As filed with the Securities and Exchange Commission on October 15, 1999
File No. 33-12289
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 15 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 |X|
AMENDMENT NO. 15 |X|
(Check appropriate box or boxes)
CLEARWATER INVESTMENT TRUST
(Exact name of registrant as specified in charter)
332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394
(Address of principal executive office) Zip Code
Registrant's Telephone Number, including Area Code: (651) 228-0935
Joseph P. Barri, Hale and Dorr LLP, 60 State Street, Boston, MA 02109
(Name and address of agent for service)
It is proposed that this filing will become effective (check appropriate box)
|X| on December 29, 1999, pursuant to paragraph (a)(2) of Rule 485 under the
Securities Act
CLEARWATER INVESTMENT TRUST
CLEARWATER GROWTH FUND
CLEARWATER SMALL CAP FUND
CLEARWATER TAX-EXEMPT BOND FUND
PROSPECTUS
December ___, 1999
The Securities and Exchange Commission has not approved or disapproved of these securities as an investment or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
The information in this prospectus is not complete and may be changed. We may not sell shares of Clearwater Tax-Exempt Bond Fund until the amendment filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
CONTENTS
Investment objectives, key investments, strategies, risks and expenses:
Things you should know before investing........................2
Clearwater Growth Fund.........................................3
Clearwater Small Cap Fund......................................5
Clearwater Tax-Exempt Bond Fund................................7
Other investments and investment strategies...................................9
Management...................................................................10
Buying shares................................................................11
Exchanging and redeeming shares..............................................12
Other things to know about share transactions................................13
Dividends, distributions and taxes...........................................14
Financial highlights.........................................................15
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THINGS YOU SHOULD KNOW BEFORE INVESTING
About the manager
The funds' investment manager is Clearwater Management Co., Inc. The manager has engaged Parametric Portfolio Associates as subadviser to select investments for Clearwater Growth Fund, Kennedy Capital Management as subadviser to select investments for Clearwater Small Cap Fund and Sit Fixed Income Advisors II, L.L.C., a subsidiary of Sit Investment Associates, Inc., as subadviser to select investments for Clearwater Tax-Exempt Bond Fund.
About mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.
Clearwater Investment Trust-2
About each fund's investment objective
Each fund's investment objective is classified as nonfundamental and may be changed by the fund's trustees without shareholder approval.
Clearwater Investment Trust-3
CLEARWATER GROWTH FUND
Investment objectives
The fund seeks long-term growth of capital. Current income, to the extent income is produced by the stocks included in the Russell 1000 Index, is a secondary objective.
Key investments and strategies
The fund is passively managed to track but not replicate the Russell 1000 Index, an unmanaged, capitalization weighted index of the largest 1000 public companies in the United States. The fund holds a broadly diversified portfolio of common stocks comparable to stocks in the Index in terms of economic sector weightings, market capitalization and liquidity.
How the subadviser selects the fund's investments
The subadviser manages the fund so that the fund's holdings match the holdings of the Index as closely as possible without requiring the fund to realize taxable gains. This means that the fund will not buy and sell securities to match changes in the composition of securities in the Index. Instead, the manager adjusts the fund's portfolio periodically to reflect the holdings and weightings of the Index but only after consideration of the fund's policy to minimize realization of taxable gains.
Prior to 1998, the fund was actively managed to meet a different investment objective. To reduce potential realized capital gain from the sale of portfolio securities acquired prior to 1998, the subadviser is gradually adjusting the fund's portfolio to align it with the Index over a period of several years. Until the fund's portfolio is aligned with the Index, the fund may continue to hold securities in amounts that do not match Index weightings and will be subject to the risks of such securities.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not perform as well as other investments, if any of the following occurs:
o The Russell 1000 Index declines generally or performs poorly relative to
other U.S. equity indexes or individual stocks.
o An adverse company specific event, such as an unfavorable earnings report,
negatively affects the stock price of one of the larger companies in the
Index.
o The stocks of companies which comprise the Index fall out of favor with
investors.
Even though the fund invests substantially all of its assets in the common stocks of companies represented in the Russell 1000 Index, the fund will not mirror the Index perfectly because
o The fund must have an amount of cash or other liquid securities available
to meet redemption requests;
o The subadviser manages the fund to reduce the tax liability to the fund's
shareholders; and
o The fund bears certain expenses the Index does not bear.
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Total return and comparative performance
The bar chart indicates the risks of investing in the fund by showing the performance of the fund's shares for each of the past 10 calendar years. The total return table indicates the risk of investing in the fund by comparing the average annual total return of the fund for the periods shown to that of the Russell 1000 Index, an unmanaged index of common stocks of the largest 1000 public companies in the United States. The table assumes redemption of shares at the end of the period and the reinvestment of distributions and dividends. Past performance does not necessarily indicate how the fund will perform in the future.
[GRAPHIC OMITTED]
% Total Return
37.2 -4.1 42.8 4.4 2.2 1.2 32.8 21.5 28.4 22.7 89 90 91 92 93 94 95 96 97 98
Calendar years ended December 31
Quarterly returns
Highest: 21.9% in 4th quarter 1998 Lowest: (16.8)% in 3rd quarter 1990
Year to date: 4.9% through 9/30/99
Average Annual Total Returns (Calendar Years Ended December 31, 1998)
1 Year 5 Years 10 Years Since Inception Inception Date
Clearwater Growth Fund 22.7% 20.8% 17.8% 13.9% 6/19/87
Russell 1000 Index 27.0% 23.4% 19.0% 15.9%
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Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in shares of the fund.
Shareholder fees (paid directly from your investment) None
Annual fund operating expenses (paid by the fund as a % of fund net assets)
Management fees 0.45%
Other expenses 0.00%
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Total annual fund operating expenses 0.45%
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Example
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This example helps you compare the costs of investin in the fund with other mutual funds. Your actual costs may be higher or lower.
