall performance than if the fund had
not entered into any futures contracts or options transactions. Because perfect
correlation between a futures position and portfolio position that is intended
to be protected is impossible to achieve, the desired protection may not be
obtained and the fund may be exposed to risk of loss. The loss incurred by a
fund in entering into futures contracts and in writing call options on futures
is potentially unlimited and may exceed the amount of the premium received.
Futures markets are highly volatile and the use of futures may increase the
volatility of the fund's net asset value. The profitability of a fund's trading
in futures to seek to increase total return depends upon the ability of the
subadviser to correctly analyze the futures markets. In addition, because 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 the
fund. Further, futures contracts and options on futures may be illiquid, and
exchanges may limit fluctuations in futures contract prices during a single day.
Repurchase Agreements (each fund). If the other party or "seller" defaults on
its repurchase obligation, a fund might suffer a loss to the extent that the
proceeds from the sale of the underlying securities and other collateral held by
the fund in connection with the related repurchase agreement are less than the
repurchase price. In addition, in such event, a fund could suffer a loss of
interest on or principal of the security and could incur costs associated with
delay and enforcement of the repurchase agreement.
Lending of Portfolio Securities (each fund). Lending portfolio securities
involves risk of delay in recovery of the loaned securities and in some cases
loss of rights in the collateral should the borrower fail financially. Loans of
portfolio securities will be made only to borrowers that have been approved in
advance by the trust's Board of Trustees. The Board of Trustees will monitor the
creditworthiness of such firms on a continuing basis. At no time will the value
of securities loaned by Growth Fund or Small Cap Fund exceed 33% of the value of
such fund's total assets. The funds have no current intention to loan securities
in excess of 5% of the funds' total assets.
When-Issued Securities (each fund). There may be a risk of loss to a fund that
engages in these transactions if the value of the security declines prior to the
settlement date.
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INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each fund has adopted certain fundamental
investment restrictions which may not be changed without the affirmative vote of
the holders of a majority of that fund's outstanding voting securities which, as
used in the Prospectus and the SAI, means approval of the lesser of (1) the
holders of 67% or more of the shares represented at a meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy or (2)
the holders of more than 50% of the outstanding shares.
A fund may not:
(1) invest more than 5% of its assets in commodities or commodity
contracts, except that each fund may invest without regard to
the 5% limitation in interest rate futures contracts, options
on securities, securities indices, currency and other
financial instruments, futures contracts on securities,
securities indices, currency and other financial instruments,
options on such futures contracts, forward commitments,
securities index put and call warrants and repurchase
agreements entered into in accordance with the fund's
investment policies;
(2) underwrite any issue of securities;
(3) make loans to any person except by (a) the acquisition of debt
securities and making portfolio investments, (b) entering into
repurchase agreements, or (c) lending portfolio securities;
(4) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions;
(5) borrow money or issue senior securities, except as permitted
by the Investment Company Act of 1940, as amended (the "1940
Act");
(6) invest more than 25% of its total assets in securities of
issuers in any one industry except that this limitation does
not apply to (i) obligations of the U.S. Government or any of
its agencies or instrumentalities (i.e., U.S. Government
securities), or (ii) Clearwater Growth Fund to the extent that
the manager or subadviser determines that investment without
regard to the stated limits is necessary in order to pursue
Clearwater Growth Fund's policy of tracking the Russell 1000
Index or any substitute index.
(7) with respect to 75% of its total assets, purchase any security
(other than U.S. Government securities) if, immediately after
and as a result of such purchase, (a) more than 5% of the
value of the fund's total assets would be invested in
securities of the issuer or (b) the fund would hold more than
10% of the voting securities of the issuer.
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Nonfundamental Investment Restrictions. The following investment restrictions
are designated as nonfundamental and may be changed by the trust's Board of
Trustees without shareholder approval.
A fund may not:
(1) buy or sell real estate in the ordinary course of its
business; provided, however, that the fund may (i) invest in
readily marketable debt securities secured by real estate or
interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or
interests therein and (ii) hold and sell real estate acquired
as the result of its ownership of securities;
(2) invest in companies for the purpose of exercising control or
management;
(3) purchase any security, including any repurchase agreement
maturing in more than seven days, which is not readily
marketable, if more than 15% of the net assets of the fund,
taken at market value, would be invested in such securities;
or
(4) sell securities short, except to the extent that the fund
contemporaneously owns or has the right to acquire at no
additional cost securities identical to those sold short;
PORTFOLIO TURNOVER
Although neither fund purchases and sells securities for short-term profits,
each fund will sell portfolio securities without regard to the time they have
been held whenever such action seems advisable. Small Cap Fund pursues the
policy of selling that security in its portfolio which seems the least
attractive security owned whenever it is desired to obtain funds not otherwise
available for the purchase of a security that is considered more attractive. The
resulting rate of portfolio turnover is not a consideration. A high rate of
portfolio turnover (100% or more) involves correspondingly greater transaction
costs which must be borne by a fund and its shareholders.
