As filed with the Securities and Exchange Commission on October 15, 1999
File No. 33-12289
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
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Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 15 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 |X|
AMENDMENT NO. 15 |X|
(Check appropriate box or boxes)
CLEARWATER INVESTMENT TRUST
(Exact name of registrant as specified in charter)
332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394
(Address of principal executive office) Zip Code
Registrant's Telephone Number, including Area Code: (651) 228-0935
Joseph P. Barri, Hale and Dorr LLP, 60 State Street, Boston, MA 02109
(Name and address of agent for service)
It is proposed that this filing will become effective (check appropriate box)
|X| on December 29, 1999, pursuant to paragraph (a)(2) of Rule 485 under the
Securities Act
<PAGE>
CLEARWATER INVESTMENT TRUST
CLEARWATER GROWTH FUND
CLEARWATER SMALL CAP FUND
CLEARWATER TAX-EXEMPT BOND FUND
PROSPECTUS
December ___, 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.
The information in this prospectus is not complete and may be changed. We may
not sell shares of Clearwater Tax-Exempt Bond Fund until the amendment filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
CONTENTS
Investment objectives, key investments, strategies, risks and expenses:
Things you should know before investing........................2
Clearwater Growth Fund.........................................3
Clearwater Small Cap Fund......................................5
Clearwater Tax-Exempt Bond Fund................................7
Other investments and investment strategies...................................9
Management...................................................................10
Buying shares................................................................11
Exchanging and redeeming shares..............................................12
Other things to know about share transactions................................13
Dividends, distributions and taxes...........................................14
Financial highlights.........................................................15
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, Kennedy Capital Management as subadviser to select
investments for Clearwater Small Cap Fund and Sit Fixed Income Advisors II,
L.L.C., a subsidiary of Sit Investment Associates, Inc., as subadviser to select
investments for Clearwater Tax-Exempt Bond 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.
Clearwater Investment Trust-2
<PAGE>
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-3
<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
to meet 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-4
<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
Year to date: 4.9% through 9/30/99
<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 - 5
<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
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: 25.5% in 3rd quarter 1997
Lowest: (25.1)% in 3rd quarter 1998
Year to date: 9.2% through 9/30/99
<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>
CLEARWATER TAX-EXEMPT BOND FUND
Investment objectives
The fund seeks high current income that is exempt from federal income tax,
consistent with preservation of capital.
Key investments and strategies
The fund invests at least 80% of its assets in municipal securities, which are
debt obligations issued by or for the U.S. states, territories and possessions
and the District of Columbia. The interest on these securities is generally
exempt from regular federal income tax and may also be exempt from federal
alternative minimum tax. However, the fund may invest up to 20% of its assets in
these securities that generate interest income subject to federal alternative
minimum tax.
The fund invests in both revenue bonds, which are backed by and payable only
from the revenues derived from a specific facility or specific revenue source
and in general obligation bonds, which are secured by the full faith, credit and
taxation power of the issuing municipality. The fund generally invests a
significant portion of its assets in revenue bonds of health care related
facilities and in obligations of municipal housing authorities, which include
single family and multi-family mortgage revenue bonds.
The fund primarily invests in securities rated investment grade at the time of
purchase or, if unrated, determined to be of comparable quality by the fund's
subadviser. However, the fund may invest up to 30% of its assets in securities
rated below investment grade or determined to be of comparable quality by the
subadviser. The fund may not invest in securities rated at the time of purchase
lower than B3 by Moody's or B- by Standard and Poor's Corporation, Fitch IBCA or
Duff & Phelps.
The subadviser attempts to maintain an average effective duration for the
portfolio of approximately 4 to 8 years. Duration is a measure of total price
sensitivity relative to changes in interest rates. Portfolios with longer
durations are typically more sensitive to changes in interest rates.
How the subadviser selects the fund's investments
The subadviser selects securities that offer high tax-exempt income. In
selecting securities for the fund, the subadviser analyzes the general outlook
on the economy and interest rate forecasts, while also evaluating a security's
structure, credit quality, yield, maturity, and liquidity.
Principal risks of investing in the fund
o Call or prepayment risk: As a result of declining interest rates, the
issuer of a security exercises its right to prepay principal earlier
than scheduled, forcing the fund to reinvest in lower yielding
securities. Declining interest rates may compel borrowers to prepay
mortgages and debt obligations underlying the mortgage-backed
securities and manufactured home loan pass-through securities owned by
the fund. The proceeds received by the fund from prepayments will
likely be reinvested at interest rates lower than the original
investment, thus resulting in a reduction of income to the fund.
Likewise, rising interest rates could reduce prepayments and extend the
life of securities with lower interest rates, which may increase the
sensitivity of the fund's value to rising interest rates.
o Credit risk: The issuers or guarantors of securities owned by the fund
may default on the payment of principal or interest, or on other
obligations to the fund, causing the value of the fund to decrease. The
revenue bonds in which the fund invests may entail greater credit risk
than the fund's investments in general obligation bonds. In particular,
weaknesses in federal housing subsidy programs and their administration
may result in a decrease of subsidies available for the payment of
principal and interest on certain multi-family housing authority bonds.
o Interest rate risk: An increase in interest rates may lower the fund's
value and the overall return on your investment.
o Political and economic risk: Because the fund invests primarily in
municipal securities issued by states and their political subdivisions,
the fund may be particularly affected by the political and economic
conditions and developments in those states. The value of the fund may
be adversely affected by future changes in federal or state income tax
laws.
o The manager's judgment about the attractiveness or relative value of a
particular security proves to be incorrect.
Clearwater Tax-Exempt Bond Fund is not a suitable
investment for tax-deferred accounts.
Clearwater Investment Trust - 7
<PAGE>
Total return and comparative performance
No past performance data is available yet for this new fund.
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 0.60%
Other expenses 0.00%
-----
Total annual fund operating expenses 0.60%
=====
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*
$61 $192 $ $750
*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 - 8
<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's fixed income securities
may be of any maturity. Clearwater Growth Fund and Clearwater Small Cap Fund
will only invest in fixed income securities rated investment grade.
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. Clearwater Growth Fund and Clearwater Small Cap Fund may
each 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 neither Clearwater Small Cap Fund nor Clearwater Tax-Exempt Bond Fund
purchase or sell securities for short-term profits, either fund may engage in
active and frequent trading to achieve its principal investment strategies.
Frequent trading increases transaction costs, which could decrease a 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 - 9
<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 June 30, 1999, Clearwater had
$197 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.
The portfolio managers
The portfolio managers are primarily responsible for the day-to-day operation of
the funds indicated beside their names.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fund Subadviser Portfolio Since Past 5 years' business experience
Manager
Growth Fund Parametric Portfolio Brian 1997 Managing director of Parametric since 1990.
Associates Langstraat
Small Cap Fund Kennedy Capital Richard Sinise 1994 Chief Investment Officer of Kennedy Capital since
Management 1999 and Vice President since 1979.
Tax-Exempt Bond Fund Sit Fixed Income Michael C. 1999 President of Sit Fixed Income and Senior Vice
Advisors II, L.L.C. Brilley President of Sit Investment Associates since 1984.
Debra A. Sit Vice President of Sit Fixed Income since 1987.
</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 - 10
<PAGE>
BUYING SHARES
Investment minimums
Initial and subsequent investments in any fund must be at least $1,000.
Buying shares by mail
Initial purchases
o For initial purchases of any 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 - 11
<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 - 12
<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 - 13
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds normally pay dividends and distribute capital gain, if any, as
follows:
Dividends, distributions and taxes
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.
Clearwater Growth Fund and Clearwater Small Cap Fund each 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.
Clearwater Tax-Exempt Bond Fund declares any dividends from net investment
income daily and pays the dividends monthly. The fund intends to meet certain
federal tax requirements so that distributions of tax-exempt interest income may
be treated as "exempt-interest dividends." These dividends are not subject to
regular federal income tax. The fund may invest up to 25% of its assets in
municipal securities subject to the alternative minimum tax. Any portion of
exempt interest dividends attributable to interest on these securities may
increase some shareholders' alternative minimum tax. All exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax, if
any. The fund expects that its distributions will consist primarily of
exempt-interest dividends. The fund's exempt-interest dividends may be subject
to state and local taxes.
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.
In general, redeeming and exchanging shares and receiving distributions other
than exempt-interest dividends (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
Taxable dividends Ordinary income
Exempt-interestdividends (Tax-Exempt Bond Exemptfrom regular federal
Fund only) income tax; may in some cases
increase liability for
alternative minimum tax
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
taxable 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 (other
than exempt-interest 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 - 14
<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 LLP, independent auditors, whose report, along with the fund's
financial statements, are included in the annual report (available upon
request). Financial highlights for Clearwater Tax-Exempt Bond Fund are not shown
because the fund had not yet commenced investment operations during the periods
shown.
