CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
April 30, 2000
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 April 30, 2000 of Clearwater
Growth Fund ("Growth Fund"), Clearwater Small Cap 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 10
Investment Restrictions 13
Portfolio Turnover 15
Brokerage 15
Management, Advisory and Other Services 16
Executive Officers and Trustees 20
Net Asset Value 21
How Are Shares Purchased? 22
Exchange of Shares 22
How Are Shares Redeemed? 23
Taxes 24
Performance Data 29
More Information About the Funds 31
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.
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INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives and Policies
General. Growth Fund, Small Cap Fund and 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 April 30, 2000, 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
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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.
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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
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"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 do not have 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 accelerate payment of the bond or require the
issuer to redeem the bond. In any event, where the
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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 may 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
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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 fund 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). Both
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 sells a security that
it borrows from a securities lender while either contemporaneously owning the
security or having the right to acquire the security
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at no extra cost. If the price of the security has declined at the time the fund
repays the loan with the security it owns, the fund will benefit from the
difference in the price. If the price of the security has increased, the fund
will realize a loss.
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;
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(2) invest in companies for the purpose of exercising control or
management;
(3) purchase any security, including any repurchase agreement maturing in
more than seven days, which is not readily marketable, if more than
15% of the net assets of the fund, taken at market value, would be
invested in such securities; or
(4) sell securities short, except to the extent that the fund
contemporaneously owns or has the right to acquire at no additional
cost securities identical to those sold short.
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, 1997, 1998 and 1999, Growth Fund paid
brokerage commissions in the amounts of $88,681, $8,659 and $49,439
respectively. During the fiscal year ended 1999, the manager's efforts to
improve Growth Fund's tracking error in relation to its benchmark led to an
overall increase in transactions and brokerage commissions paid by the fund.
During the three years ended December 31, 1997, 1998 and 1999, Small Cap Fund
paid brokerage commissions in the amounts of $165,105, $82,266 and $130,935
respectively.
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. The initial term of the contract for the
management of the Growth Fund and Small Cap Fund commenced on March 1, 1998. The
initial term of the contract for the management of the Tax-Exempt Bond Fund
commenced on December 3, 1999.
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%, 1.35% and 0.60% of the
net assets of Growth Fund, Small Cap Fund and Tax-Exempt Bond 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, 1997, 1998 and 1999, the
total dollar amounts paid to the manager by Growth Fund were $1,012,399,
$558,531 and $655,350, respectively. During the three years ended December 31,
1997, 1998 and 1999 the total dollar amounts paid to the manager by Small Cap
Fund were $534,172, $606,738 and $623,390,respectively. The Tax-Exempt Bond Fund
was not in operation prior to 2000.
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. The trust and the manager have filed an application for
an exemptive order with the SEC permitting the manager, subject to the approval
of the board of trustees of the trust, to select subadvisers to serve as
portfolio managers of the funds or to materially modify an existing subadvisory
contract without obtaining shareholder approval of a new or amended subadvisory
contract.
Parametric Portfolio Associates. In connection with the management of Growth
Fund, the manager and Parametric Portfolio Associates ("Parametric") entered
into a subadvisory contract dated November 1, 1997 (the "old subadvisory
contract"). Parametric, a registered investment adviser under the Investment
Advisers Act of 1940, was founded in 1987 as a global equity manager and was a
sub-partnership of PIMCO Advisors, L.P. ("PIMCO"), a publicly traded investment
management organization. On October 31, 1999, PIMCO entered into a merger
agreement pursuant to which a majority ownership of PIMCO would be acquired by
Allianz of America, Inc. In anticipation of this event, the shareholders of the
Growth Fund approved a new subadvisory contract ("new subadvisory contract")
with Parametric at a special meeting of the shareholders held February 22, 2000.
The consummation of this agreement on May 5, 2000 resulted in a change in
control of PIMCO and thereby Parametric. The new subadvisory contract became
effective on May 5, 2000 and is substantially identical to the old advisory
contract. 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 compensation paid to Parametric with
respect to Growth Fund for the year ended
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December 31, 1999 was 0.15% 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 period January 1, 1997 through October 31, 1997 the manager paid
subadvisory fees of $450,753 to Sit Investment Associates, Inc. (the previous
subadviser). During the period from November 1, 1997 through December 31, 1997,
and the full years ended December 31, 1998 and 1999, the manager paid
subadvisory fees of $28,999, $184,724 and $ 219,915, 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 Small Cap Fund's portfolio since January 1,
1994. In connection with the management of Small Cap Fund, the trust, the
manager and KCM entered into asubadvisory contract (the "Small Cap subadvisory
contract") dated April 16, 1999. 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, 1999 was 0.84% 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, 1997, 1998 and 1999, the manager paid
subadvisory fees of $346,861, $357,313 and $390,568, respectively, to KCM.