Number of years you own your shares 1 year* 3 years* 5 years* 10 years* $ 46 $ 144 $ 252 $ 567
*The example assumes: o You invest $10,000 for the period shown
o You reinvest all distributions and dividends
o The fund's operating expenses remain the same
o Your investment has a 5% return each year
Clearwater Investment Trust - 5
CLEARWATER SMALL CAP FUND
Investment objectives
The fund seeks long-term growth of capital. Current income is a secondary objective.
Key investments and strategies
The fund invests primarily in equity securities of issuers with market capitalizations no greater than the range of capitalizations of the companies included in the Russell 2000 Index at the time of investment. Equity securities consist primarily of exchange traded common and preferred stocks and convertible securities.
How the subadviser selects the fund's investments
The subadviser uses a "bottom up" investment approach in selecting securities based on its fundamental analysis of a security's value. In selecting individual companies for investment, the subadviser looks for companies with:
o Growing and accelerating sales, earnings and cash flow
o Above average growth rates at reasonable market valuation.
o Low valuations relative to long term potential because the market has
overlooked them or because they are temporarily out of favor in the market
due to poor economic conditions, adverse regulatory changes or market
declines.
The subadviser also employs an active sell discipline and will generally sell stock if it determines:
o The company's future fundamentals have deteriorated
o The company's stock has reached full or excessive valuation levels Proceeds
are then reinvested in new securities exhibiting desirable investment
characteristics as described above.
Principal risks of investing in the fund
o The stock market goes down. This risk may be greater if you are a
short-term investor.
o Small company stocks fall out of favor with investors.
o The manager's judgment about the attractiveness or relative value of a
particular security proves to be incorrect.
The fund also has risks associated with investing in small companies. Compared to large companies, small companies, and the market for their common stocks, are likely to:
o Be more sensitive to changes in the economy, earnings results and investor
expectations.
o Have more limited product lines and capital resources.
o Experience sharper swings in market values.
o Be harder to sell at the times and prices the fund thinks appropriate.
o Offer greater potential for gain and loss .
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Total return and comparative performance
The bar chart indicates the risks of investing in the fund by showing the performance of the fund's shares for each of the past 10 calendar years. The total return table indicates the risk of investing in the fund by comparing the average annual total return of the fund for the periods shown to that of the Russell 2000 Index, an unmanaged index of small capitalization stocks. The table assumes redemption of shares at the end of the period and the reinvestment of distributions and dividends. Past performance does not necessarily indicate how the fund will perform in the future.
[GRAPHIC OMITTED]
% Total Return
37.2 -4.1 42.8 4.4 2.2 1.2 32.8 21.5 28.4 22.7 89 90 91 92 93 94 95 96 97 98
Calendar years ended December 31
Quarterly returns
Highest: 25.5% in 3rd quarter 1997 Lowest: (25.1)% in 3rd quarter 1998
Year to date: 9.2% through 9/30/99
Average Annual Total Returns (Calendar Years Ended December 31, 1998)
1 Year 5 Years 10 Years Since Inception Inception Date
Clearwater Small Cap Fund (7.1)% 12.0% n/a 12.0% 12/31/93
Russell 2000 Index (2.5)% 11.9% n/a 11.9%
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Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in shares of the fund.
Shareholder fees (paid directly from your investment) None Annual fund operating expenses (paid by the fund as a % of fund net assets)
Management fees 1 .35%
Other expenses 0 .00%
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Total annual fund operating expenses 1 .35%
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Example
This example helps you compare the costs of investing in the fund with other mutual funds. Your actual costs may be higher or lower.
Number of years you own your shares 1 year* 3 years* 5 years* 10 years* $ 137 $ 428 $ 739 $ 1,624
*The example assumes: o You invest $10,000 for the period shown
o You reinvest all distributions and dividends
o The fund's operating expenses remain the same
o Your investment has a 5% return each year
Clearwater Investment Trust - 6
CLEARWATER TAX-EXEMPT BOND FUND
Investment objectives
The fund seeks high current income that is exempt from federal income tax, consistent with preservation of capital.
Key investments and strategies
The fund invests at least 80% of its assets in municipal securities, which are debt obligations issued by or for the U.S. states, territories and possessions and the District of Columbia. The interest on these securities is generally exempt from regular federal income tax and may also be exempt from federal alternative minimum tax. However, the fund may invest up to 20% of its assets in these securities that generate interest income subject to federal alternative minimum tax.
The fund invests in both revenue bonds, which are backed by and payable only from the revenues derived from a specific facility or specific revenue source and in general obligation bonds, which are secured by the full faith, credit and taxation power of the issuing municipality. The fund generally invests a significant portion of its assets in revenue bonds of health care related facilities and in obligations of municipal housing authorities, which include single family and multi-family mortgage revenue bonds.
The fund primarily invests in securities rated investment grade at the time of purchase or, if unrated, determined to be of comparable quality by the fund's subadviser. However, the fund may invest up to 30% of its assets in securities rated below investment grade or determined to be of comparable quality by the subadviser. The fund may not invest in securities rated at the time of purchase lower than B3 by Moody's or B- by Standard and Poor's Corporation, Fitch IBCA or Duff & Phelps.
The subadviser attempts to maintain an average effective duration for the portfolio of approximately 4 to 8 years. Duration is a measure of total price sensitivity relative to changes in interest rates. Portfolios with longer durations are typically more sensitive to changes in interest rates.
How the subadviser selects the fund's investments
The subadviser selects securities that offer high tax-exempt income. In selecting securities for the fund, the subadviser analyzes the general outlook on the economy and interest rate forecasts, while also evaluating a security's structure, credit quality, yield, maturity, and liquidity.