BROKERAGE
Decisions relating to the purchase and sale of portfolio securities for each
fund, the allocation of portfolio transactions and, where applicable, the
negotiation of commission rates or transaction costs are made by the respective
portfolio subadvisers. It is the primary consideration in all portfolio
transactions to seek the most favorable price and execution and to deal directly
with principal market makers in over-the-counter transactions except when, in
the opinion of such subadviser, an equal or better market exists elsewhere.
The determination of what may constitute best price and execution by a
broker-dealer in effecting a securities transaction involves a number of
considerations (some of which are subjective), including, without limitation,
the overall net economic result to the portfolio (involving price paid or
received, any commissions and other costs paid) and the efficiency with which
the transaction is effected, the ability to effect the transaction at all where
a large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future and
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the financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and subject to
such policies as the trustees may adopt, each fund may pay an unaffiliated
broker or dealer that provides "brokerage and research services" (as defined in
the 1934 Act) an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if the applicable portfolio
subadviser determines in good faith that the amount of commissions charged by
the broker is reasonable in relation to the value of the brokerage and research
services provided by such broker. The subadvisers of the funds have advised the
manager that neither of them has paid any such excess in connection with
brokerage transactions for the funds. Nevertheless, the subadvisers have
received brokerage and research services consisting of written research reports,
access to investment analysis and information services and related electronic
components, all of which may be used for any of their respective clients.
During the three years ended December 31, 1996, 1997 and 1998, Growth Fund paid
brokerage commissions in the amounts of $156,583, $88,681 and $8,659,
respectively. During the three years ended December 31, 1996, 1997 and 1998,
Small Cap Fund paid brokerage commissions in the amounts of $94,093, $165,105
and $82,266, respectively.
During the three years ended December 31, 1996, 1997 and 1998, (i) Growth Fund
paid brokerage commissions of $495.00 (0.32% of brokerage commissions paid) to
Weeden & Co., LP in 1996 only and (ii) Small Cap Fund paid brokerage commissions
of $3,402 (2.52% of brokerage commissions paid) to Weeden & Co., LP in 1997
only. One of the funds' trustees is also a director of Weeden Securities
Corporation, the general partner of Weeden & Co., LP.
MANAGEMENT, ADVISORY AND OTHER SERVICES
Trustees and Officers
The trust's Board of Trustees has overall responsibility for management and
supervision of the funds. By virtue of the functions performed by Clearwater
Management Co., Inc., the Trust's manager (the "manager"), the trust requires no
employees other than its executive officers, all of whom receive their
compensation from the manager or other sources.
Manager
Clearwater Management Co., Inc. Clearwater Investment Trust has contracted with
Clearwater Management Co., Inc., 332 Minnesota Street, Suite 2100, St. Paul,
Minnesota, to act as manager of the trust. The initial term of the management
contract between the trust and the manager is two years and is renewable
annually for successive one year terms.
Under the terms of the management contract, the manager supervises all of the
trust's business operations and is responsible for formulating and implementing
investment strategies for the funds. The manager performs all administrative and
other management functions necessary to the supervision and conduct of the
affairs of the funds.
Pursuant to the management contract, the manager pays for office space and
equipment, clerical, secretarial and administrative services and executive and
other personnel as
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are necessary to fulfill its responsibilities and all other ordinary operating
expenses related to its services for the trust, including executive salaries of
the trust. Pursuant to the management contract, the manager also pays all of the
funds' other expenses, except brokerage, taxes, interest and extraordinary
expenses.
As compensation for its management services and expenses assumed, the manager
receives a management fee at the annual rate of 0.45% and 1.35% of the net
assets of Growth Fund and Small Cap Fund, respectively. Prior to November 1,
1997, the management fee for Growth Fund was 1.10% of the fund's average annual
net assets. The manager's fees are calculated and accrued daily as a percentage
of each fund's daily net assets, and are paid quarterly. During the three years
ended December 31, 1996, 1997 and 1998, the total dollar amounts paid to the
manager by Growth Fund were $977,321 $1,012,399 and $558,531, respectively.
During the three years ended December 31, 1996, 1997 and 1998 the total dollar
amounts paid to the manager by Small Cap Fund were $392,202 $534,172 and
$606,738 respectively.
Portfolio Subadvisers
General. Under the terms of the management contract, the manager is authorized
to enter into subadvisory contracts with one or more investment advisers which
will have responsibility for rendering investment advice to all or a portion of
the funds' portfolios.
Parametric Portfolio Associates. In connection with the management of Growth
Fund, the trust, the manager and Parametric Portfolio Associates ("Parametric ")
entered into a subadvisory contract dated November 1, 1997 (the "Growth
subadvisory contract"). Parametric, a registered investment adviser under the
Investment Advisers Act of 1940, was founded in 1987 as a global equity manager
and is a sub-partnership of PIMCO Advisors, L.P., a publicly traded investment
management organization. Parametric is located at 701 Fifth Avenue, Suite 7310,
Seattle, Washington 98104-7090. Parametric combines indexing with tax management
to increase the potential for higher after-tax return for taxable investors.