Sit Fixed Income Advisors II, L.L.C. 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 December 15, 1999 ("Tax-Exempt Bond subadvisory
contract"). Sit, which is organized under the laws of the State of Minnesota and
is registered under the Investment Advisers Act of 1940, devotes 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.
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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:
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 either of the management
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
management 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.
Personal Securities Transactions. The trust, the manager and each subadviser
have each adopted a code of ethics under Rule 17j-1 of the 1940 Act which is
applicable to officers, trustees/directors and designated employees. Each code
permits such persons to engage in personal securities transactions for their own
accounts, including securities that may be purchased or held by a fund, and is
designed to prescribe the means reasonably necessary to prevent conflicts of
interest from arising in connection with personal securities transactions. Each
code is on public file with and available from the SEC.
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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* (54),
President, CEO and Treasurer of the Trust
Chairman of
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
Frederick T. Weyerhaeuser* (68), Trustee
Vice President and Secretary of the Trust
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
Lucy R. Jones (58) Trustee
Private Investor
562 Harrington Road
Wayzata, Minnesota 55391
Lawrence H. King (44), Trustee
President & CEO, Treessentials Company (1989/present)
5 Beebe Avenue
Mendota Heights, Minnesota 55118
Charles W. Rasmussen (33), Trustee
Financial Analyst, U.S. Bank, N.A. (1998/present)
MBA student (1997/1998)
Production Forester, Weyerhaeuser Company (1989/1997)
667 Ivy Falls Court
Mendota Heights, Minnesota 55118
Laura E. Rasmussen (36), Trustee
Private Investor
4365 Virginia Avenue
Shoreview, Minnesota 55126
The business address of all officers of the trust is 332 Minnesota Street, Suite
2100, St. Paul, Minnesota 55101.
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Mr. Lawrence H. King, Mr. Charles W. Rasmussen and Ms. Laura E. Rasmussen are
first cousins. Mr. Frederick T. Weyerhaeuser is an uncle of all three of the
foregoing.
As of March 31, 2000, all of the trustees and officers of the trust, as a group,
owned of record 1.21% of the outstanding shares of Growth Fund, 1.32% of the
outstanding shares of Small Cap Fund and 1.99% of the outstanding shares of the
Tax-Exempt Bond 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, paid each of the
trustees an annual fee of $2,000, plus $500 per meeting attended prior to the
year 2000. After 1999 the trustees are paid $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, 1999. Mr. Weyerhaeuser
was the only current trustee serving in 1999.
Compensation With Respect
Name of Trustees to Trust/Complex
Frederick T. Weyerhaeuser $3,500
Total $3,500
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
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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.
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.
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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.
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.
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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 has elected 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 investment company taxable income and net capital
gains distributed to shareholders in accordance with the Tax Code, each fund
must satisfy certain requirements relating to the sources of its income,
diversification of its assets and timely 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 a portion 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.
In order to qualify as a regulated investment company under the Tax Code, each
fund must, among other things, derive at least 90% of its gross income for each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies ("the 90% income test") and satisfy certain annual
distribution and quarterly diversification requirements. For purposes of the 90%
income test, the character of income earned by certain entities in which a fund
invests that are not treated as corporations (e.g. partnerships or trusts) for
U.S. tax purposes will generally pass through to such fund. Consequently, a fund
may be required to limit its equity investments in such entities that earn fee
income, rental income or other nonqualifying income.
Each of Growth Fund and Small Cap Fund may be subject to foreign withholding or
other foreign taxes on its income (including, taxes on interest, dividends and
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, certain options and futures contracts
relating to foreign currency, foreign currency forward
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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. Under future regulations, any such transactions that are not
directly related to a fund's investments in stock or securities (or its options
contracts or futures contracts with respect to stock or securities) may have to
be limited in order to enable a fund to satisfy the 90% income test. If the net
foreign exchange loss for a year were to exceed a fund's investment company
taxable income (computed without regard to such loss), the resulting ordinary
loss for such year would not be deductible by a fund or its shareholders in
future years.