For a share of capital stock outstanding throughout each year ended December 31:
<TABLE>
<CAPTION>
Clearwater Growth Fund
For the six For the year ended December 31
months ended
June 30, 1999
(unaudited
<S> <C> <C> <C> <C> <C> <C>
1998 1997(a) 1996 1995 1994
Net asset value, beginning of period $25.92 $21.17 $17.88 $17.01 $13.62 $14.49
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Income from investment operations
Net investment income (loss) 0.05 0.09 (0.01) (0.01) 0.01 0.06
Net realized and unrealized gain (loss) 2.23 4.71 5.08 3.68 4.43 0.11
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total from investment operations 2.28 4.80 5.07 3.67 4.44 0.17
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Less distributions:
Dividends from net investment income 0.00 (0.05) 0.00 0.00 (0.01) (0.06)
Distributions from realized gains 0.00 0.00 (1.78) (2.80) (1.04) (0.98)
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total distributions 0.00 (0.05) (1.78) (2.80) (1.05) (1.04)
Net asset value, end of period $28.20 $25.92 $21.17 $17.88 $17.01 $13.62
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total return(b) 8.8% 22.7% 28.4% 21.6% 32.6% 1.2%
Net assets, end of period (000's) $148,438 134,773 106,859 93,922 84,775 65,999
- ------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Ratio of expenses to average net assets(c) 0.23% 0.45% 0.98% 1.08% 1.08% 1.07%
Ratio of net investment income (loss) to 0.17% 0.39% (0.06)% (0.07)% 0.06% 0.39%
average net assets
Portfolio turnover rate (excluding short-term 5.81% 3.65% 38.16% 75.90% 58.64% 70.69%
securities)
</TABLE>
(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 distributions at net asset
value.
(c) The year 1996 includes federal and state taxes of 0.01%.
Clearwater Investment Trust - 15
<PAGE>
For a share of capital stock outstanding throughout each year ended December 31:
<TABLE>
<CAPTION>
Clearwater Small Cap Fund
For the six months For the year ended December 31
ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994(a)
Net asset value, beginning of period $13.08 $15.24 $12.74 $11.47 $9.89 $12.26
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Income from investment operations
Net investment income (loss) (0.02) (0.04) (0.02) 0.00 0.04 0.17
Net realized and unrealized gain (loss) 1.48 (1.04) 5.14 1.71 2.56 (0.99)
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total from investment operations 1.46 (1.08) 5.12 1.71 2.60 (0.82)
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income 0.00 0.00 0.00 0.00 (0.04) (0.17)
Excess distributions from net 0.00 0.00 0.00 (0.01) 0.00 0.00
investment income
Distributions from realized gains 0.00 (1.08) (2.62) (0.42) (0.98) (1.38)
Tax return of capital 0.00 0.00 0.00 (0.01) 0.00 0.00
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total distributions 0.00 (1.08) (2.62) (0.44) (1.02) (1.55)
Net asset value, end of period $14.54 $13.08 $15.24 $12.74 $11.47 $9.89
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total return(b) 11.2% (7.1)% 40.2% 15.0% 26.3% (6.7)%
Net assets, end of period (000's) $48,573 39,217 40,838 32,774 26,826 17,998
- --------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Ratio of expenses to average net assets(c) 0.67% 1.36% 1.35% 1.37% 1.35% 1.40%
Ratio of net investment income (loss) to (0.17)% (0.26%) (0.17)% 0.00% 0.36% 1.61%
average net assets
Portfolio turnover rate (excluding 52.69% 88.27% 92.22% 89.25% 77.46% 122.88%
short-term securities)
</TABLE>
(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.
Clearwater Investment Trust - 16
<PAGE>
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond 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>
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 CLEARWATER TAX-EXEMPT BOND FUND SUBADVISER
Hale and Dorr LLP Sit Fixed Income Advisors II, L.L.C.
60 State Street 4600 Norwest Center
Boston, MA 02109 Minneapolis, MN 55402
INDEPENDENT ACCOUNTANTS TRANSFER AGENT AND SHAREHOLDER SERVICES
KPMG LLP Fiduciary Counselling, Inc.
4200 Norwest Center 332 Minnesota Street, Suite 2100
90 South 7th Street St. Paul, MN 55101-1394
Minneapolis, MN 55402 (888) 228-0935
</TABLE>
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>
December __, 1999
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond 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 December __,1999 of Clearwater
Growth Fund ("Growth Fund"), Clearwater Small Cap Fund, formerly named
Clearwater Value Fund ("Small Cap Fund") and Clearwater Tax-Exempt Bond Fund
("Tax-Exempt Bond 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 12
Investment Restrictions 15
Portfolio Turnover 17
Brokerage 17
Management, Advisory and Other Services 18
Executive Officers and Trustees 21
Net Asset Value 22
How Are Shares Purchased? 23
Exchange of Shares 24
How Are Shares Redeemed? 24
Taxes 25
Performance Data 29
More Information About the Funds 30
Financial Statements 32
Appendix A - Descriptions of Ratings 33
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.
The information in this statement of additional information is not complete and
may be changed. We may not sell shares of Clearwater Tax-Exempt Bond Fund until
the amendment filed with the Securities and Exchange Commission is effective.
This statement of additional information is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives and Policies
General. Clearwater Growth Fund ("Growth Fund"), Clearwater Small Cap Fund
("Small Cap Fund") and Clearwater Tax-Exempt Bond Fund ("Tax-Exempt Bond 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. The
prospectus of Growth Fund, Small Cap Fund and Tax-Exempt Bond Fund dated
December __, 1999, identifies the investment objectives and principal investment
policies of the funds.
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. 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. Under normal circumstances, Tax-Exempt Bond
Fund primarily invests in municipal securities, which are debt obligations
issued by or for the U.S. states, territories and possessions and the District
of Columbia.
Other policies of the funds are set forth below.
EQUITY SECURITIES (each fund)
Each of Growth Fund's and Small Cap 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. Tax-Exempt Bond Fund's investment in equity securities will be
limited to other open-end and closed-end tax exempt investment companies.
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
2
<PAGE>
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
securities may result in higher expenses due to costs associated with converting
U.S.
dollars to foreign currencies.
FIXED INCOME SECURITIES (Each fund)
Corporate Debt Obligations (Growth Fund and Small Cap Fund only). Growth Fund
and Small Cap Fund each 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. 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.
3
<PAGE>
MUNICIPAL OBLIGATIONS (Tax-Exempt Bond Fund only)
Tax-Exempt Bond Fund invests primarily in municipal securities. The yields on
municipal securities are dependent on a variety of factors, including the
general level of interest rates, the financial condition of the issuer, general
conditions of the tax-exempt securities market, the size of the issue, the
maturity of the obligation and the rating of the issue. Ratings are general, and
not absolute, standards of quality. Consequently, securities of the same
maturity, interest rate and rating may have different yields, while securities
of the same maturity and interest rate with different ratings may have the same
yield.
Certain types of municipal bonds known as private activity bonds are issued to
obtain funding for privately operated facilities. Under current tax law, the
fund's distribution (as an exempt-interest dividend) of interest income earned
by the fund from certain private activity bonds is an item of tax preference for
a shareholder that is subject to the alternative minimum tax.
Municipal securities in which the fund invests include securities that are
issued by a state or its agencies, instrumentalities, municipalities and
political subdivisions, or by territories or possessions of the United States.
Tax-exempt municipal securities include municipal bonds, municipal notes,
municipal commercial paper and municipal leases.
Municipal Bonds. Municipal bonds generally have maturities at the time of
issuance ranging from one to thirty years, or more. Municipal bonds are issued
to raise money for various public purposes. The two principal types of municipal
bonds are general obligation bonds and revenue bonds. The fund may invest in
both in any proportion. General obligation bonds are secured by the full faith,
credit and taxing power of the issuing municipality and not from any particular
fund or revenue source. Revenue bonds are not backed by the municipality's
general taxing power but by the revenues derived from a facility or class of
facilities or from the proceeds of a special excise or other specific revenue
source.
Municipal Notes. Municipal notes generally mature in three months to three
years.
Municipal Commercial Paper. Municipal commercial paper generally matures in one
year or less.
Municipal Leases. Tax-Exempt Bond Fund may invest up to 25% of its net assets in
municipal lease obligations issued by state and local governments or authorities
to finance the acquisition of equipment and facilities. Municipal leases may
take the form of a lease, an installment purchase contract, a conditional sales
contract or a participation certificate in any of the above. In determining
leases in which the fund will invest, the subadviser will carefully evaluate the
outstanding credit rating of the issuer (and the probable secondary market
acceptance of such credit rating). Additionally, the subadviser may require that
certain municipal lease obligations be issued or backed by a letter of credit or
put arrangement with an independent financial institution.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. The constitutions and statutes of all
states contain requirements that the state or a municipality must meet to incur
debt. These often include voter referendum, interest rate limits and public sale
requirements. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
4
<PAGE>
"nonappropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis.
In addition to the "nonappropriation" risk, municipal leases have additional
risk aspects because they represent a relatively new type of financing that has
not yet developed the depth of marketability associated with conventional bonds;
moreover, although the obligations will be secured by the leased equipment, the
disposition of the equipment in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In addition, in certain instances the
tax-exempt status of the obligations will not be subject to the legal opinion of
a nationally recognized "bond counsel," as is customarily required in larger
issues of municipal securities.
Municipal lease obligations, except in certain circumstances, are considered
illiquid by the staff of the Securities and Exchange Commission ("SEC").
Municipal lease obligations held by the fund will be treated as illiquid unless
they are determined to be liquid pursuant to guidelines established by the
fund's Board of Trustees. Under these guidelines, the subadviser will consider
factors including, but not limited to 1) whether the lease can be canceled, 2)
what assurance there is that the assets represented by the lease can be sold, 3)
the issuer's general credit strength (e.g. its debt, administrative, economic
and financial characteristics), 4) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g. the
potential for an "event of non-appropriation"), and 5) the legal recourse in the
event of failure to appropriate.