Under the Growth subadvisory contract, Parametric develops, recommends and
implements an investment program and strategy for Growth Fund which is
consistent with the fund's investment objectives and policies. Parametric is
also responsible for making all portfolio and brokerage decisions. As
compensation, Parametric receives a fee that is based on Growth Fund's net
assets. This fee is calculated and accrued on a monthly basis as a percentage of
Growth Fund's month-end net assets. The annualized compensation paid to
Parametric with respect to Growth Fund for the period from November 1, 1997
through December 31, 1997 was .15% of Growth Fund's net assets. For the period
January 1, 1997 to October 31, 1997 SIT Investment Associates, Inc. ("SIT")
served as the subadviser to the fund . The annualized compensation paid to SIT
with respect to Growth Fund for the period January 1, 1997 to October 31, 1997,
was .53% of Growth Fund's net assets. Under the Growth subadvisory contract, the
manager, and not Growth Fund, is responsible for payment of subadvisory fees to
Parametric.
During the year ended December 31, 1996 and the period January 1, 1997 through
October 31, 1997 the manager paid subadvisory fees of $507,628 and $450,753,
respectively to SIT (the previous subadviser). During the period from November
1, 1997 through December 31, 1997, and the year ended December 31, 1998, the
manager paid subadvisory fees of $28,999 and $213,736, respectively, to
Parametric.
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<PAGE>
Kennedy Capital Management. Kennedy Capital Management ("KCM"), a Missouri
corporation that is a registered investment adviser under the Investment
Advisers Act of 1940 has managed Small Cap Fund's portfolio since January 1,
1994. In connection with the management of Small Cap Fund, the trust, the
manager and KCM have entered into an interim subadvisory contract (the "Small
Cap subadvisory contract") which was approved by the board of trustees on April
16, 1998, and is subject to shareholder approval. KCM devotes full time to
investment counseling and provides advice, management and other services to
investors and accounts. KCM's address is 10829 Olive Boulevard, St. Louis,
Missouri 63141-7739.
Under the Small Cap subadvisory contract, KCM develops, recommends and
implements an investment program and strategy for Small Cap Fund which is
consistent with the fund's investment objectives and policies. KCM is also
responsible for making all portfolio and brokerage decisions. As compensation,
KCM receives a fee that is based on Small Cap Fund's net assets. This fee is
calculated and accrued on a monthly basis as a percentage of Small Cap Fund's
month-end net assets.
Fees payable to KCM are calculated and accrued monthly on the basis of month-end
net assets, and are paid quarterly by the manager according to the following
schedule:
Percent Net Assets
0.85% Up to and including $50 million
0.80% More than $50 million
The compensation paid to KCM with respect to the Small Cap Fund for the year
ended December 31, 1998 was 0.81% of Small Cap Fund's net assets.
Small Cap Fund is not responsible for payment of the subadvisory fees to KCM.
During the years ended December 31, 1996, 1997 and 1998, the manager paid
subadvisory fees of $298,894 and $346,861 and $357,313 respectively to KCM.
Other Provisions of the Contracts. Any amendment to the management contract or
either of the subadvisory contracts requires approval by vote of (a) a majority
of the outstanding voting securities of the affected fund and (b) a majority of
the trustees who are not interested persons of the trust or of any other party
to such contract. Each contract terminates automatically in the event of its
assignment and the subadvisory contracts terminate automatically upon
termination of the management contract. Also, each contract may be terminated by
not more than 60 days nor less than 30 days' written notice by either the trust
or the manager or upon not less than 120 days' notice by the subadviser. Each
contract provides that the manager or the subadviser shall not be liable to the
trust, to any shareholder of the trust, or to any other person, except for loss
resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.
Subject to the above-described termination provisions, each contract has an
initial term of two years and will continue in effect thereafter if such
continuance is approved at least annually by (a) a majority of the trustees who
are not interested persons of the trust or of any other party to such contract
and (b) either (i) a majority of all of the trustees of the trust or (ii) by
vote of a majority of the outstanding voting securities of the affected funds.
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<PAGE>
EXECUTIVE OFFICERS AND TRUSTEES
The trustees and executive officers of the trust are listed below, together with
their principal occupations during the past five years and their ages and
addresses.
Philip W. Pascoe* (53), Trustee
Chairman and Treasurer of the Trust
Chairman, Clearwater Management Co., Inc. (1996/Present)
Managing Director, Investments of Piper Jaffray, Inc. (1996/Present)
Senior Vice President, Dean Witter Reynolds, Inc. (1996)
Associate Vice President, Dean Witter Reynolds, Inc. (1982-1996)
1145 Broadway, Suite 1500
P.O. Box 1278
Tacoma, Washington 98401
Samuel B. Carr, Jr. (43), Trustee
President and Chief Investment Officer, S. B. Carr Investments, Inc.