Principal risks of investing in the fund
o Call or prepayment risk: As a result of declining interest rates, the issuer of a security exercises its right to prepay principal earlier than scheduled, forcing the fund to reinvest in lower yielding securities. Declining interest rates may compel borrowers to prepay mortgages and debt obligations underlying the mortgage-backed securities and manufactured home loan pass-through securities owned by the fund. The proceeds received by the fund from prepayments will likely be reinvested at interest rates lower than the original investment, thus resulting in a reduction of income to the fund. Likewise, rising interest rates could reduce prepayments and extend the life of securities with lower interest rates, which may increase the sensitivity of the fund's value to rising interest rates.
o Credit risk: The issuers or guarantors of securities owned by the fund may default on the payment of principal or interest, or on other obligations to the fund, causing the value of the fund to decrease. The revenue bonds in which the fund invests may entail greater credit risk than the fund's investments in general obligation bonds. In particular, weaknesses in federal housing subsidy programs and their administration may result in a decrease of subsidies available for the payment of principal and interest on certain multi-family housing authority bonds.
o Interest rate risk: An increase in interest rates may lower the fund's value and the overall return on your investment.
o Political and economic risk: Because the fund invests primarily in municipal securities issued by states and their political subdivisions, the fund may be particularly affected by the political and economic conditions and developments in those states. The value of the fund may be adversely affected by future changes in federal or state income tax laws.
o The manager's judgment about the attractiveness or relative value of a particular security proves to be incorrect.
Clearwater Tax-Exempt Bond Fund is not a suitable investment for tax-deferred accounts.
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Total return and comparative performance
No past performance data is available yet for this new fund.
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in shares of the fund.
Shareholder fees (paid directly from your investment) None Annual fund operating expenses (paid by the fund as a % of fund net assets)
Management fees 0.60%
Other expenses 0.00%
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Total annual fund operating expenses 0.60%
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Example
This example helps you compare the costs of investing in the fund with other mutual funds. Your actual costs may be higher or lower.
Number of years you own your shares 1 year* 3 years* 5 years* 10 years*
$61 $192 $ $750
*The example assumes: o You invest $10,000 for the period shown
o You reinvest all distributions and dividends
o The fund's operating expenses remain the same
o Your investment has a 5% return each year
Clearwater Investment Trust - 8
OTHER INVESTMENTS AND INVESTMENT STRATEGIES
Fixed income securities. Each fund may invest in fixed income securities including bonds and notes. Clearwater Growth Fund will generally only invest in fixed income securities represented in the Russell 1000 Index, if any. The funds' fixed income securities may have all types of interest rate payment and reset terms, including fixed rate, adjustable rate, zero coupon, deferred, payment in kind and auction rate features. Each fund's fixed income securities may be of any maturity. Clearwater Growth Fund and Clearwater Small Cap Fund will only invest in fixed income securities rated investment grade.
Credit quality and risk. Securities are investment grade if:
o They are rated in one of the top four long-term rating categories of a nationally recognized statistical rating organization.
o They have received a comparable short-term or other rating
o They are unrated securities that the subadviser believes to be of comparable quality.
The value of a fund's fixed income securities may go down if:
o Interest rates rise, which will make the prices of fixed income securities go down.
o The issuer of a security owned by the fund has its credit rating downgraded or defaults on its obligation to pay principal and/or interest.
Derivatives. Each fund may utilize securities, and securities index futures contracts and options in order to invest cash balances, to maintain liquidity, to meet shareholder redemptions, or to minimize trading costs. Clearwater Growth Fund's use of derivatives will be limited by its avoidance of tax liability and its low turnover rate.
Even a small investment in derivative contracts can have a big impact on the funds' market exposure. Therefore, using derivatives can disproportionately increase losses and reduce opportunities for gains when market prices are changing. A fund may not fully benefit from or may lose money on derivatives if changes in their value do not correspond accurately to changes in the value of the fund's holdings. The other parties to certain derivative contracts present the same types of credit risk as issuers of fixed income securities. Derivatives can also make a fund less liquid and harder to value, especially in declining markets.
Foreign securities. Clearwater Growth Fund and Clearwater Small Cap Fund may each invest up to 25% of its total assets in securities of foreign issuers from a variety of countries, including emerging markets. Clearwater Growth Fund's foreign securities will primarily be limited to those that are represented in the Russell 1000 Index. The fund may, however, hold foreign securities not contained in the Index. Many foreign countries in which the funds may invest have markets that are less liquid and more volatile than markets in the U.S. In some foreign countries, less information is available about foreign issuers and markets because of less rigorous accounting and regulatory standards than in the U.S. Currency fluctuations could erase investment gains or add to investment losses. The risk of investing in foreign securities is greater in the case of emerging markets.
Portfolio turnover. The subadviser for Clearwater Growth Fund believes that a passive portfolio management strategy, combined with tax management techniques, provides the best opportunity for optimal after tax total return. The subadviser also believes that passive portfolio management will limit the fund's portfolio turnover rate to a lower level than if the fund were actively managed. Although the fund does not purchase or sell securities for short-term profits, the fund will sell portfolio securities without regard to the time they have been held whenever such action seems advisable.
Although neither Clearwater Small Cap Fund nor Clearwater Tax-Exempt Bond Fund purchase or sell securities for short-term profits, either fund may engage in active and frequent trading to achieve its principal investment strategies. Frequent trading increases transaction costs, which could decrease a fund's performance, and may result in increased net short-term capital gains, distributions of which are taxable to shareholders as ordinary income.
Temporary defensive investments. When in the judgment of its subadviser, adverse market conditions warrant, each fund may adopt a temporary defensive position by investing up to 100% of its assets in cash and cash equivalents. If a fund takes a temporary defensive position, it may be unable to achieve its investment goal.