Passive Foreign Investment Companies. If Growth Fund or Small Cap Fund acquires
any equity interest (under future regulations, generally including not only
stock but also an option to acquire stock such as is inherent in a convertible
bond), 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 that 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 on 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. A fund may limit and/or manage
its holdings in passive foreign investment companies to limit its tax liability
or maximize its return from these investments.
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) 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. However, a fund
must distribute at least annually, all or substantially all of its net taxable
and tax-exempt income, including such accrued income, to shareholders to qualify
as a regulated investment company under the Code and avoid federal income and
excise taxes. Therefore, a fund may have to dispose of its securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements. Management of the
funds will consider these potential adverse tax consequences in evaluating the
appropriateness of these investments.
Options written or purchased and futures contracts entered into by a fund on
certain securities, indices and foreign currencies, as well as certain forward
currency contracts, may cause a fund to recognize gains or losses from
marking-to-market even though such options may not have lapsed, been closed out,
or exercised, or such futures or forward contracts may not have been performed
or closed out. The tax rules applicable to these contracts may affect the
characterization of some capital gains and losses realized by a fund as
long-term or short-term. Certain options, futures and forward contracts relating
to foreign currency may be subject to Section 988 as described above, and
accordingly may produce ordinary income or loss. Additionally, a fund may be
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<PAGE>
required to recognize gain if an option, futures contract, short sale against
the box or other transaction that is not subject to the mark-to-market rules is
treated as a "constructive sale" of an appreciated financial position" held by a
fund under Section 1259 of the Tax Code. Any net mark-to-market gains and/or
gains from constructive sales may also have to be distributed to satisfy the
distribution requirements referred to above even though a fund may receive no
corresponding cash amounts, possibly requiring the disposition of fund
securities or borrowing to obtain the necessary cash. Losses on certain options,
futures or forward contracts and/or offsetting positions (fund securities or
other positions with respect to which a fund's risk of loss is substantially
diminished by one or more options, future or forward contracts) may also be
deferred under the tax straddle rules of the Tax Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available to ameliorate some adverse effects of the tax rules described in this
paragraph. The tax rules applicable to options, forward contracts and straddles
may affect the amount, timing and character of the fund's income and gains or
losses and hence of its distributions to shareholders.
Taxation of Shareholders. Both 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 investment company taxable income,
which includes net investment income (other than exempt-interest dividends paid
by Tax-Exempt Bond Fund, as described below), certain net foreign exchange gains
and the excess of net short-term capital gain over net long-term capital loss
("net capital gain") will be taxable to shareholders as ordinary income.
Distributions from the excess of net long-term capital gain over net short-term
capital loss will be taxable to shareholders as long-term capital gain,
regardless of the shareholder's holding period for the shares. Certain
distributions paid by a fund in January of a given year will be taxable to
shareholders as if received on December 31 of the prior year.
Dividends 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.
Special Tax Issues Affecting Tax-Exempt Bond Fund's Shareholders. The Tax Code
permits tax-exempt interest received by a fund to flow through as tax-exempt
"exempt-interest dividends" to the fund's shareholders, provided that the fund
qualifies as a regulated investment company and at least 50% of the value of the
fund's total assets at the close of each quarter of its taxable year consists of
tax-exempt obligations, i.e., obligations described in Section 103(a) of the Tax
Code. That part of a fund's net investment income which is attributable to
interest from tax-exempt obligations and which is distributed to shareholders
will be designated by Tax-Exempt Bond Fund as an "exempt-interest dividend"
under the Tax Code.
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
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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 swap payments, income from securities lending or
repurchase agreements, certain income from options or futures contracts or
certain stripped tax-exempt obligations or their coupons, income from
disposition of rights to when-issued securities prior to issuance, realized
market discount, or certain other income) will be taxable to shareholders as
ordinary income, whether received in cash or in additional shares.
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.
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 ("private activity bonds") 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-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%.
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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. 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) extended before and after each dividend held in an unleveraged
position and distributed and properly designated by the fund (except for capital
gain dividends received from a regulated investment company) may be eligible for
the 70% dividends received deduction generally available to corporations under
the Tax Code.. 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
transactions or 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 or otherwise incur debt attributable to 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.