Housing Authority Bonds. Tax-Exempt Bond Fund may invest without limitation in
obligations of municipal housing authorities which include both single family
and multifamily mortgage revenue bonds. Weaknesses in federal housing subsidy
programs and their administration may result in a decrease of subsidies
available for payment of principal and interest on multifamily housing authority
bonds. Economic developments, including fluctuations in interest rates and
increasing construction and operating costs, may also adversely impact revenues
of housing authorities. In the case of some housing authorities, inability to
obtain additional financing could also reduce revenues available to pay existing
obligations. Mortgage revenue bonds are subject to extraordinary mandatory
redemption at par in whole or in part from the proceeds derived from prepayments
of underlying mortgage loans and also from the unused proceeds of the issue
within a stated period of time.
The exclusion from gross income for federal income tax purposes of the interest
on certain housing authority bonds depends on qualification under relevant
provisions of the Internal Revenue Code of 1986, as amended (the "Tax Code") and
on other provisions of federal law. These provisions of federal law contain
certain ongoing requirements relating to the cost and location of the residences
financed with the proceeds of the single family mortgage bonds and the income
levels of occupants of the housing units financed with the proceeds of the
single and multifamily housing bonds. While the issuers of the bonds, and other
parties, including the originators and servicers of the single family mortgages
and the owners of the rental projects financed with the multifamily housing
bonds, covenant to meet these ongoing requirements and generally agree to
institute procedures designed to insure that these requirements are met, there
can be no assurance that these ongoing requirements will be consistently met.
The failure to meet these requirements could cause the interest on the bonds to
become taxable, possibly retroactively from the date of issuance, thereby
reducing the value of the bonds, subjecting shareholders to unanticipated tax
liabilities and possibly requiring the fund to sell the bonds at the reduced
value. Furthermore, any failure to meet these ongoing requirements might not
constitute an event of default under the applicable mortgage which might
otherwise permit the holder to
5
<PAGE>
accelerate payment of the bond or require the issuer to redeem the bond. In any
event, where the mortgage is insured by the Federal Housing Administration
("FHA"), the consent of the FHA may be required before insurance proceeds would
become payable to redeem the mortgage subsidy bonds.
Industrial Development Revenue Bonds. Tax-Exempt Bond Fund may invest in
industrial development revenue bonds. Industrial development revenue bonds are
backed by the user of the facilities and the specific revenues of the project to
be financed. The credit quality of industrial development bonds is usually
directly related to the credit standing of the user of the facilities or the
credit standing of a third-party guarantor or other credit enhancement
participant, if any.
Zero Coupon Securities (Tax-Exempt Bond Fund only). Tax-Exempt Bond Fund is
permitted to invest in zero coupon securities. Such securities are debt
obligations which do not entitle the holder to periodic interest payments prior
to maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity of the security approaches and this
accretion (adjusted for amortization) is recognized as interest income. Zero
coupon securities can be sold prior to their due date in the secondary market at
the then-prevailing market value which depends primarily on the time remaining
to maturity, prevailing levels of interest rates and the perceived credit
quality of the issuer. The market prices of zero coupon securities are more
volatile than the market prices of securities of comparable quality and similar
maturity that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such non-zero coupon securities.
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 intention to seek generally to avoid realizing taxable gains 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.
Neither Growth Fund nor Small Cap 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.
Tax-Exempt Bond Fund may purchase and sell exchange traded put and call options
on debt securities of an amount up to 5% of its net assets for the purpose of
hedging. The fund may, from time to time, write exchange-traded call options on
debt securities, but the fund will not write put options. A put option
(sometimes called a standby commitment) gives the purchaser of the option, in
return for a premium paid, the right to sell the underlying security at a
specified price during the term of the option. The writer of the put option
receives the premium and has the
6
<PAGE>
obligation to buy the underlying securities upon exercise at the exercise price
during the option period. A call option (sometimes called a reverse standby
commitment) gives the purchaser of the option, in return for a premium, the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option receives
the premium and has the obligation at the exercise of the option, to deliver the
underlying security against payment of the exercise price during the option
period. A principal risk of standby commitments is that the writer of a
commitment may default on its obligation to repurchase or deliver the
securities.
Futures Contracts and Options on Futures Contracts (Growth Fund and Tax-Exempt
Bond 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.
Tax-Exempt Bond Fund may invest in interest rate futures contracts, index
futures contracts and may buy options on such contracts for the purpose of
hedging its portfolio of fixed income securities (and not for speculative
purposes) against the adverse effects of anticipated movements in interest
rates. As a result of entering into futures contracts, no more than 5% of the
fund's total assets may be committed to margin.
An interest rate futures contract is an agreement to purchase or deliver an
agreed amount of debt securities in the future for a stated price on a certain
date. The fund may use interest rate futures solely as a defense or hedge
against anticipated interest rate changes and not for speculation. The fund
presently could accomplish a similar result to that which it hopes to achieve
through the use of futures contracts by selling debt securities with long
maturities and investing in debt securities with short maturities when interest
rates are expected to increase, or conversely, selling short-term debt
securities and investing in long-term debt securities when interest rates are
expected to decline. However, because of the liquidity that is often available
in the futures market, such protection is more likely to be achieved, perhaps at
a lower cost and without changing the rate of interest being earned by the fund,
through using futures contracts.
Tax-Exempt Bond Fund may purchase and sell put and call options and options on
interest rate futures contracts which are traded on a United States exchange or
board of trade as a hedge against changes in interest rates, and will enter into
closing transactions with respect to such options to terminate existing
positions. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
financial instrument (debt security) at a specified price, date, time and place.
An option on an interest rate
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futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in an interest rate futures contract at a specified exercise price at
any time prior to the expiration date of the option. Options on interest rate
futures contracts are similar to options on securities, which give the purchaser
the right, in return for the premium paid, to purchase or sell securities.
A call option gives the purchaser of such option the right to buy, and obliges
its writer to sell, a specified underlying futures contract at a stated exercise
price at any time prior to the expiration date of the option. A purchaser of a
put option has the right to sell, and the writer has the obligation to buy, such
contract at the exercise price during the option period. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the interest rate futures contract on the expiration date. The
potential loss related to the purchase of an option on interest rate futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset values of the fund.
Purchase of Put Options on Futures Contracts. Tax-Exempt Bond Fund may purchase
put options on futures contracts if the subadviser anticipates a rise in
interest rates. Because the value of an interest rate or municipal bond index
futures contract moves inversely in relation to changes in interest rates, a put
option on such a contract becomes more valuable as interest rates rise. By
purchasing put options on futures contracts at a time when the Adviser expects
interest rates to rise, the Funds will seek to realize a profit to offset the
loss in value of its portfolio securities.
Purchase of Call Options on Futures Contracts. Tax-Exempt Bond Fund may purchase
call options on futures contracts if the subadviser anticipates a decline in
interest rates. The purchase of a call option on an interest rate or index
futures contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate or index
futures contract moves inversely in relation to changes to interest rates, a
call option on such a contract becomes more valuable as interest rates decline.
The fund will purchase a call option on a futures contract to hedge against a
decline in interest rates in a market advance when the fund is holding cash. The
fund can take advantage of the anticipated rise in the value of long-term
securities without actually buying them until the market is stabilized. At that
time, the options can be liquidated and the fund's cash can be used to buy
long-term securities.
The fund expects that new types of futures contracts, options thereon, and put
and call options on securities and indexes may be developed in the future. As
new types of instruments are developed and offered to investors, the subadviser
will be permitted to invest in them provided that the subadviser believes their
quality is equivalent to the fund's quality standards.
Swap Agreements (Tax-Exempt Bond Fund only). Tax-Exempt Bond Fund may enter into
swap agreements. Swap agreements are two party contracts entered into primarily
by institutional
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investors in which two parties agree to exchange the returns (or differential
rates of return) earned or realized on particular predetermined investments or
instruments.
The fund may enter into swap agreements for purposes of attempting to obtain a
particular investment return at a lower cost to the fund than if the fund had
invested directly in an instrument that provided that desired return. The fund
bears the risk of default by its swap counterparty and may not be able to
terminate its obligations under the agreement when it is most advantageous to do
so. In addition, certain tax aspects of swap agreements are not entirely clear
and their use, therefore, may be limited by the requirements relating to the
qualification of the fund as a regulated investment company under the Tax Code.
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 (Growth Fund and Small Cap Fund only). Each of
Growth Fund and Small Cap 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.
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
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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 (Growth Fund and Small Cap 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 if an election is made to take market discount into account annually)
could require the fund to sell certain of its portfolio securities in order to
generate sufficient cash to satisfy certain income distribution requirements.
High Yield Securities (Tax-Exempt Bond Fund only) Tax-Exempt Bond Fund may
invest up to 30% of its assets in securities rated below investment-grade.