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MANAGEMENT
Management services and fees
Clearwater Management Co. serves as the funds' manager. Clearwater is a privately owned registered investment adviser. The manager has been in the investment management business since 1987. As of June 30, 1999, Clearwater had $197 million in assets under management. Clearwater selects and supervises subadvisers for the funds and administers the funds' business operations. For these services for the fiscal year ended December 31, 1998, the manager received a fee from Clearwater Growth Fund and Clearwater Small Cap Fund, equal to 0.45% and 1.35%, respectively, of each fund's average daily net assets.
The portfolio managers
The portfolio managers are primarily responsible for the day-to-day operation of the funds indicated beside their names.
Fund Subadviser Portfolio Since Past 5 years' business experience
Manager
Growth Fund Parametric Portfolio Brian 1997 Managing director of Parametric since 1990.
Associates Langstraat
Small Cap Fund Kennedy Capital Richard Sinise 1994 Chief Investment Officer of Kennedy Capital since
Management 1999 and Vice President since 1979.
Tax-Exempt Bond Fund Sit Fixed Income Michael C. 1999 President of Sit Fixed Income and Senior Vice
Advisors II, L.L.C. Brilley President of Sit Investment Associates since 1984.
Debra A. Sit Vice President of Sit Fixed Income since 1987.
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Year 2000
Many computer software systems in use today cannot distinguish the year 2000 from the year 1900 because of the way dates are encoded and calculated. That failure could have a negative impact on handling securities trades, pricing and account services. Companies in which a fund invests may also be affected by the Year 2000 problem. The investment manager and the funds' service providers have taken steps that they believe are reasonably designed to address the Year 2000 problem with respect to the computer systems that they use and expect that their systems will be adapted in time for that event.
Clearwater Investment Trust - 10
BUYING SHARES
Investment minimums
Initial and subsequent investments in any fund must be at least $1,000.
Buying shares by mail
Initial purchases
o For initial purchases of any fund's shares, complete the Purchase Order
and Account Application and send it with your check to Fiduciary
Counselling, Inc., the funds' transfer agent. An account application is
included with this prospectus. If you need additional copies, call
1-888-228-0935.
o Send completed purchase application together with a check for the
amount of the investment to:
Clearwater Investment Trust
(specify fund)
c/o Fiduciary Counselling, Inc. 332 Minnesota Street, Suite 2100 St. Paul, MN 55101-1394
o Checks drawn on foreign banks must be payable in U.S. dollars and have
the routing number of the U.S. bank encoded on the check.
o All purchase orders must include a date on which the order is to be
effective. If no date is specified, the purchase order will be filled
at the net asset value next computed.
Subsequent purchases
o Send a check for the amount of the subsequent purchase by mail directly
to the transfer agent at the address above.
o Be sure to include your fund and account number on checks for
subsequent investments.
Clearwater Investment Trust - 11
EXCHANGING AND REDEEMING SHARES
Exchange privilege
Contact the transfer agent to exchange into other Clearwater funds. An exchange of shares from one fund to another is a taxable transaction.
o You may exchange shares only for shares of another Clearwater fund.
o You must meet the minimum investment amount for each fund unless you
are exchanging into a fund you already own.
o Your fund may suspend or terminate your exchange privilege if you
engage in an excessive pattern of exchanges.
To learn more about the exchange privilege contact the transfer agent or consult the statement of additional information.
Exchanging and redeeming shares by phone
You may exchange or redeem shares by telephone. Redemption proceeds can be sent
by check to your address of record. You may be asked to provide proper
identification information. Telephone exchange and redemption requests may be
made by calling the transfer agent at (888) 228-0935 between 9:00 a.m. and 4:00
p.m. Eastern time on any day the New York Stock Exchange is open. If telephone
exchange or redemptions are not available for any reason, you may use the fund's
exchange or redemption by mail procedure described elsewhere in this prospectus.
Redemptions by mail
You may redeem some or all of your shares by sending a written request to:
Clearwater Investment Trust
(specify fund)
c/o Fiduciary Counselling, Inc. 332 Minnesota Street, Suite 2100 St. Paul, MN 55101-1394
The written request for redemption must be in good order. A request in good order means that you have provided the following information. Your request will not be processed without this information.
o Name of the fund
o Account number
o Dollar amount or number of shares being redeemed
o Signature of each owner exactly as account is registered
o Other documentation required by Fiduciary Counselling, Inc. including,
if applicable, endorsed share certificates
o To be in good order, your request must include a signature guarantee.
You can obtain a signature guarantee from most banks, dealers, brokers,
credit unions and federal savings and loans, but not from a notary
public.
Redemption payments
In all cases, your redemption price is the net asset value per share next determined after your request is received in good order. Redemption proceeds normally will be sent within seven days. However, if you recently purchased your shares by check, your redemption proceeds will not be sent to you until your original check clears. Your redemption proceeds will be sent by check to your address of record. Redemption proceeds may be sent to an address other than that of record if the request includes a signature guarantee.
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OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
Each fund has the right to:
o Suspend the offering of shareS
o Waive or change minimum and additional investment amountS
o Reject any purchase or exchange order
o. Change, revoke or suspend the exchange privilege
o. Suspend telephone transactions
o Suspend or postpone redemptions of shares on any day when trading on
the New York Stock Exchange is restricted, or as otherwise permitted by
the Securities and Exchange Commission
o Pay redemption proceeds consisting of portfolio securities or non-cash
assets for redemptions of greater than $1 million
Small account balances
If your account falls below $1,000 because of a redemption of fund shares, the fund may ask you to bring your account up to the minimum requirement. If your account is still below $1,000 after 30 days, the fund may close your account and send you the redemption proceeds.