(1990/present)
124 Auburn Street, Suite 200 North
Cambridge, Massachusetts 02138-5700
Stanley R. Day, Jr. (40), Trustee
President and Director, SRAM Corporation, (1987/present)
361 West Chestnut Street
Chicago, Illinois 60611
Robert J. Phares (35), Trustee
Chief Executive Officer, Battle Ridge Ranch Company, (1986/present)
7180 Jackson Creek Road
Bozeman, Montana 59715
Daniel C. Titcomb (45), Vice President and Secretary
President and Director, Research Engineering and Design, Inc., (1994/Present)
President and Director, Titcomb Associates, Inc., (1987/1994)
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
Frederick T. Weyerhaeuser* (67), Trustee
Chairman, Clearwater Management Co., Inc. (1987/1996)
Director, Potlatch Corporation, a forest products company (1960/present)
Trustee, The Minnesota Mutual Life Insurance Company (1968/present)
Director, Weeden Securities Corporation (1987/present)
332 Minnesota Street, Suite 2090
St. Paul, Minnesota 55101
The business address of all officers of the trust is 332 Minnesota Street, Suite
2100, St. Paul, Minnesota 55101.
As of January 30, 1999, all of the trustees and officers of the trust, as a
group, owned of record 1.26% of the outstanding shares of Growth Fund and 1.96%
of the outstanding shares of Small Cap Fund.
13
<PAGE>
*Messrs. Philip W. Pascoe and Frederick T. Weyerhaeuser are "interested persons"
(as defined in the 1940 Act) of the trust.
Compensation of Trustees and Officers
The trust pays no salaries or compensation to any of its officers. Pursuant to
the management contract, the manager, on behalf of the trust, pays each of the
trustees an annual fee of $2,000, plus $500 per meeting attended; expenses
incurred by trustees in attending meetings are reimbursed. Such fees and
expenses are reimbursed by the manager to the trust under the management
contract. The following table sets forth the amounts of compensation received by
each trustee during the fiscal year ended December 31, 1998.
Compensation With Respect
Name of Trustees to Trust/Complex
Philip W. Pascoe $ - 0 -
Samuel B. Carr, Jr. $ 4,000
Stanley R. Day, Jr. $ 3,000
Robert J. Phares $ 4,000
Frederick T. Weyerhaeuser $ 4,000
Total $15,000
NET ASSET VALUE
The net asset value per share of each fund is determined as of the close of
regular trading on the New York Stock Exchange (the "Closing Time") on each day
that the Exchange is open for trading if such determination is then required to
properly process a purchase order, redemption request or exchange request for
shares of such fund. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the previous Friday or following Monday if any holiday falls
on a Saturday or Sunday. Net asset value per share is determined by dividing the
value of all of a fund's assets, less its liabilities, by the number of shares
outstanding. Investments in securities are valued at the Closing Time at the
last available sale price on the principal exchange or market where they are
traded. Securities which have not traded on the date of valuation or securities
for which sales prices are not generally reported are valued at the mean between
the last bid and asked prices. Securities for which no market quotations are
readily available (including those for which trading has been suspended) will be
valued at fair value as determined in good faith by the board of trustees,
although the actual computations may be made by persons acting at the direction
of the board of trustees. The price at which a purchase order is filled is the
net asset value per share next computed after payment and a properly completed
application are received by the transfer agent, unless a later computation date
is specified by the investor on the purchase order.
14
<PAGE>
HOW ARE SHARES PURCHASED?
Shares may be purchased directly from each fund. There is no sales charge or
underwriting commission on purchases of shares of the funds. In order to
purchase shares of either fund, an investor must either send a check or wire
funds to the transfer agent and deliver to the transfer agent a completed
Purchase Order and Account Application.
Minimum Purchases. No initial or subsequent investment of less than $1,000 will
be accepted by the funds. However, reinvestments of dividends and capital gain
distributions will be permitted, even if the amount of any such reinvestment is
less than $1,000.
Minimum Account Size. If a shareholder holds shares of either fund in an account
which, as a result of redemptions, has an aggregate net asset value of less than
$1,000, the fund may redeem the shares held in such account at net asset value
if the shareholder has not increased the net asset value of such shares in the
account to at least $1,000 within three months of notice in writing by the fund
to the shareholder of the fund's intention to redeem such shareholder's shares.
During the three months following the mailing of such notice, each shareholder
so notified has the opportunity to increase the value of his or her account to
$1,000 and avoid redemption. An involuntary redemption consummated at a price
below the shareholder's cost would result in a loss to the shareholder.
The trust reserves the right in its sole discretion to withdraw all or any part
of the offering of shares of the funds when, in the judgment of the trustees or
the manager, such withdrawal is in the best interests of the trust. An order to
purchase shares is not binding on, and may be rejected by, the trust until it
has been confirmed in writing.
Fund Accounts. When a shareholder first purchases shares of either fund, an
account is opened in his or her name on the records of that fund. This account
provides a convenient means to make additional investments and provides for
regular transaction statements without the necessity of receiving and storing
certificates. When a shareholder purchases or sells shares of a fund, an account
statement showing the details of such transaction will be sent to the
shareholder.