Securities rated below investment-grade are referred to as high yield securities
or "junk bonds." Junk bonds are regarded as being predominantly speculative as
to the issuer's ability to make payments of principal and interest. Investment
in such securities involves substantial risk. Issuers of junk bonds may be
highly leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of junk bonds may be more likely to experience financial stress,
especially if such issuers are highly leveraged. In addition, the market for
junk bonds is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such periods, such issuers may not have sufficient cash flows to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to the creditors of the
issuer. While most of the junk bonds in which the funds may invest do not
include securities
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which, at the time of investment, are in default or the issuers of which are in
bankruptcy, there can be no assurance that such events will not occur after the
fund purchases a particular security, in which case the fund may experience
losses and incur costs. Junk bonds frequently have call or redemption features
that would permit an issuer to repurchase the security from the fund. If a call
were exercised by the issuer during a period of declining interest rates, the
fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
Junk bonds tend to be more volatile than higher-rated fixed income securities,
so that adverse economic events may have a greater impact on the prices of junk
bonds than on higher-rated fixed income securities. Factors adversely affecting
the market value of such securities are likely to affect adversely the fund's
net asset value. Like higher-rated fixed income securities, junk bonds generally
are purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the junk bond market,
which may be less liquid than the market for higher-rated fixed income
securities, even under normal economic conditions. Also there may be significant
disparities in the prices quoted for junk bonds by various dealers. Adverse
economic conditions and investor perceptions thereof (whether or not based on
economic fundamentals) may impair the liquidity of this market and may cause the
prices the fund receives for its junk bonds to be reduced. In addition, the fund
may experience difficulty in liquidating a portion of its portfolio when
necessary to meet the fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Under such conditions, judgment may play a greater role in valuing certain of
the fund's portfolio securities than in the case of securities trading in a more
liquid market. In addition, the fund may incur additional expenses to the extent
that it is required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
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 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.
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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
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.
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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 (Growth Fund and Small Cap Fund only). 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 any 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.
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.
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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.
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;
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(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.
As a non-fundamental policy, Tax-Exempt Bond Fund will not invest more than 25%
of its assets in revenue bonds payable only from revenues derived from
facilities or projects within a single industry; however, because other
appropriate available investments may be in limited supply, the industry
limitation does not apply to housing authority obligations or securities issued
by governments or political subdivisions of governments. Appropriate available
investments may be in limited supply from time to time in the opinion of the
subadviser due to the fund's investment policy of investing primarily in
"investment grade" securities.
PORTFOLIO TURNOVER
Although none of the funds 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 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
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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 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
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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 $977,32I, $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.
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
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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, $346,861 and $357,313 respectively to KCM.
Sit Fixed Income Advisors II, L.L.M. In connection with the management of
Tax-Exempt Bond Fund, the trust, the Manager and Sit Fixed Income Advisors II
L.L.C. ("SIT"), a subsidiary of Sit Investment Associates, Inc. entered into a
subadvisory contract dated _______________, 1999 ("Tax-Exempt Bond subadvisory
contract"). SIT, which is incorporated in Minnesota and is registered under the
Investment Advisers Act of 1940, devoted full time to investment counseling and
provides advice, management and other services to investors and accounts,
including other mutual funds. SIT's address is 4600 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota 55402-4130.
Under the Tax-Exempt Bond subadvisory contract, SIT develops, recommends and
implements an investment program and strategy for Tax-Exempt Bond Fund which is
consistent with the fund's investment objectives and policies. SIT is also
responsible for making all portfolio and brokerage decisions. As compensation,
SIT receives a fee that is based on Tax-Exempt Bond Fund's net assets. This fee
is calculated and accrued on a monthly basis as a percentage of Tax-Exempt Bond
Fund's month-end net assets.
Fees payable to SIT 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:
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Percent .........Net Assets
0.40% .........Up to and including $20 million
0.30% .........Next $30 million
0.25% .........Next $25 million
0.20% .........Over $75 million
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.
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. (44), Trustee
Managing Director, Alpha Windward, L.L.C. (1998/present)
President and Chief Investment Officer, Alpha Windward, L.L.C.
(formerly S. B. Carr Investments, Inc.) (1990/1998)
200 Louder Brook Drive
Westwood, MA 02090-1178
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Stanley R. Day, Jr. (41), Trustee
President and Director, SRAM Corporation, (1987/present)
361 West Chestnut Street
Chicago, Illinois 60611
Robert J. Phares (36), Trustee
Chief Executive Officer, Battle Ridge Ranch Company, (1986/present)
7180 Jackson Creek Road
Bozeman, Montana 59715
Daniel C. Titcomb (46), 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* (68), 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 September 30, 1999, all of the trustees and officers of the trust, as a
group, owned of record 1.25% of the outstanding shares of Growth Fund and 1.74%
of the outstanding shares of Small Cap Fund.
*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
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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.
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 a 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.
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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 a 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 a
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 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 followed by the
purchase of new shares 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.
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HOW ARE SHARES REDEEMED?
Any shareholder of any of the Clearwater funds 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 a 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.
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 SEC, by order, so permits.
TAXES
General. Under 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.
Each fund is treated as a separate entity for federal income tax purposes, has
elected or, in the case of Tax-Exempt Bond Fund, intends to elect to be treated
as a "regulated investment company" under the Tax Code, and intends 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
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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 (not including tax-exempt interest) 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 of Growth Fund and Small Cap 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 Tax 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 Investment Companies. If Growth Fund or Small Cap 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 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
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under the Tax 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 of Growth Fund and Small Cap 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. Tax-Exempt
Bond Fund will declare its dividends from investment income daily and distribute
these dividends monthly. Distributions from net investment income (other than
exempt-interest dividends paid by Tax-Exempt Bond Fund, as described below),
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.
Special Tax Issues Affecting Tax-Exempt Bond Fund's Shareholders. Under the Tax
Code and applicable regulations, interest on indebtedness incurred or continued
to purchase or carry shares of an investment company paying exempt-interest
dividends, such as Tax-Exempt Bond Fund, will not be deductible by a shareholder
in proportion to the ratio of exempt-interest dividends to all dividends (both
taxable and tax-exempt) other than those treated as long-term capital gains.
Indebtedness may be allocated to shares of Tax-Exempt Bond Fund even though not
directly traceable to the purchase of such shares. Federal law also restricts
the deductibility of other expenses allocable to shares of such fund.
Tax-Exempt Bond Fund intends to take all actions required under the Tax Code to
ensure that the fund may pay "exempt-interest dividends." Distributions of net
interest income from tax-exempt obligations that are designated by the fund as
exempt-interest dividends are excludable from the gross income of the fund's
shareholders. The fund's present policy is to designate exempt-interest
dividends annually. The fund will calculate exempt-interest dividends based on
the average annual method and the percentage of income designated as tax-exempt
for any particular distribution may be substantially different from the
percentage of income that was tax-exempt during the period covered by the
distribution. Shareholders are required for information purposes to report
exempt-interest dividends and other tax-exempt interest on their tax return.
Distributions paid from taxable interest income, from any net realized
short-term capital gains and certain other taxable sources (possibly including
certain swamp payments, income from securities lending or repurchase agreements,
certain income from options or futures, realized market discount, or certain
other income) will be taxable to shareholders as ordinary income, whether
received in cash or in additional shares.
For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax exceeds a taxpayer's regular income tax
liability (with certain adjustments). Exempt-interest dividends attributable to
interest income on certain tax-exempt obligations issued after August 7, 1986 to
finance certain private activities are treated as an item of tax preference that
is included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers. The Tax-Exempt Bond Fund may invest up to 20% of
its assets in securities that generate interest that is treated as an item of
tax preference. In addition, a portion of all other tax-exempt interest received
by a corporation, including exempt-
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interest dividends, will be included in
adjusted current earnings and in earnings and profits for purposes of
determining the federal corporate AMT and the branch profits tax imposed on
foreign corporations under Section 884 of the Tax Code.
Because liability for the AMT depends upon the regular tax liability and tax
preference items of a specific taxpayer, the extent, if any, to which any tax
preference items resulting from investment in Tax-Exempt Bond Fund will be
subject to the tax will depend upon each shareholder's individual situation. For
shareholders with substantial tax preferences, the AMT could reduce the
after-tax economic benefits of an investment in Tax-Exempt Bond Fund. Each
shareholder is advised to consult his or her tax adviser with respect to the
possible effects of such tax preference items.
Shares of Tax-Exempt Bond Fund may not be an appropriate investment for persons
who are "substantial users" of facilities financed by industrial development or
private activity bonds, or persons related to "substantial users." Consult your
tax adviser if you think this may apply to you.
In addition, shareholders who are or may become recipients of Social Security or
certain railroad retirement benefits should be aware that exempt-interest
dividends are includable in computing "modified adjusted gross income" for
purposes of determining the amount of such benefits, if any, that is required to
be included in gross income. The maximum amount of Social Security benefits
includable in gross income is 85%.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds
which, if not satisfied, could result in loss of tax exemption for interest on
such bonds, even retroactively to the date of issuance of the bonds. Proposals
may be introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
securities. Tax-Exempt Bond Fund cannot predict what additional legislation may
be enacted that may affect shareholders. The fund will avoid investment in
tax-exempt securities which, in the opinion of the investment adviser, pose a
material risk of the loss of tax exemption. Further, if a tax-exempt security in
the fund's portfolio loses its exempt status, the fund will make every effort to
dispose of such investment on terms that are not detrimental to the fund.
Dividends-Received Deduction. For purposes of the 70% dividends-received
deduction available to corporations, dividends received by Growth Fund or Small
Cap 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 prior to a taxable distribution will
nevertheless be required to treat the distribution as ordinary income or
long-term capital gain as described above, even though economically it may
represent 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 (other than exempt-interest 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.
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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:
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.
Yield. Yield is computed by dividing the net investment income per share (as
defined under SEC rules and regulations) earned during the computation period by
the maximum offering price per share on the last day of the period, according to
the following formula:
28
<PAGE>
6
Yield = 2([((a-b)/cd) +1] -1)
a = dividends and interest earned during the periods;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
The formula assumes values for a, b, c, and d will be calculated based on a
30-day period.
Taxable Equivalent Yield. The Tax-Exempt Bond Fund may state a taxable
equivalent yield which is computed by dividing that portion of the yield of the
fund which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield of the fund that is not
tax-exempt.