Share price
You may buy, exchange or redeem shares at the net asset value per share next determined after receipt of your request in good order. Each fund's net asset value per share is the value of its assets minus its liabilities divided by the total shares outstanding. Each fund calculates its net asset value when regular trading closes on the New York Stock Exchange (normally 4:00 p.m., Eastern time) if such calculation is then required to properly process a purchase order, redemption request or exchange request for shares of the fund. The New York Stock Exchange is closed on weekends and certain holidays listed in the Statement of Additional Information.
Each fund generally values its securities based on market prices or quotations. When market prices are not available, or when the manager believes they are unreliable or that the value of a security has been materially affected by events occurring after a foreign exchange closes, the funds may price those securities at fair value. Fair value is determined in accordance with procedures approved by the funds' board. A fund that uses fair value to price securities may value those securities higher or lower than another fund using market quotations to price the same securities. International markets may be open on days when U.S. markets are closed and the value of foreign securities owned by a fund could change on days when you cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place your order with the transfer agent before the New York Stock Exchange closes. If the New York Stock Exchange closes early, you must place your order prior to the actual closing time. Otherwise, you will receive the next business day's price.
Clearwater Investment Trust - 13
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds normally pay dividends and distribute capital gain, if any, as follows:
Dividends, distributions and taxes
Annual distributions of income and capital gain are made at the end of the year in which the income or gain is realized, or the beginning of the next year.
Clearwater Growth Fund and Clearwater Small Cap Fund each expects to make annual distributions primarily from capital gain. The funds may pay additional distributions and dividends at other times if necessary to avoid a federal tax.
Clearwater Tax-Exempt Bond Fund declares any dividends from net investment income daily and pays the dividends monthly. The fund intends to meet certain federal tax requirements so that distributions of tax-exempt interest income may be treated as "exempt-interest dividends." These dividends are not subject to regular federal income tax. The fund may invest up to 25% of its assets in municipal securities subject to the alternative minimum tax. Any portion of exempt interest dividends attributable to interest on these securities may increase some shareholders' alternative minimum tax. All exempt-interest dividends may increase a corporate shareholder's alternative minimum tax, if any. The fund expects that its distributions will consist primarily of exempt-interest dividends. The fund's exempt-interest dividends may be subject to state and local taxes.
Capital gain distributions and dividends are reinvested in additional fund shares. Alternatively, you can instruct the transfer agent to have your distributions and/or dividends paid in cash. You can change your choice at any time to be effective as of the next distribution or dividend, except that any change given to the transfer agent less than five days before the payment date will not be effective until the next distribution or dividend is made.
In general, redeeming and exchanging shares and receiving distributions other than exempt-interest dividends (whether in cash or additional shares) are all taxable events.
Transaction Federal income tax status
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned
more than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Taxable dividends Ordinary income
Exempt-interestdividends (Tax-Exempt Bond Exemptfrom regular federal
Fund only) income tax; may in some cases
increase liability for
alternative minimum tax
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Long-term capital gain distributions are taxable to you as long-term capital gain regardless of how long you have owned your shares. You may want to avoid buying shares when a fund is about to declare a capital gain distribution or a taxable dividend, because it will be taxable to you even though it may actually be a return of a portion of your investment.
After the end of each year, the funds will provide you with information about the distributions and dividends that you received and any redemptions of shares during the previous year. If you do not provide a fund with your correct taxpayer identification number and any required certifications, you may be subject to back-up withholding of 31% of your distributions, dividends (other than exempt-interest dividends) and redemption proceeds. Because each shareholder's circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in a fund.
Clearwater Investment Trust - 14
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the performance of each share for the past 5 years. Certain information reflects financial results for a single share. Total return represents the rate that a shareholder would have earned (or lost) on a fund share assuming reinvestment of all dividends and distributions. The information in the following tables was audited by KPMG LLP, independent auditors, whose report, along with the fund's financial statements, are included in the annual report (available upon request). Financial highlights for Clearwater Tax-Exempt Bond Fund are not shown because the fund had not yet commenced investment operations during the periods shown.
For a share of capital stock outstanding throughout each year ended December 31:
Clearwater Growth Fund
For the six For the year ended December 31
months ended
June 30, 1999
(unaudited
1998 1997(a) 1996 1995 1994
Net asset value, beginning of period $25.92 $21.17 $17.88 $17.01 $13.62 $14.49
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Income from investment operations
Net investment income (loss) 0.05 0.09 (0.01) (0.01) 0.01 0.06
Net realized and unrealized gain (loss) 2.23 4.71 5.08 3.68 4.43 0.11
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total from investment operations 2.28 4.80 5.07 3.67 4.44 0.17
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Less distributions:
Dividends from net investment income 0.00 (0.05) 0.00 0.00 (0.01) (0.06)
Distributions from realized gains 0.00 0.00 (1.78) (2.80) (1.04) (0.98)
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total distributions 0.00 (0.05) (1.78) (2.80) (1.05) (1.04)
Net asset value, end of period $28.20 $25.92 $21.17 $17.88 $17.01 $13.62
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Total return(b) 8.8% 22.7% 28.4% 21.6% 32.6% 1.2%
Net assets, end of period (000's) $148,438 134,773 106,859 93,922 84,775 65,999
------------------------------------------------- ----------------- ----------- ------------- ------------ ----------- ------------
Ratio of expenses to average net assets(c) 0.23% 0.45% 0.98% 1.08% 1.08% 1.07%
Ratio of net investment income (loss) to 0.17% 0.39% (0.06)% (0.07)% 0.06% 0.39%
average net assets
Portfolio turnover rate (excluding short-term 5.81% 3.65% 38.16% 75.90% 58.64% 70.69%
securities)
|
(a) Effective November 1, 1997, Parametric Portfolio Associates became the subadviser to the fund.
(b) Total return figures are based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value.
(c) The year 1996 includes federal and state taxes of 0.01%.