Share Certificates. Certificates representing shares of a fund ordinarily will
not be issued. However, the board of trustees may, in its sole discretion,
authorize the issuance of certificates for shares of a fund to shareholders who
make a specific written request for share certificates.
EXCHANGE OF SHARES
Subject to the restrictions set forth below, some or all of the shares of either
fund, including shares purchased with reinvested dividends and/or capital gain
distributions, may be exchanged for shares of the other fund on the basis of the
net asset value per share of each fund at the time of exchange.
Instructions for exchanges are made by delivery to the transfer agent of an
exchange request signed by the record owner(s) exactly as the shares being
exchanged are registered. New accounts must be established with the same
registration information as the account from which the exchange is to be made.
The dollar amount exchanged must at least equal the $1,000 minimum investment
required for each of the funds. However, exchanges of shares of one fund
15
<PAGE>
for shares of the other fund in which the shareholder has an existing account
will be permitted, even if the value of the shares exchanged is less than
$1,000.
A shareholder should consider the differences in investment objectives and
policies of the funds, as described in this Prospectus, before making any
exchange. For federal and (generally) state income tax purposes, an exchange of
shares is treated as a redemption of the shares exchanged and, therefore, is a
taxable transaction for the shareholder making the exchange.
Currently, there is no charge for the exchange privilege or limitation as to the
frequency of exchanges. The trust may terminate or suspend the right to make
exchange requests, or impose a limit on the number of exchanges that may be
effected by a shareholder within any calendar year, or impose a transaction fee
in connection with any exchange, at any time with notice to shareholders as
required by law.
HOW ARE SHARES REDEEMED?
Any shareholder of either fund has the right to offer shares for redemption by
the trust. Redemptions will be effected at the net asset value per share next
determined after receipt by the transfer agent of all required documents from
the redeeming shareholder, unless a later redemption date is specified by the
investor on the redemption request. Payment will be made within seven days after
a redemption has been effected. However, if shares to be redeemed were recently
purchased by check, a fund may delay transmittal of redemption proceeds until it
has assured itself that good funds have been collected for the purchase of such
shares. This may take up to 15 days. A fund may effect redemptions in kind
(i.e., pay redemption proceeds consisting of portfolio securities or other
non-cash assets) for redemptions in excess of $1 million if the manager
determines, in its sole discretion, that any such redemption would be in the
best interests of the fund. In order to redeem shares of either fund, a
shareholder must deliver to the transfer agent a redemption request which has
been endorsed by the recordholder(s) exactly as the shares are registered with
signature(s) guaranteed by any one of the following institutions: (i) a bank;
(ii) a securities broker or dealer, including a government or municipal
securities broker or dealer, that is a member of a clearing corporation or has
net capital of at least $100,000; (iii) a credit union having authority to issue
signature guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v) a
national securities exchange, a registered securities exchange or a clearing
agency, provided that any such institution satisfies the standards established
by the transfer agent.
If a share certificate has been issued at the discretion of the trustees, the
shares represented by such certificate may be redeemed only if the share
certificate is included with such redemption request and the certificate is
properly endorsed with signature(s) so guaranteed or is accompanied by a
properly endorsed stock power with signature(s) so guaranteed.
Net asset value per share for the purpose of redemption is determined in the
manner described in "Net Asset Value." The net asset value per share received
upon redemption may be more or less than the cost of shares to an investor, and
a redemption is a taxable transaction for the redeeming shareholder.
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<PAGE>
Redemptions may be suspended or payment postponed during any period in which any
of the following conditions exists: the New York Stock Exchange is closed or
trading on the Exchange is restricted; an emergency exists as a result of which
disposal by the trust of securities owned by a fund is not reasonably
practicable or it is not reasonably practicable for the custodian fairly to
determine the value of the fund's net assets; or the Securities and Exchange
Commission, by order, so permits.
TAXES
General. Under the Internal Revenue Code of 1986, as amended (the "Tax Code"),
each fund is treated as a separate taxpayer for federal income tax purposes. The
funds do not expect to incur other than nominal state income tax liability in
1999.
Each fund is treated as a separate entity for federal income tax purposes, has
elected to be treated and has qualified as a "regulated investment company"
under the Tax Code, and intends to continue to qualify for such treatment for
each taxable year. To qualify as a regulated investment company under the Tax
Code and be free from any federal income tax on income and gains distributed to
shareholders in accordance with the Tax Code, each fund must satisfy certain
requirements relating to the sources of its income, diversification of its
assets and distribution of its income to shareholders.
4% Excise Tax. Under the Tax Code, each of the funds will be subject to a
nondeductible 4% excise tax on substantially all of its undistributed ordinary
income and capital gain if it fails to meet certain distribution requirements by
the end of each calendar year.