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 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
29
<PAGE>
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.
<TABLE>
<CAPTION>
As of September 30, 1999, each of the following persons owned five percent or
more of the voting securities of each such fund:
<S> <C> <C>
- --------------------------------------------------- -------------------------------- -------------------------------
Name Total Shares Total Shares
Clearwater Growth Fund Clearwater Small Cap Fund
- --------------------------------------------------- -------------------------------- -------------------------------
W. John Driscoll* 12.66% 10.98%
- --------------------------------------------------- -------------------------------- -------------------------------
Frank W. Piasecki* 7.01%
- --------------------------------------------------- -------------------------------- -------------------------------
Walter S. Rosenberry, III* 8.70% 6.48%
- --------------------------------------------------- -------------------------------- -------------------------------
John W. Titcomb, Jr.** 5.73%
- --------------------------------------------------- -------------------------------- -------------------------------
Charles A. Weyerhaeuser* 11.77% 8.52%
- --------------------------------------------------- -------------------------------- -------------------------------
David C. Weyerhaeuser* 6.22%
- --------------------------------------------------- -------------------------------- -------------------------------
David M. Weyerhaeuser** 9.31% 6.47%
- --------------------------------------------------- -------------------------------- -------------------------------
Frederick T. Weyerhaeuser* 13.97% 19.02%
- --------------------------------------------------- -------------------------------- -------------------------------
George H. Weyerhaeuser** 24.20% 18.01%
- --------------------------------------------------- -------------------------------- -------------------------------
William T. Weyerhaeuser** 27.75% 19.73%
- --------------------------------------------------- -------------------------------- -------------------------------
Wendy W. Weyerhaeuser** 10.88%
- --------------------------------------------------- -------------------------------- -------------------------------
</TABLE>
* 332 Minnesota Street, Suite 2100, Saint Paul, Minnesota 55101-1394
** 1145 Broadway, Suite 1500, P.O. Box 1278, Tacoma, Washington 98401
Independent Accountants. KPMG LLP serves as independent public accountants to
the trust. In this capacity, KPMG 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.
30
<PAGE>
APPENDIX A
Description of Ratings
BOND RATINGS
Moody's Investors Service, Inc.
Rating Definition
Aaa Judged to be the best quality, carry the smallest degree of
investment risk.
Aa Judged to be of high quality by all standards.
A Possess many favorable investment attributes and are to be
considered as higher medium grade obligations.
Baa Medium grade obligations. Lack outstanding investment
characteristics.
Ba Judged to have speculative elements. Protection of interest
and principal payments may be very moderate.
B Generally lack characteristics of a desirable investment.
Assurance of interest and principal payments over any long
period of time may be small.
Moody's also applies numerical indicators, 1, 2, and 3, to rating categories Aa
through Ba. The modifier 1 indicates that the security is in the higher end of
the rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.
Standard & Poor's Corporation
Rating Definition
AAA Highest grade obligations and possess the ultimate degree of
protection as to principal and interest.
AA Also qualify as high grade obligations, and in the majority
of instances differ from AAA issues only in small degree.
A Regarded as upper medium grade, have considerable investment
strength but are not entirely free from adverse effects of
changes in economic and trade conditions, interest and
principal are regarded as safe.
BBB Considered investment grade with adequate capacity to pay
interest and repay principal.
BB Judged to be speculative with some inadequacy to meet timely
interest and principal payments.
B Has greater vulnerability to default than other speculative
grade securities. Adverse economic conditions will likely
impair capacity or willingness to pay interest and principal.
Standard & Poor's applies indicators "+", no character, and "-" to the above
rating categories AA through B. The indicators show relative standing within the
major rating categories.
Fitch IBCA
Rating Definition
AAA Highest credit quality with exceptional ability to pay
interest and repay principal.
AA Investment grade and very high credit quality ability to pay
interest and repay principal is very strong, although not
quite as strong as AAA.
31
<PAGE>
A Investment grade with high credit quality. Ability to pay
interest and repay principal is strong.
BBB Investment grade and has satisfactory credit quality. Adequate
ability to pay interest and repay principal.
BB Considered speculative. Ability to pay interest and repay
principal may be affected over time by adverse economic
changes.
B Considered highly speculative. Currently meeting interest and
principal obligations, but probability of continued payment
reflects limited margin of safety.
+ and - indicators indicate the relative position within the rating category,
but are not used in AAA category.
Duff & Phelps Credit Rating Co.
Rating Definition
AAA Highest credit quality, risk factors are negligible. AA High
credit quality with moderate risk.
A Protection factors are average but adequate, however, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors, but still considered
sufficient for prudent investment.
BB Below investment grade but likely to meet obligations when
due.
B Below investment made and possessing risk that obligations
will not be met when due.
+ and - indicators indicate the relative position within the rating category,
but are not used in AAA category.
COMMERCIAL PAPER RATINGS
Moody's
Commercial paper rated "Prime" carries the smallest degree of investment risk.
The modifiers 1, 2, and 3 are used to denote relative strength within this
highest classification.
Standard & Poor's
The rating A-1 is the highest commercial paper rating assigned by Standard &
Poor's Corporation. The modifier "+" indicates that the security is in the
higher end of this rating category.
Fitch IBCA
F-1+ Exceptionally strong credit quality.
F-1 Strong credit quality.
Duff & Phelps
Category 1 (top grade):
Duff1+ Highest certainty of timely payment.
Duff1 Very high certainty of timely payment.
32
<PAGE>
Duff1- High certainty of timely payment.
MUNICIPAL BOND, MUNICIPAL NOTE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Municipal Bond Ratings
Standard & Poor's Corporation:
Rating Definition
AAA Highest rating; extremely strong security.
AA Very strong security; differs from AAA in only a small degree.
A Strong capacity but more susceptible to adverse economic
effects than two above categories.
BBB Adequate capacity but adverse economic conditions more likel
to weaken capacity.
BB Judged to be speculative with some inadequacy to meet timely
interest and principal payments.
B Has greater vulnerability to default than other speculative
grade securities. Adverse economic conditions will likely
impair capacity or willingness to pay interest and principal.
Standard & Poor's applies indicators "+", no character, and "-" to the above
rating categories AA through B. The indicators show relative standing within the
major rating categories.
Moody's Investors Services, Inc.:
Rating Definition
Aaa Best quality; carry the smallest degree of investment risk.
Aa High quality; margins of protection not quite as large as the
Aaa bonds.
A Upper medium grade; security adequate but could be susceptible
to impairment.
Baa Medium grade; neither highly protected nor poorly
secured--lack outstanding investment characteristics and
sensitive to changes in economic circumstances.
Ba Judged to have speculative elements. Protection of interes
and principal payments may be very moderate.
B Generally lack characteristics of a desirable investment.
Assurance of interest and principal payments over any long
period of time may be small.
Moody's also applies numerical indicators, 1, 2, and 3, to rating categories Aa
through Ba. The modifier 1 indicates that the security is in the higher end of
the rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.
Fitch IBCA:
Rating Definition
AAA Highest credit quality with exceptional ability to pay
interest and repay principal.
AA Investment grade and very high credit quality ability to pay
interest and repay principal is very strong, although not
quite as strong as AAA.
A Investment grade with high credit quality. Ability to pay
interest and repay principal is strong.
33
<PAGE>
BBB Investment grade and has satisfactory credit quality. Adequate
ability to pay interest and repay principal.
BB Considered speculative. Ability to pay interest and repay
principal may be affected over time by adverse economic
changes.
B Considered highly speculative. Currently meeting interest and
principal obligations, but probability of continued payment
reflects limited margin of safety.
+ and - indicators indicate the relative position within the rating category,
but are not used in AAA category.
Duff & Phelps Credit Rating Co.:
Rating Definition
AAA Highest credit quality, risk factors are negligible.
AA High credit quality with moderate risk.
A Protection factors are average but adequate, however, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors, but still considered
sufficient for prudent investment.
BB Below investment grade but likely to meet obligations when
due.
B Below investment grade and possessing risk that obligation
will not be met when due.
+ and - indicators indicate the relative position within the rating category,
but are not used in AAA category.
Municipal Note Ratings
Standard & Poor's Corporation:
Rating Definition
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc.:
Rating* Definition
MIG 1 Best quality.
MIG 2 High quality.
MIG 3 Favorable quality.
MIG 4 Adequate quality.
* A short-term issue having a demand feature, i.e., payment relying on
external liquidity and usually payable upon demand rather than fixed
maturity dates, is differentiated by Moody's with the use of the symbols
VMIG1 through VMIG4.
34
<PAGE>
Tax-Exempt Commercial Paper Ratings
Standard & Poor's Corporation:
Rating Definition
A-1+ Highest degree of safety.
A-1 Very strong degree of safety.
Moody's Investors Service, Inc.:
Rating Definition
Prime 1 (P-1) Superior capacity for repayment.
35
<PAGE>
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond 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: CLEARWATER TAX-EXEMPT BOND
FUND SUBADVISER:
Hale and Dorr LLP Sit Fixed Income Advisors II, L.L.C.
60 State Street 4600 Norwest Center
Boston, MA 02109 Minneapolis, MN 55402
INDEPENDENT ACCOUNTANTS: TRANSFER AGENT AND
SHAREHOLDER SERVICES:
KPMG LLP Fiduciary Counselling, Inc.