Clearwater Investment Trust - 15
For a share of capital stock outstanding throughout each year ended December 31:
Clearwater Small Cap Fund
For the six months For the year ended December 31
ended June 30, 1999
1998 1997 1996 1995 1994(a)
Net asset value, beginning of period $13.08 $15.24 $12.74 $11.47 $9.89 $12.26
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Income from investment operations
Net investment income (loss) (0.02) (0.04) (0.02) 0.00 0.04 0.17
Net realized and unrealized gain (loss) 1.48 (1.04) 5.14 1.71 2.56 (0.99)
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total from investment operations 1.46 (1.08) 5.12 1.71 2.60 (0.82)
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income 0.00 0.00 0.00 0.00 (0.04) (0.17)
Excess distributions from net 0.00 0.00 0.00 (0.01) 0.00 0.00
investment income
Distributions from realized gains 0.00 (1.08) (2.62) (0.42) (0.98) (1.38)
Tax return of capital 0.00 0.00 0.00 (0.01) 0.00 0.00
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total distributions 0.00 (1.08) (2.62) (0.44) (1.02) (1.55)
Net asset value, end of period $14.54 $13.08 $15.24 $12.74 $11.47 $9.89
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Total return(b) 11.2% (7.1)% 40.2% 15.0% 26.3% (6.7)%
Net assets, end of period (000's) $48,573 39,217 40,838 32,774 26,826 17,998
--------------------------------------------- -------------------- ------------ ----------- ----------- ----------- -----------
Ratio of expenses to average net assets(c) 0.67% 1.36% 1.35% 1.37% 1.35% 1.40%
Ratio of net investment income (loss) to (0.17)% (0.26%) (0.17)% 0.00% 0.36% 1.61%
average net assets
Portfolio turnover rate (excluding 52.69% 88.27% 92.22% 89.25% 77.46% 122.88%
short-term securities)
|
(a) Effective January 1, 1994, Kennedy Capital Management became the subadviser to the fund.
(b) Total return figures are based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value.
(c) Includes federal and state taxes of .01% in 1998 and .04% in 1996.
Clearwater Investment Trust - 16
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond Fund
Additional Information About the Funds
Shareholder Reports. Annual and semiannual reports to shareholders provide additional information about the funds' investments. These reports discuss the market conditions and investment strategies that significantly affected each fund's performance during its last fiscal year.
Statement of Additional Information. The statement of additional information provides more detailed information about each fund. It is incorporated by reference into (is legally a part of) this combined prospectus.
How to Obtain Additional Information.
o You can make inquiries about the fund or obtain shareholder reports or the statement of additional information (without charge) by contacting the transfer agent, by calling 1-888-228-0935 or writing the funds at 332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394.
o You can also review the funds' shareholder reports, prospectus and statement of additional information at the Securities and Exchange Commission's Public Reference Room in Washington, D.C. Information about the public reference room may be obtained by calling 1-800-SEC-0330. Copies of these materials may be obtained, upon payment of a duplicating fee, by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-60019. You can get the same reports and information free from the Commission's internet web site--http://www.sec.gov.
EXECUTIVE OFFICERS TRUSTEES Philip W. Pascoe Philip W. Pascoe Chairman of the Board Samuel B. Carr, Jr. Robert J. Phares Treasurer Stanley R. Day, Jr. Frederick T. Weyerhaeuser INVESTMENT MANAGER CLEARWATER GROWTH FUND SUBADVISER Clearwater Management Co., Inc. Parametric Portfolio Associates 332 Minnesota Street, Suite 2100 701 Fifth Avenue, Suite 7 St. Paul, MN 55101 Seattle, WA 98104-7090 CUSTODIAN CLEARWATER SMALL CAP FUND SUBADVISER Investors Fiduciary Trust Company Kennedy Capital Management 801 Pennsylvania 10829 Olive Boulevard Kansas City, MO 64105 St. Louis, MO 63141-7739 COUNSEL CLEARWATER TAX-EXEMPT BOND FUND SUBADVISER Hale and Dorr LLP Sit Fixed Income Advisors II, L.L.C. 60 State Street 4600 Norwest Center Boston, MA 02109 Minneapolis, MN 55402 INDEPENDENT ACCOUNTANTS TRANSFER AGENT AND SHAREHOLDER SERVICES KPMG LLP Fiduciary Counselling, Inc. 4200 Norwest Center 332 Minnesota Street, Suite 2100 90 South 7th Street St. Paul, MN 55101-1394 Minneapolis, MN 55402 (888) 228-0935 |
If someone makes a statement about the funds that is not in this prospectus, you should not rely upon that information. The funds are not offering to sell shares of the funds to any person to whom the funds may not lawfully sell their shares.
(Investment Company Act file no. 811-05038)
December __, 1999
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (SAI) is not a Prospectus, but should be read in conjunction with the Prospectus dated December __,1999 of Clearwater Growth Fund ("Growth Fund"), Clearwater Small Cap Fund, formerly named Clearwater Value Fund ("Small Cap Fund") and Clearwater Tax-Exempt Bond Fund ("Tax-Exempt Bond Fund"). A copy of the Prospectus can be obtained free of charge by calling Fiduciary Counselling, Inc. at 888-228-0935 or by written request to Fiduciary Counselling, Inc. at 332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394 (Attention: Clearwater Investment Trust). The most recent Annual Report to Shareholders accompanies this SAI and is incorporated herein.