For federal income tax purposes, the Growth Fund had a capital loss carryover of
$205,323 at December 31, 1998, that will expire in 2006 if not offset by capital
gains.
Each fund may be subject to foreign withholding or other foreign taxes on its
income (possibly including, in some cases, capital gains) from certain of its
foreign investments, if any, and neither fund will be eligible to elect to pass
such taxes and associated foreign tax credits or deductions through to its
shareholders.
Foreign Exchange Gains and Losses. Foreign exchange gains and losses realized by
a fund in connection with certain transactions involving foreign currency
denominated debt securities, forward foreign currency contracts (if any),
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders.
Passive Foreign Investments. If either fund acquires stock, including certain
options, in certain non-U.S. corporations that receive at least 75% of their
annual gross income from passive sources (such as interest, dividends, certain
rents and royalties, or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the fund is timely distributed to its shareholders. A fund would not
be able to pass through to its shareholders any credit or deduction for such a
tax. An election may generally be available that would ameliorate these
17
<PAGE>
adverse tax consequences, but any such election could require the fund to
recognize taxable income or gain (subject to tax distribution requirements)
without the concurrent receipt of cash. These investments could also result in
the treatment of associated capital gains as ordinary income.
Other Investments. Investment by a fund in zero coupon, stripped or certain
other securities with original issue discount or market discount (if the fund
elects to include market discount in income on a current basis) or in certain
options or futures contracts that are subject to mark-to-market rules could
require the fund to recognize income or gain prior to the receipt of cash and
hence require it to liquidate investments in order to generate cash for
distributions required by the Tax Code with respect to such income or gain.
Management of the funds will consider these potential adverse tax consequences
in evaluating the appropriateness of these investments.
A fund's transactions involving options and futures contracts will be subject to
special tax rules, the effect of which may be to accelerate the fund's
recognition of income, defer fund losses, cause adjustments in the holding
periods of securities or otherwise affect the treatment as long-term or
short-term of certain capital gains or losses. A fund may also be required to
recognize gain upon entering into a short sale against the box or any other
transaction that is treated under the Code as a constructive sale of an
appreciated financial position of the fund. These rules could therefore affect
the amount, timing and character of distributions to shareholders.
Taxation of Shareholders. Each fund intends to distribute all of its net
investment income, any excess of net short-term capital gain over net long-term
capital loss, and any excess of net long-term capital gain over net short-term
capital loss, after taking into account any capital loss carryovers of the fund,
if any, at least once each year. Distributions from net investment income,
certain net foreign currency gains and the excess of net short-term capital gain
over net long-term capital loss will be taxable to shareholders as ordinary
income. Distributions from the excess of net long-term capital gain over net
short-term capital loss will be taxable to shareholders as long-term capital
gain, regardless of the shareholder's holding period for the shares. Certain
distributions paid by a fund in January of a given year will be taxable to
shareholders as if received on December 31 of the prior year.
Dividends-Received Deduction. For purposes of the 70% dividends-received
deduction available to corporations, dividends received by either fund, if any,
from U.S. domestic corporations in respect of any share of stock with a tax
holding period of at least 46 days (91 days in the case of certain preferred
stock) that is satisfied during a prescribed period before and after each
dividend in an unleveraged position and distributed and properly designated by
the fund may be treated as qualifying dividends. Any corporate shareholder
should consult its tax advisor regarding the possibility that its tax basis in
its shares may be reduced, for Federal income tax purposes, by reason of
"extraordinary dividends" received with respect to the shares and, to the extent
such basis would be reduced below zero, current recognition of income may be
required. Corporate shareholders must meet the minimum holding period
requirement stated above (46 or 91 days), taking into account any holding period
reductions from certain hedging or other positions that diminish risk of loss,
with respect to their fund shares in order to qualify for the deduction and, if
they borrow to acquire fund shares, may be denied a portion of the
dividends-received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining the excess (if any)
of a corporation's adjusted current earnings over its alternative minimum
taxable income, which may increase a corporation's alternative minimum tax
liability.
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Dividends and/or capital gain distributions, if any, may be taken in cash or
automatically reinvested in additional shares (at the net asset value per
share). All distributions are taxable as described above whether a shareholder
takes them in cash or reinvests them in additional shares of a fund.
Shareholders who purchase shares immediately prior to a distribution will be
required to treat the distribution as ordinary income or long-term capital gain
as described above, even though economically it represents a return of a portion
of their investment. Information regarding the tax status of each year's
distributions will be provided to shareholders annually.
Redemptions. All or a portion of a loss realized on a redemption of shares may
be disallowed or recharacterized under tax rules relating to wash sales or
redemptions of shares held for six months or less.
Dividends, capital gain distributions and the proceeds of redemptions, exchanges
or repurchases of shares of a fund paid to an individual or other non-exempt
payee will be subject to 31% backup withholding of federal income tax if such
shareholder does not provide the fund with his or her correct taxpayer
identification number and certain certifications required by the Internal
Revenue Service ("IRS") or if the trust is notified by the IRS or a broker that
the shareholder is subject to such withholding. Please refer to the purchase
order and account application for additional information.