4200 Norwest Center 332 Minnesota Street, Suite 2100
90 South 7th Street St. Paul, MN 55101-1394
Minneapolis, MN 55402 (888) 228-0935
STATEMENT OF ADDITIONAL INFORMATION
December __, 1999
<PAGE>
CLEARWATER INVESTMENT TRUST
FORM N-1A
PART C. OTHER INFORMATION
Item 23. Exhibits
(a)(1) Declaration of Trust dated January 12, 1987 1
(a)(2) Amendment to Declaration of Trust dated March 25, 1994 1
(a)(3) Amended and Restated Declaration of Trust dated March 1, 1998 2
(a)(4) Certificate of Designation with respect to Clearwater Municipal
Bond Fund +
(b)(1) By-Laws 1
(b)(2) Amended and Restated By-Laws dated March 1, 1998 2
(c) None.
(d)(1) Management Contract dated May 1, 1994 1
(d)(2) Management Contract, as amended, dated March 1, 1998 2
(d)(3) Form of Management Contract by and among Clearwater
Investment Trust, on behalf of its series, Clearwater Municipal
Bond Fund and Clearwater Management Co., Inc. +
(d)(4) Subadvisory Contract with SIT Investment Associates, Inc.for
Clearwater Growth Fund dated May 1, 1994 1
(d)(5) Subadvisory Contract with Parametric Portfolio Associates for
Clearwater Growth Fund dated November 1, 1997 2
(d)(6) Subadvisory Contract with Kennedy Capital Management for
Clearwater Small Cap Fund dated May 1, 1994 1
(d)(7) Amendment to the Subadvisory Contract with Kennedy Capital
Management for Clearwater Small Cap Fund dated January 1, 1998 2
1
<PAGE>
(d)(8) Form of Subadvisory Contract by and among Clearwater
Investment Trust, on behalf of its series, Clearwater Municipal
Bond Fund and Sit Investment Associates, Inc. +
(e) None.
(f) None.
(g)(1) Custodian Agreement with Norwest Bank Minnesota, N.A. dated
March 31, 1987 1
(g)(2) Amendment to Custodian Agreement dated March 27, 1991 1
(g)(3) Amendment to Custodian Agreement dated November 4, 1992 1
(g)(4) Custodian Agreement with Investors Fiduciary Trust Company
dated September 29, 1997 2
(g)(5) Amendment to Custodian Agreement dated March 1, 1998 3
(h)(1) Investment Company Service Agreement dated March 2, 1987 1
(h)(2) Amendment to Investment Company Service Agreement dated
May 1, 1995 1
(h)(3) Accounting Services Agreement dated April 3, 1995 1
(i) None.
(j)(1) Consent of Independent Accountants +
(k) None.
(l)(1) Stock Purchase Agreement dated February 19, 1987 1
(m) None.
(n) None.
(o) None.
n/a Powers of Attorney 3
2
<PAGE>
------------
+ Filed herewith
1 Previously filed as exhibits to post-effective
amendment no. 10 to the Registration Statement on
April 29, 1996 and incorporated herein by reference
(File No. 33-12289).
2 Previously filed as exhibits to post-effective
amendment no. 12 to the Registration Statement on
February 27, 1998 and incorporated herein by
reference (File No. 33-12289).
3 Previously filed as exhibits to post-effective
amendment no. 14 to the Registration Statement on
April 13, 1999 and incorporated herein by reference
(File No. 33-12289).
Item 24. Persons Controlled by or Under Common Control with the Fund
The Registrant is not directly or indirectly controlled by or
under common control with any other person.
Item 25. Indemnification
Except for the Declaration of Trust, dated January 12, 1987,
as amended and restated March 1, 1998, establishing the Registrant as a trust
under Massachusetts law, there is no contract, arrangement or statute under
which any director, officer, underwriter or affiliated person of the Registrant
is insured or indemnified. The Declaration of Trust provides that no Trustee or
officer will be indemnified against any liability to which the Registrant would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties. See the Registrant's
undertaking with respect to indemnification in Item 32 below.
Item 26. Business and Other Connections of Investment Adviser
All of the information required by this item is set forth in
the Forms ADV, as amended, of the Manager and the Subadvisers. The following
sections of such Forms ADV are incorporated herein by reference:
(a) Items 6 and 8 of Part II;
(b) Section 6, Business Background, of each Schedule D.
Item 27. Principal Underwriter
Not applicable
3
<PAGE>
Item 28. Location of Accounts and Records
The accounts, books, and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of Fiduciary Counselling, Inc., 332
Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394.
Item 29. Management Services
The Registrant is a party to four contracts, described in the
Prospectus and Statement of Additional Information, under which it receives
management services from Clearwater Management Co., Inc. and advisory services
from Parametric Portfolio Associates, Kennedy Capital Management and Sit
Investment Associates, Inc.
Item 30. Undertaking
Not applicable.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment to such Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of St. Paul
and the State of Minnesota, on the 15th day of October, 1999.
CLEARWATER INVESTMENT TRUST
By: /s/Philip W. Pascoe
----------------------
Philip W. Pascoe
Chairman and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement of Clearwater Investment
Trust has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Date
PRINCIPAL EXECUTIVE, FINANCIAL
AND ACCOUNTING OFFICER:
/s/Philip W. Pascoe October 15, 1999
- ----------------------
Philip W. Pascoe
Chairman and Treasurer
THE BOARD OF TRUSTEES:
/s/Samuel B. Carr, Jr*
Samuel B. Carr, Jr.
/s/Stanley R. Day, Jr.*
Stanley R. Day, Jr.
/s/Robert J. Phares*
Robert J. Phares
/s/Frederick T. Weyerhaeuser*
Frederick T. Weyerhaeuser
*By /s/Philip W. Pascoe October 15, 1999
----------------------------------
Philip W. Pascoe
Power-of-Attorney
5
<PAGE>
Exhibit Index
Exhibit
Number
(a)(4) Certificate of Designation
(d)(3) Form of Management Contract
(d)(8) Form of Subadvisory Contract
(j) Consent of Independent Accountants
n/a Powers of Attorney
6
<PAGE>
CLEARWATER INVESTMENT TRUST
2100 First National Bank Building
St. Paul, Minnesota 55101
Certificate of Designation
The undersigned, being a majority of the Board of Trustees ("Trustees")
of Clearwater Investment Trust (the "Trust"), a Massachusetts business trust,
DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees
of the Trust by Section 5.5 and Section 8.4 of the Amended and Restated
Declaration of Trust, dated March 1, 1998 (the "Declaration of Trust"), and by
the affirmative vote of a Majority of the Trustees by written consent dated
October 10, 1999, the Declaration of Trust is amended as set forth in this
Certificate of Designation.
A. There is hereby established and designated one additional Series of
the Trust: "Clearwater Municipal Bond Fund." Such Series shall have all the
relative rights and preferences as the other Series established by Trust as
incorporated in the Amended and Restated Declaration of Trust.
The Trustees further direct that, upon the execution of this
Certificate of Designation, the Trust take all necessary action to file a copy
of this Certificate of Designation with the Secretary of State of The
Commonwealth of Massachusetts and at any other place required by law or by the
Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument in duplicate
counterparts and have caused a duplicate copy to be lodged among the records of
the Trust as of the 10th day of October, 1999.
/s/Philip W. Pascoe /s/Robert J. Phares
- ------------------------------------ ------------------------------------
Philip W. Pascoe Robert J. Phares
Trustee Trustee
/s/Samuel B. Carr, Jr /s/Frederick T. Weyerhaeuser
- ------------------------------------ ------------------------------------
Samuel B. Carr, Jr. Frederick T. Weyerhaeuser
Trustee Trustee
/s/Stanley R. Day, Jr.
- ------------------------------------
Stanley R. Day, Jr.
Trustee
MANAGEMENT CONTRACT
AGREEMENT made as of the _____ day of ___________, 1999, by and between
CLEARWATER INVESTMENT TRUST, a Massachusetts business trust (the "Trust"), and
CLEARWATER MANAGEMENT CO., INC., a Minnesota corporation (the "Manager").
WITNESSETH:
WHEREAS, the Trust desires to utilize the services of the Manager as
the manager for the Trust on behalf of Clearwater Tax-Exempt Bond Fund (the
"Fund"); and
WHEREAS, the Manager is willing to perform such services on the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits
set forth herein, it is agreed as follows:
1. The Manager's Services.
(a) Subject always to the supervision of the Trustees of the Trust and
the investment policies and restrictions applicable to the Fund as set forth in
the registration statement of the Trust filed with the Securities and Exchange
Commission (the "SEC"), the Manager is hereby authorized and directed and hereby
agrees to develop, recommend and implement such investment programs and
strategies for the Funds as may from time to time in the circumstances appear
most appropriate to the achievement of the investment objective of the Fund as
stated in the aforesaid registration statement, to provide research and analysis
relative to the investment program and investments of the Fund, to determine
what securities should be purchased and sold and what portion of the assets of
the Fund should be held in cash or cash equivalents or other assets and to
monitor on a continuing basis the performance of the portfolio securities of the
Fund. In addition, the Manager will place orders for the purchase and sale of
securities and will advise the custodian for the Fund on a prompt basis of each
purchase and sale of a portfolio security for the Fund specifying the name of
the issuer, the description and amount or number of shares of the security
purchased, the market price, commission and gross or net price, trade date,
settlement date and identity of the effecting broker or dealer. From time to
time as the Trustees of the Trust may reasonably request, the Manager will
furnish to the Trust's officers and to each of its Trustees reports on portfolio
transactions and reports on issues of securities held in the Fund, all in such
detail as any such Trustee may reasonably request. The Manager
1
<PAGE>
will also inform the Trust's officers and Trustees on a current basis of changes
in investment strategy or tactics. The Manager will make its officers and
employees available to meet with the Trust's officers and Trustees at least
quarterly on due notice to review the investments and investment program of the
Fund in the light of current and prospective economic and market conditions. In
the performance of its duties hereunder, the Manager will comply with the
provisions of the Declaration of Trust and By-laws of the Trust, each as amended
from time to time, and will use its best efforts to safeguard and promote the
welfare of the Trust and to comply with other policies which the Trustees may
from time to time adopt and shall exercise the same care and diligence expected
of the Trustees.