Redemptions. Redemptions and exchanges are taxable events for shareholders that
are subject to tax. Shareholders should consult their own tax advisers with
reference to their individual circumstances to determine whether any particular
transaction in fund shares is properly treated as a sale for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. Any loss realized by a shareholder upon the
redemption, exchange or other disposition of shares with a tax holding period of
six months or less will be disallowed to the extent of any exempt-interest
dividends paid with respect to such shares, and any portion of such loss that
exceeds the amount disallowed will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares. Losses on redemptions or other dispositions of shares
may be disallowed under "wash sale" rules in the event of other investments in a
fund (including those made pursuant to reinvestment of dividends and/or capital
gain distributions) within a period of 61 days beginning 30 days before and
ending 30 days after a redemption or other disposition of shares. In such a
case, the disallowed portion of any loss would be included in the federal tax
basis of the shares acquired in the other investments.
Back Up Withholdings and Other Rules. Dividends (other than exempt-interest
dividends), capital gain distributions and the proceeds of redemptions,
exchanges or repurchases of shares
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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. Backup withholding may be inapplicable by the Tax-Exempt
Bond Fund for any year in which such fund reasonably estimates that at least 95%
of its dividends paid with respect to such year are exempt-interest dividends.
Special tax rules apply to IRA or other retirement plans or accounts and to
other special classes of investors, such as tax-exempt organizations, financial
institutions and insurance companies. You should consult with your own tax
adviser regarding the application of any such rules in your particular
circumstances.
Applicability to Shareholders
U.S. Shareholders. 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. The exemption of exempt-interest dividends for federal income tax
purposes does not necessarily result in exemption under the tax laws of any
state or local taxing authority, which vary with respect to the taxation of such
income. Each shareholder is advised to consult his own tax adviser regarding the
exemption, if any, of exempt-interest dividends under the state and local tax
laws applicable to the shareholder 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, possibly 31%
backup withholding unless an effective IRS Form W-8, Form W-8BEN, or other
authorized withholding certificate is on file, and should consult their tax
advisers for information on the application of these rules to their particular
situations.
PERFORMANCE DATA
The funds' average annual total return quotations, as they may appear in the
Prospectus, this SAI or in advertising and sales material, are calculated by
standard methods prescribed by the SEC.
Average annual total return quotations are computed by finding the average
annual compounded rates of return that would cause a hypothetical investment
made on the first day of a designated period (assuming all dividends and
distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
n
P (1 + T) = ERV
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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, 1999, were 24.28%, 25.83% and 16.65% respectively.
The average annual total return of Small Cap Fund for the one and five year
periods ended December 31, 1999 and the period during which the Small Cap Fund
has been managed by KCM, January 1, 1994 through December 31, 1999, were 27.30%,
19.21% and 14.44%, 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:
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.
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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 1940 Act, 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 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
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<PAGE>
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 March 31, 2000, each of the following persons owned five percent
or more of the voting securities of each such fund:
<S> <C> <C> <C>
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Name Total Shares Total Shares Total Shares
Clearwater Growth Fund Clearwater Small Cap Clearwater
Fund Tax-Exempt Bond Fund
- ----------------------------------------- ------------------------ ----------------------- -------------------------
W. John Driscoll* 12.58% 11.32% 20.37%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Frank W. Piasecki* 6.25%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Walter S. Rosenberry, III* 8.56% 6.73% 15.63%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
John W. Titcomb, Jr.** 5.97%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Annette B. Weyerhaeuser 7.83%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Charles A. Weyerhaeuser* 11.44% 9.16%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
David C. Weyerhaeuser* 6.06%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
David M. Weyerhaeuser** 9.18% 8.46%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Frederick T. Weyerhaeuser* 13.77% 17.70% 18.93%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
George H. Weyerhaeuser** 23.69% 17.28%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
William T. Weyerhaeuser** 27.03% 20.89% 28.00%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Wendy W. Weyerhaeuser** 10.73%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
Anne E. Zaccaro* 5.26%
- ----------------------------------------- ------------------------ ----------------------- -------------------------
</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, 1999
accompanies this SAI and is incorporated herein by reference in its entirety.
32
<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.
33
<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 grade 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.
34
<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 likely
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 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.
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.
35
<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 obligations
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.
36
<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.
37
<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, President, CEO Lucy R. Jones
&Treasurer Lawrence H. King
Charles W. Rasmussen
Frederick T. Weyerhaeuser, Vice Laura E. Rasmussen
President & Treasurer 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:
State Street Bank and 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
April 30, 2000
38