Special tax rules apply to IRA or other retirement plans or accounts and to
other special classes of investors, such as tax-exempt organizations, banks and
insurance companies. You should consult with your own tax adviser regarding the
application of any such rules in your particular circumstances.
The description above relates only to U.S. federal income tax consequences for
shareholders who are U.S. persons (i.e., U.S. citizens or residents or U.S.
corporations, partnerships, trusts, or estates) and who are subject to federal
income tax. In addition to federal taxes, a shareholder may be subject to
foreign, state and local taxes on distributions from or on the value of shares
of a fund, depending on the laws of the shareholder's place of residence.
Shareholders also may inquire about these and other matters by calling the
Transfer Agent at (888) 228-0935.
Non-U.S. Shareholders. Shareholders who are not U.S. persons, as defined above,
are subject to different tax rules, including a possible U.S. withholding tax at
rates up to 30% on certain dividends treated as ordinary income, and should
consult their tax advisers for information on the application of these rules to
their particular situations.
PERFORMANCE DATA
The funds' average annual total return quotations, as they may appear in the
Prospectus, this SAI or in advertising and sales material, are calculated by
standard methods prescribed by the SEC.
Average annual total return quotations are computed by finding the average
annual compounded rates of return that would cause a hypothetical investment
made on the first day of a designated period (assuming all dividends and
distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
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n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
designated period at the end of the
designated period (or fractional portion
thereof)
For purposes of the above computation, it is assumed that all dividends and
distributions made by the funds are reinvested at net asset value during the
designated period. The average annual total return quotation is determined to
the nearest 1/100 of 1%. Computations of average annual total return of a fund
will not take into account any required payments of federal or state income
taxes.
In determining the average annual total return (calculated as provided above) of
each fund, recurring fees, if any, that are charged to all shareholder accounts
are taken into consideration. For any account fees that vary with the size of
the account, the account fees used for purposes of the above computation are
assumed to be the fees that would be charged to the mean account size of such
fund.
The average annual total return of each fund will vary from time to time
depending on market conditions, the composition of the fund's portfolio and
operating expenses of the fund. These factors and possible differences in the
methods used in calculating returns should be considered when comparing
performance information regarding a fund to information published for other
investment companies and other investment vehicles. Any return quotation should
also be considered relative to changes in the values of a fund's shares and the
risks associated with that fund's investment objectives and policies. At any
time in the future, any return quotation may be higher or lower than a past
return quotation and there can be no assurance that any historical return
quotation will continue in the future.
The average annual total return of Growth Fund for the one, five and ten year
periods ended December 31, 1998, were 22.69%, 20.75% and 17.81% respectively.
The average annual total return of Small Cap Fund for the one and five year
periods ended December 31, 1998 and the period since Small Cap Fund commenced
operations on January 31, 1989 through December 31, 1998 were (7.09)%, 12.03%
and 10.72%, respectively. The foregoing average annual total return figures were
determined based on expenses in effect for the funds during the covered periods.
MORE INFORMATION ABOUT THE FUNDS
General. As a Massachusetts business trust, the trust's operations are governed
by its Declaration of Trust dated January 12, 1987 as amended and restated March
1, 1998 (the "Declaration of Trust"), a copy of which is on file with the office
of the Secretary of the Commonwealth of the Commonwealth of Massachusetts.
Unless otherwise required by the Investment Company Act of 1940, as amended,
ordinarily it will not be necessary for the trust to hold annual meetings of
shareholders. As a result, shareholders may not consider the election of
trustees or the appointment of independent accountants for the trust on an
annual basis. The
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Board of Trustees, however, will call a special meeting of
shareholders for the purpose of electing trustees if, at any time, less than a
majority of trustees holding office at the time were elected by shareholders.
The Board of Trustees may remove a trustee by the affirmative vote of at least a
majority of the remaining trustees. Under certain circumstances, shareholders
may communicate with other shareholders in connection with requesting a special
meeting of shareholders.
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable for the obligations of
such trust. However, the Declaration of Trust 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 or instrument
entered into or executed by the trust or its trustees. Moreover, the Declaration
of Trust provides for the indemnification out of trust property of any
shareholders held personally liable for any obligations of the trust. Thus, the
risk of a shareholder incurring financial loss beyond his or her investment
because of shareholder liability would be limited to circumstances in which the
trust itself would be unable to meet its obligations. In light of the nature of
the trust's business and the nature and amount of its assets, the possibility of
the trust's liabilities exceeding its assets, and therefore a shareholder's risk
of personal liability, is extremely remote.
The Declaration of Trust further provides that the trust shall indemnify each of
its trustees for any neglect or wrongdoing of any advisory board member,
officer, agent, employee, consultant, investment adviser or other adviser,
administrator, distributor or principal underwriter, custodian or transfer,
dividend disbursing, shareholder servicing or accounting agent of the trust, nor
shall any trustee be responsible for the act or omission of any other trustee.