CONTENTS
Investment Objectives And Policies 2 Risk Factors 12 Investment Restrictions 15 Portfolio Turnover 17 Brokerage 17 Management, Advisory and Other Services 18 Executive Officers and Trustees 21 Net Asset Value 22 How Are Shares Purchased? 23 Exchange of Shares 24 How Are Shares Redeemed? 24 Taxes 25 Performance Data 29 More Information About the Funds 30 Financial Statements 32 Appendix A - Descriptions of Ratings 33 |
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
The information in this statement of additional information is not complete and may be changed. We may not sell shares of Clearwater Tax-Exempt Bond Fund until the amendment filed with the Securities and Exchange Commission is effective. This statement of additional information is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
INVESTMENT OBJECTIVES AND POLICIES INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives and Policies
General. Clearwater Growth Fund ("Growth Fund"), Clearwater Small Cap Fund
("Small Cap Fund") and Clearwater Tax-Exempt Bond Fund ("Tax-Exempt Bond Fund")
(each, a "fund") are each separate, diversified investment portfolios of
Clearwater Investment Trust (the "trust"), an open-end, management investment
company organized under the laws of the Commonwealth of Massachusetts. The
prospectus of Growth Fund, Small Cap Fund and Tax-Exempt Bond Fund dated
December __, 1999, identifies the investment objectives and principal investment
policies of the funds.
Under normal circumstances, Growth Fund will invest substantially all of its assets in the common stocks of companies represented in the Russell 1000 Index. The fund may invest in certain short-term fixed income securities such as cash equivalents, although cash and cash equivalents are normally expected to represent less than 1% of the fund's total assets. Under normal market conditions, Small Cap Fund invests at least 65% of its total assets in equity and fixed income securities of companies that have total equity market capitalizations no greater than the range of capitalizations of companies contained in the Russell 2000 Index. Under normal circumstances, Tax-Exempt Bond Fund primarily invests in municipal securities, which are debt obligations issued by or for the U.S. states, territories and possessions and the District of Columbia.
Other policies of the funds are set forth below.
EQUITY SECURITIES (each fund)
Each of Growth Fund's and Small Cap Fund's portfolio of equity securities may consist of common and preferred stocks that trade on national securities exchanges or are quoted on the National Association of Securities Dealers' NASDAQ National Market and either have the potential for capital appreciation or pay dividends or both, as well as securities convertible into such common or preferred stocks. Tax-Exempt Bond Fund's investment in equity securities will be limited to other open-end and closed-end tax exempt investment companies.
Common Stocks. Each fund invests primarily in common stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of the entity's preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do so.
Preferred Stocks and Convertible Securities. Each fund may invest in convertible debt and preferred stocks. Convertible debt securities and preferred stock entitle the holder to acquire the issuer's stock by exchange or purchase at a predetermined rate. Convertible securities are subject both to the credit and interest rate risks associated with fixed income securities and to the stock market risk associated with equity securities.
Warrants. Each fund may invest in warrants. Warrants acquired entitle the fund to buy common stock from the issuer at a specified price and time. Warrants are subject to the same market risks as stocks, but may be more volatile in price. Each fund's investment in warrants
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.
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
"nonappropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition to the "nonappropriation" risk, municipal leases have additional risk aspects because they represent a relatively new type of financing that has not yet developed the depth of marketability associated with conventional bonds; moreover, although the obligations will be secured by the leased equipment, the disposition of the equipment in the event of non-appropriation or foreclosure might, in some cases, prove difficult. In addition, in certain instances the tax-exempt status of the obligations will not be subject to the legal opinion of a nationally recognized "bond counsel," as is customarily required in larger issues of municipal securities.
Municipal lease obligations, except in certain circumstances, are considered illiquid by the staff of the Securities and Exchange Commission ("SEC"). Municipal lease obligations held by the fund will be treated as illiquid unless they are determined to be liquid pursuant to guidelines established by the fund's Board of Trustees. Under these guidelines, the subadviser will consider factors including, but not limited to 1) whether the lease can be canceled, 2) what assurance there is that the assets represented by the lease can be sold, 3) the issuer's general credit strength (e.g. its debt, administrative, economic and financial characteristics), 4) the likelihood that the municipality will discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (e.g. the potential for an "event of non-appropriation"), and 5) the legal recourse in the event of failure to appropriate.
Housing Authority Bonds. Tax-Exempt Bond Fund may invest without limitation in obligations of municipal housing authorities which include both single family and multifamily mortgage revenue bonds. Weaknesses in federal housing subsidy programs and their administration may result in a decrease of subsidies available for payment of principal and interest on multifamily housing authority bonds. Economic developments, including fluctuations in interest rates and increasing construction and operating costs, may also adversely impact revenues of housing authorities. In the case of some housing authorities, inability to obtain additional financing could also reduce revenues available to pay existing obligations. Mortgage revenue bonds are subject to extraordinary mandatory redemption at par in whole or in part from the proceeds derived from prepayments of underlying mortgage loans and also from the unused proceeds of the issue within a stated period of time.
The exclusion from gross income for federal income tax purposes of the interest on certain housing authority bonds depends on qualification under relevant provisions of the Internal Revenue Code of 1986, as amended (the "Tax Code") and on other provisions of federal law. These provisions of federal law contain certain ongoing requirements relating to the cost and location of the residences financed with the proceeds of the single family mortgage bonds and the income levels of occupants of the housing units financed with the proceeds of the single and multifamily housing bonds. While the issuers of the bonds, and other parties, including the originators and servicers of the single family mortgages and the owners of the rental projects financed with the multifamily housing bonds, covenant to meet these ongoing requirements and generally agree to institute procedures designed to insure that these requirements are met, there can be no assurance that these ongoing requirements will be consistently met. The failure to meet these requirements could cause the interest on the bonds to become taxable, possibly retroactively from the date of issuance, thereby reducing the value of the bonds, subjecting shareholders to unanticipated tax liabilities and possibly requiring the fund to sell the bonds at the reduced value. Furthermore, any failure to meet these ongoing requirements might not constitute an event of default under the applicable mortgage which might otherwise permit the holder to
accelerate payment of the bond or require the issuer to redeem the bond. In any event, where the mortgage is insured by the Federal Housing Administration ("FHA"), the consent of the FHA may be required before insurance proceeds would become payable to redeem the mortgage subsidy bonds.