(b) Except as otherwise provided herein, the Manager, at its own
expense, shall furnish the Trust with office space in the offices of the Manager
or in such other place as may be agreed upon from time to time, and all
necessary office facilities, equipment and personnel for managing the affairs
and investments of the Funds, and shall arrange, if desired by the Trust, for
members of the Manager's organization to serve as officers or agents of the
Trust.
(c) The Manager shall pay directly or reimburse the Trust for all
expenses not hereinafter specifically assumed by the Trust or the Fund. The
Trust on behalf of the Fund will pay commissions and other direct charges
relating to the purchase and sale of portfolio securities and other assets,
taxes, interest and extraordinary expenses, including without limitation
litigation expenses.
(d) It shall be the duty of the Manager to furnish to the Trustees of
the Trust such information as may reasonably be necessary in order for the
Trustees to evaluate this Contract or any proposed amendments hereto for the
purposes of casting a vote pursuant to Sections 5 or 7 hereof.
(e) In the performance of its duties hereunder, the Manager is and
shall be an independent contractor and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the Trust in any way
or otherwise be deemed to be an agent of the Trust.
2. Subadvisers
It is understood that the Manager may employ one or more subinvestment
advisers (each a "Subadviser") to provide investment advisory services to the
Fund by entering into a written agreement with each such Subadviser; provided,
that any such agreement first shall be approved on behalf of the Fund in
accordance with the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"), as such requirements are modified by rule, regulation,
interpretation or order of the SEC. The authority given to the Manager in
Sections 1 through 7 hereof may be delegated by it under any such agreement;
provided, that any Subadviser shall be subject to the same restrictions and
limitations on investments and brokerage discretion
2
<PAGE>
as the Manager. The Trust agrees that the Manager shall not be accountable to
the Trust or the Fund or the Fund's shareholders for any loss or other liability
relating to specific investments directed by any Subadviser, even though the
Manager retains the right to reverse any such investment, because, in the event
a Subadviser is retained, the Trust and the Manager will rely almost exclusively
on the expertise of such Subadviser for the selection and monitoring of specific
investments.
3. Other Agreements, etc.
It is understood that any of the shareholders, trustees, officers and
employees of the Trust may be a shareholder, director, officer or employee of,
or be otherwise interested in, the Manager, any interested person (as defined in
the 1940 Act) of the Manager, any organization in which the Manager may have an
interest or any organization which may have an interest in the Manager, and that
the Manager, any such interested person or any such organization may have an
interest in the Trust. It is also understood that the Trust and the Manager may
have advisory, management, service or other contracts with other individuals or
entities, and may have other interests and business; provided, that the Manager
shall not undertake any seriously conflicting duties or loyalties which would
affect its prior fiduciary duty to the Trust.
4. Manager's Compensation.
(a) The Trust on behalf of Clearwater Tax-Exempt Bond Fund ("Bond
Fund") shall pay to the Manager, as compensation for the Manager's services to
the Bond Fund and as reimbursement to the Manager for the payment of the Bond
Fund's expenses, a fee at the annual rate of 0.60% of the Bond Fund's average
daily net assets. The management fee payable by the Bond Fund hereunder shall be
calculated and accrued daily as a percentage of the Fund's average daily net
assets and shall be payable quarterly after the end of each calendar quarter on
or before the 15th day of January, April, July and October with respect to the
preceding quarter. In the event of termination of this Contract with respect to
the Bond Fund, the fee provided for in this paragraph shall be computed on the
basis of the period ending on the last business day on which this Contract is in
effect subject to a pro rata adjustment based on the number of days elapsed in
the current quarter as a percentage of the total number of days in such quarter.
(b) The method of determining the net assets of the Fund for purposes
of calculating the fee payable to the Manager hereunder shall be the same as the
method of determining net assets for purposes of establishing the offering and
redemption price of shares of the Fund. If this Contract shall be effective for
only a portion of a calendar quarter with respect to the Fund, the applicable
fee shall be prorated for that portion of such calendar quarter during which
this Contract is in effect.
(c) The Manager may from time to time agree not to impose all or a
portion of its fee with respect to the Fund otherwise payable hereunder (in
advance of the time
3
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such fee or a portion thereof would otherwise accrue) and/or undertake to pay or
reimburse the Fund for all or a portion of its expenses not otherwise required
to be borne or reimbursed by the Manager. Any such fee reduction or undertaking
may be discontinued or modified by the Manager at any time.
5. Assignment and Amendment
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the 1940 Act); provided,
that such termination shall not relieve either party of any liability incurred
hereunder. The terms of this Contract shall not be changed unless such change is
approved in accordance with the requirements of the 1940 Act, as such
requirements are modified by rule, regulation, interpretation or order of the
SEC.
6. Avoidance of Inconsistent Position.
(a) In connection with purchases and sales of portfolio securities for
the account of the Fund, neither the Manager nor any of its Directors, officers
or employees will act as a principal or agent or receive any commission except
as permitted by the 1940 Act. The Manager shall arrange for the placing of all
orders for the purchase and sale of portfolio securities for the Fund's account
with brokers or dealers selected by the Manager. In the selection of such
brokers or dealers and the placing of such orders, the Manager is directed at
all times to seek for the Fund the most favorable execution and net price
available except as described herein. It is understood that it is desirable for
the Fund that the Manager have access to supplemental investment and market
research and security and economic analyses provided by brokers who may execute
brokerage transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Manager is authorized to place
orders for the purchase and sale of securities for a Fund with such brokers,
subject to review by the Trust's Trustees from time to time with respect to the
extent and continuation of this practice. It is understood that the services
provided by such brokers may be useful to the Manager in connection with the
Manager's services (or its affiliates' services) to other clients.
(b) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients, the
Manager, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased in order to obtain the best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such clients.
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7. Effective Period and Termination of this Contract.
(a) This Contract shall become effective on the date hereof and shall
remain in full force and effect as to the Fund until two years from the date set
forth above and from year to year thereafter, but only so long as its
continuance is approved in accordance with the requirements of the 1940 Act, as
such requirements are modified by rule, regulation, interpretation or order of
the SEC, subject to the respective rights of the Trust and the Manager to
terminate this contract as provided in paragraphs (b) and (c) hereof.
(b) The Trust may at any time and without penalty terminate this
Contract as to the Fund or as to the Trust as a whole by not more than sixty
(60) days' nor less than thirty (30) days' written notice given to the Manager;
or
(c) The Manager may at any time and without penalty terminate this
Contract as to the Fund or as to the Trust as a whole by not less than one
hundred twenty (120) days' written notice given to the Trust.
8. Complete Agreement
This Contract states the entire agreement of the parties hereto, and is
intended to be the complete and exclusive statement of the terms hereof. It may
not be added to or changed orally, and may not be modified or rescinded except
by a writing signed by the parties hereto and in accordance with Section 5
hereof and the applicable requirements of the 1940 Act as such requirements are
modified by rule, regulation, interpretation or order of the SEC.
9. Nonliability of the Manager
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or of reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, to
any shareholder of the Trust, or to any person, firm or organization, for any
act or omission in the course of, or connected with, rendering services
hereunder. Nothing herein, however, shall derogate from the Manager's
obligations under applicable federal and state securities laws.
10. Limitation of Liability of the Trustees
Officers and Shareholders. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Trustees of the Trust as Trustees and not individually and that
the obligations of this instrument with respect to a Fund or to the Trust in
general are not binding upon any of the Trustees, officers or shareholders of
the Trust but are binding only upon the assets and property of that Fund or of
the Trust, as the case may be.
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11. Notices
Any notice, instruction, request or other communications required or
contemplated by this Contract shall be in writing and shall be duly given when
deposited by first-class mail, postage prepaid, or consigned to a nationally
recognized overnight delivery service addressed to (or delivered by hand with
confirmation to) the Trust or the Manager at the applicable address set forth
below:
If to Trust:
Clearwater Investment Trust
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
If to Manager:
Clearwater Management Co., Inc.
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
12. Disclosure Statement
The Trust acknowledges receipt of the Manager's written disclosure
statement required by Rule 204-3 under the Investment Advisers Act of 1940 not
less than 48 hours prior to entering into this Contract.
13. Governing Law
This Contract and all performance hereunder shall be governed by,
interpreted, construed and enforced in accordance with the laws of the State of
Minnesota.
14. Severability
Any term or provision of this Contract which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms or provisions of this Contract or affecting
the validity or enforceability of any of the terms or provisions of this
Contract in any other jurisdiction.
15. Counterparts
This Contract may be executed in two or more counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their duly authorized officers and as of the day and year first
written above.
CLEARWATER INVESTMENT TRUST
By:________________________________
Name:
Title:
CLEARWATER MANAGEMENT CO., INC.