The Declaration of Trust does not authorize the trust to indemnify any trustee
or officer against any liability to which he or she would otherwise be subject
by reason of or for willful misfeasance, bad faith, gross negligence or reckless
disregard of such person's duties.
Voting. Under the Declaration of Trust, the board of trustees is authorized to
issue an unlimited number of shares of beneficial interest which may, without
shareholder approval, be divided into an unlimited number of series. Shares of
the trust are freely transferable, are entitled to dividends as declared by the
board of trustees and, in liquidation, are entitled to receive the net assets of
their series, but not of any other series. Shareholders are entitled to cast one
vote per share (with proportional voting for fractional shares) on any matter
requiring a shareholder vote. Shareholders of each series vote separately as a
class on any matter submitted to shareholders except when otherwise required by
the 1940 Act, in which case the shareholders of all series affected by the
matter in question will vote together as one class. If the board of trustees
determines that a matter does not affect the interests of a series, then the
shareholders of that series will not be entitled to vote on that matter. As of
January 30, 1999, each of the following persons owned five percent or more of
the voting securities of each such fund:
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<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------- -------------------------------- -------------------------------
Name Total Shares Total Shares
Clearwater Growth Fund Clearwater Small Cap Fund
- --------------------------------------------------- -------------------------------- -------------------------------
W. John Driscoll* 12.50% 13.35%
- --------------------------------------------------- -------------------------------- -------------------------------
Frank W. Piasecki* 7.46%
- --------------------------------------------------- -------------------------------- -------------------------------
Walter S. Rosenberry, III* 8.77% 8.52%
- --------------------------------------------------- -------------------------------- -------------------------------
Edward R. Titcomb* 7.86%
- --------------------------------------------------- -------------------------------- -------------------------------
John W. Titcomb, Jr.** 5.78%
- --------------------------------------------------- -------------------------------- -------------------------------
Charles A. Weyerhaeuser* 11.87% 9.07%
- --------------------------------------------------- -------------------------------- -------------------------------
David C. Weyerhaeuser* 6.61%
- --------------------------------------------------- -------------------------------- -------------------------------
David M. Weyerhaeuser** 9.37% 6.78%
- --------------------------------------------------- -------------------------------- -------------------------------
Frederick T. Weyerhaeuser* 14.08% 21.86%
- --------------------------------------------------- -------------------------------- -------------------------------
George H. Weyerhaeuser** 24.3% 19.02%
- --------------------------------------------------- -------------------------------- -------------------------------
William T. Weyerhaeuser** 27.43% 20.34%
- --------------------------------------------------- -------------------------------- -------------------------------
Wendy W. Weyerhaeuser** 10.96%
- --------------------------------------------------- -------------------------------- -------------------------------
Anne E. Zaccaro* 5.07%
- --------------------------------------------------- -------------------------------- -------------------------------
<FN>
* 332 Minnesota Street, Suite 2100, Saint Paul, Minnesota 55101-1394
** 1145 Broadway, Suite 1500, P.O. Box 1278, Tacoma, Washington 98401
</FN>
</TABLE>
Independent Accountants. KPMG Peat Marwick LLP serves as independent public
accountants to the trust. In this capacity, KPMG Peat Marwick LLP audits and
renders an opinion on the funds' financial statements.
FINANCIAL STATEMENTS
The trust's annual report for the fiscal year ended December 31, 1998
accompanies this SAI and is incorporated herein by reference in its entirety.
22
<PAGE>
APPENDIX A
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Ratings Group
AAA: Bonds rated AAA are the highest grade obligations. This rating indicates an
extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
23
<PAGE>
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
332 Minnesota Street, Suite 2100
St. Paul, MN 55101
EXECUTIVE OFFICERS: TRUSTEES:
Philip W. Pascoe Philip W. Pascoe
Chairman of the Board Samuel B. Carr, Jr.
Treasurer Stanley R. Day, Jr.
Robert J. Phares
Frederick T. Weyerhaeuser
INVESTMENT MANAGER: CLEARWATER GROWTH FUND
SUBADVISER:
Clearwater Management Co., Inc. Parametric Portfolio Associates
332 Minnesota Street, Suite 2100 701 Fifth Avenue, Suite 7310
St. Paul, MN 55101 Seattle, WA 98014-7090
CUSTODIAN: CLEARWATER SMALL CAP FUND
SUBADVISER:
Investors Fiduciary Trust Company Kennedy Capital Management
801 Pennsylvania 10829 Olive Boulevard
Kansas City , MO 64105 St. Louis, MO 63141-7739
COUNSEL FOR THE FUNDS: TRANSFER AGENT AND
SHAREHOLDER SERVICES:
Hale and Dorr LLP Fiduciary Counselling, Inc.
60 State Street 332 Minnesota Street, Suite 2100
Boston, MA 02109 St. Paul, MN 55101-1394
(888) 228-0935
INDEPENDENT ACCOUNTANTS:
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, MN 55402
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
24