By:________________________________
Name:
Title:
7
<PAGE>
FORM OF SUBADVISORY CONTRACT
AGREEMENT made as of the ____ day of _______________, 1999, by and
among CLEARWATER INVESTMENT TRUST, a Massachusetts business trust (the "Trust"),
CLEARWATER MANAGEMENT CO., INC., a Minnesota corporation (the "Manager"), and
SIT FIXED INCOME ADVISORS II, L.L.C., a Minnesota corporation (the "Subadviser")
a subsidiary of Sit Investment Associates, Inc.
W I T N E S S E T H:
WHEREAS, the Manager desires to utilize the services of the Subadviser
as financial counsel with respect to Clearwater Tax-Exempt Bond Fund (the
"Fund"), a separate series of the Trust; and
WHEREAS, the Subadviser is willing to perform such services on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits
herein contained, it is agreed as follows:
1. The Subadviser's Services. The Subadviser will serve the Manager as
financial counsel with respect to the Fund which is under the management of the
Manager pursuant to the Management Contract dated _____________________, 1999
between the Manager and the Trust. Subject to the supervision of the Manager,
the investment policies and restrictions applicable to the Fund as set forth in
the registration statement of the Trust filed with the Securities and Exchange
Commission and such resolutions as from time to time may be adopted by the
Trust's Trustees and furnished to the Subadviser, the Subadviser is hereby
authorized and directed and hereby agrees to develop, recommend and implement
such investment program and strategy for the Fund as may from time to time in
the circumstances appear most appropriate to the achievement of the investment
objectives of the Fund as stated in the aforesaid registration statement, to
provide research and analysis relative to the investment program and investments
of the Fund, to determine what securities should be purchased and sold and what
portion of the assets of the Fund should be held in cash or cash equivalents or
other assets and to monitor on a continuing basis the performance of the
portfolio securities of the Fund. In addition, the Subadviser will place orders
for the purchase and sale of portfolio securities and will advise the Manager
and the custodian for the Fund on a prompt basis of each purchase and sale of a
portfolio security specifying the name of the issuer, the description and amount
or number of shares of the security purchased, the market price, commission and
gross or
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net price, trade date, settlement date and identity of the effecting broker or
dealer. From time to time as the Trustees of the Trust or the Manager may
reasonably request, the Subadviser will furnish to the Trust's officers and to
each of its Trustees reports on portfolio transactions and reports on issues of
securities held by the Fund, all in such detail as any such Trustee or the
Manager may reasonably request. The Subadviser also will inform the Trust's
officers and Trustees on a current basis of changes in investment strategy or
tactics. The Subadviser will make its officers and employees available to meet
with the Trust's officers and Trustees and the Manager's officers and Directors
at least quarterly on due notice to review the investments and investment
program of the Fund in the light of current and prospective economic and market
conditions.
2. Avoidance of Inconsistent Position.
(a) In connection with purchases and sales of portfolio securities for
the account of the Fund, the Subadviser will not act as a principal or agent or
receive any commission except as permitted by the Investment Company Act of
1940, as amended (the "1940 Act"). The Subadviser shall arrange for the placing
of all orders for the purchase and sale of portfolio securities for the Fund's
account with brokers or dealers selected by the Subadviser. In the selection of
such brokers or dealers and the placing of such orders, the Subadviser is
directed at all times to seek for the Fund the most favorable execution and net
price available except as otherwise described herein. It is understood that it
is desirable for the Fund that the Subadviser have access to supplemental
investment and market research and security and economic analyses provided by
brokers who may execute brokerage transactions at a higher cost to the Fund than
may result when allocating brokerage to other brokers on the basis of seeking
the most favorable price and efficient execution. Therefore, the Subadviser is
authorized to place orders for the purchase and sale of securities for the Fund
with such brokers consistent with the requirements of Section 28(e) of the
Securities Exchange Act of 1934, subject to review by the Trust's Trustees from
time to time with respect to the extent and continuation of this practice. It is
understood that the services provided by such brokers may be useful to the
Subadviser in connection with its services (and the services of the Subadviser's
affiliates) to other clients.
(b) On occasions when the Subadviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients, the
Subadviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased in order to obtain the best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Subadviser in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such clients.
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<PAGE>
3. Other Agreements, etc. It is understood that any of the
shareholders, Trustees, officers and employees of the Trust may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the Subadviser, any interested person (as defined in the 1940 Act) of the
Subadviser, any organization in which the Subadviser may have an interest or any
organization which may have an interest in the Subadviser and that the
Subadviser, any such interested person or any such organization may have an
interest in the Trust. It is also understood that the Subadviser, the Manager
and the Trust may have advisory, management, service or other contracts with
other individuals or entities, and may have other interests and businesses. When
a security proposed to be purchased or sold for the Trust is also to be
purchased or sold for other accounts managed by the Subadviser at the same time,
the Subadviser shall make such purchases or sales on a pro rata, rotating or
other equitable basis so as to avoid any one account being preferred over any
other account.
4. Subadviser's Compensation. The Manager shall pay to the Subadviser
for services hereunder a fee at the annual rate provided in the following
schedule based on the Fund's net assets under the Subadviser's management:
Percent Net Assets
0.40% Up to and including $20 million
0.30% Next $30 million
0.25% Next $25 million
0.20% Over $75 million
Such fee shall be calculated and accrued on a monthly basis as a percentage of
the Fund's month end net assets under the Subadviser's management, and shall be
payable quarterly after the end of each calendar quarter on or before the 15th
day of January, April, July and October of each year with respect to the
preceding quarter. If this Contract shall be effective for only a portion of a
calendar quarter, the aforesaid fee shall be prorated for that portion of such
calendar quarter during which this Contract is in effect.
5. Assignment and Amendment. This Contract shall automatically
terminate, without the payment of any penalty, in the event of its assignment
(as defined in the 1940 Act) or in the event of the termination of the
Management Contract between the Trust and the Manager insofar as it applies to
the Fund; provided, that such termination shall not relieve either party of any
liability incurred hereunder. The terms of this Contract shall not be changed
unless such change is approved in accordance with the requirements of the 1940
Act, and as such requirements may be modified by rule, regulation or order of
the Securities and Exchange Commission ("SEC").
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<PAGE>
6. Effective Period and Termination of this Contract.
(a) This Contract shall become effective on the date hereof and shall
remain in full force and effect until two years from the date hereof and from
year to year thereafter, but only so long as its continuance is approved
annually in accordance with the requirements of the 1940 Act, and as such
requirements may be modified by rule, regulation or order of the SEC.
(b) The Trust or the Manager may at any time terminate this Contract by
not more than sixty (60) days' nor less than thirty (30) days' written notice
given to the Subadviser.
(c) The Subadviser may at any time terminate this Contract by not less
than one hundred twenty (120) days' written notice given to the Trust and the
Manager.
7. Complete Agreement. This Contract states the entire agreement of the
parties hereto, and is intended to be the complete and exclusive statement of
the terms hereof. It may not be added to or changed orally, and may not be
modified or rescinded except by a writing signed by the parties hereto and in
accordance with Section 5 hereof and the applicable requirements of the 1940
Act.
8. Nonliability of the Subadviser. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Subadviser, or of
reckless disregard of its obligations and duties hereunder, the Subadviser shall
not be subject to any liability to the Manager or the Trust, to any shareholder
of the Fund, or to any person, firm or organization, for any act or omission in
the course of, or connected with, rendering services hereunder. Nothing herein,
however, shall derogate from the Subadviser's obligations under applicable
federal and state securities laws.
9. Limitation of Liability of the Trustees, Officers and Shareholders.
A copy of the Declaration of Trust of the Trust is on file with the Secretary of
State of The Commonwealth of Massachusetts, and notice is hereby given that this
Contract is executed on behalf of the Trustees of the Trust as Trustees and not
individually and that the obligations under this Contract are not binding upon
any of the Trustees, officers or shareholders of the Trust but are binding only
upon the assets and property of the Fund.
10. Notices. Any notice, instruction, request or other communications
required or contemplated by this Contract shall be in writing and shall be duly
given when deposited by first class mail, postage prepaid, addressed to (or
delivered by hand with confirmation to) the Trust, the Manager or the Subadviser
at the applicable address set forth below:
4
<PAGE>
If to Subadviser:
Sit Fixed Income Advisors II, L.L.C.
4600 Norwest Center
90 South Seventh Street
Minneapolis, MN 555402-4130
If to Trust:
Clearwater Investment Trust
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
If to Manager:
Clearwater Management Co., Inc.
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
11. Disclosure Statement. The Manager and the Trust acknowledge receipt
of the Subadviser's written disclosure statement required by Rule 204-3 under
the Investment Advisers Act of 1940 not less than 48 hours prior to entering
into this Contract.
12. Governing Law. This Contract and all performance hereunder shall be
governed by, interpreted, construed and enforced in accordance with the laws of
the State of Minnesota.
13. Any term or provision of this Contract which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms or provisions of this Contract or affecting
the validity or enforceability of any of the terms or provisions of this
Contract in any other jurisdiction.
14. This Contract may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their duly authorized officers and as of the day and year first
written above.
CLEARWATER INVESTMENT TRUST
By:
Name: Philip W. Pascoe
Title: Chairman
CLEARWATER MANAGEMENT CO., INC.
By:
Name: Philip W. Pascoe
Title: Chairman
SIT FIXED INCOME ADVISORS II, L.L.C.
By:
Name:
Title:
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<PAGE>
The Board of Trustees
Clearwater Investment Trust:
We consent to the use of our report incorporated by reference herein and to the
reference to our Firm under the heading "Independent Accountants" in Part B of
the Registration Statement.
KPMG LLP
Minneapolis, Minnesota
October 15, 1999