Industrial Development Revenue Bonds. Tax-Exempt Bond Fund may invest in industrial development revenue bonds. Industrial development revenue bonds are backed by the user of the facilities and the specific revenues of the project to be financed. The credit quality of industrial development bonds is usually directly related to the credit standing of the user of the facilities or the credit standing of a third-party guarantor or other credit enhancement participant, if any.
Zero Coupon Securities (Tax-Exempt Bond Fund only). Tax-Exempt Bond Fund is permitted to invest in zero coupon securities. Such securities are debt obligations which do not entitle the holder to periodic interest payments prior to maturity and are issued and traded at a discount from their face amounts. The discount varies depending on the time remaining until maturity, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity of the security approaches and this accretion (adjusted for amortization) is recognized as interest income. Zero coupon securities can be sold prior to their due date in the secondary market at the then-prevailing market value which depends primarily on the time remaining to maturity, prevailing levels of interest rates and the perceived credit quality of the issuer. The market prices of zero coupon securities are more volatile than the market prices of securities of comparable quality and similar maturity that pay interest periodically and may respond to a greater degree to fluctuations in interest rates than do such non-zero coupon securities.
DERIVATIVES
Options on Securities and Securities Indices (each fund). Growth Fund may write
(sell) covered call and put options and purchase call and put options on any
securities in which it may invest or on any securities index composed of
securities in which it may invest. Growth Fund's use of derivatives will be
limited by its intention to seek generally to avoid realizing taxable gains and
its low turnover rate.
Small Cap Fund may write (sell) covered call options in standard contracts traded on national securities exchanges or those which may be traded over-the-counter ("OTC") and quoted in a NASDAQ market, provided that Small Cap Fund continues to own the securities covering each call until the call has been exercised or has expired, or until Small Cap Fund has purchased a closing call to offset its obligations to deliver securities pursuant to the call it has written.
Neither Growth Fund nor Small Cap Fund may write covered call options on more than 25% of the market value of any single portfolio security. In addition, neither fund has a present intention of writing covered call options on portfolio securities with an aggregate market value exceeding 5% of the fund's net assets.
Tax-Exempt Bond Fund may purchase and sell exchange traded put and call options on debt securities of an amount up to 5% of its net assets for the purpose of hedging. The fund may, from time to time, write exchange-traded call options on debt securities, but the fund will not write put options. A put option (sometimes called a standby commitment) gives the purchaser of the option, in return for a premium paid, the right to sell the underlying security at a specified price during the term of the option. The writer of the put option receives the premium and has the
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
futures contract, as contrasted with the direct investment in such a contract, gives the purchaser the right, in return for the premium paid, to assume a position in an interest rate futures contract at a specified exercise price at any time prior to the expiration date of the option. Options on interest rate futures contracts are similar to options on securities, which give the purchaser the right, in return for the premium paid, to purchase or sell securities.
A call option gives the purchaser of such option the right to buy, and obliges its writer to sell, a specified underlying futures contract at a stated exercise price at any time prior to the expiration date of the option. A purchaser of a put option has the right to sell, and the writer has the obligation to buy, such contract at the exercise price during the option period. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing price of the interest rate futures contract on the expiration date. The potential loss related to the purchase of an option on interest rate futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option is fixed at the point of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset values of the fund.
Purchase of Put Options on Futures Contracts. Tax-Exempt Bond Fund may purchase put options on futures contracts if the subadviser anticipates a rise in interest rates. Because the value of an interest rate or municipal bond index futures contract moves inversely in relation to changes in interest rates, a put option on such a contract becomes more valuable as interest rates rise. By purchasing put options on futures contracts at a time when the Adviser expects interest rates to rise, the Funds will seek to realize a profit to offset the loss in value of its portfolio securities.
Purchase of Call Options on Futures Contracts. Tax-Exempt Bond Fund may purchase call options on futures contracts if the subadviser anticipates a decline in interest rates. The purchase of a call option on an interest rate or index futures contract represents a means of obtaining temporary exposure to market appreciation at limited risk. Because the value of an interest rate or index futures contract moves inversely in relation to changes to interest rates, a call option on such a contract becomes more valuable as interest rates decline. The fund will purchase a call option on a futures contract to hedge against a decline in interest rates in a market advance when the fund is holding cash. The fund can take advantage of the anticipated rise in the value of long-term securities without actually buying them until the market is stabilized. At that time, the options can be liquidated and the fund's cash can be used to buy long-term securities.
The fund expects that new types of futures contracts, options thereon, and put and call options on securities and indexes may be developed in the future. As new types of instruments are developed and offered to investors, the subadviser will be permitted to invest in them provided that the subadviser believes their quality is equivalent to the fund's quality standards.
Swap Agreements (Tax-Exempt Bond Fund only). Tax-Exempt Bond Fund may enter into swap agreements. Swap agreements are two party contracts entered into primarily by institutional
investors in which two parties agree to exchange the returns (or differential rates of return) earned or realized on particular predetermined investments or instruments.
The fund may enter into swap agreements for purposes of attempting to obtain a particular investment return at a lower cost to the fund than if the fund had invested directly in an instrument that provided that desired return. The fund bears the risk of default by its swap counterparty and may not be able to terminate its obligations under the agreement when it is most advantageous to do so. In addition, certain tax aspects of swap agreements are not entirely clear and their use, therefore, may be limited by the requirements relating to the qualification of the fund as a regulated investment company under the Tax Code.
OTHER INVESTMENT TECHNIQUES
Repurchase Agreements (each fund). In order to earn income for periods as short as overnight, each fund may enter into repurchase agreements with commercial and investment banks that furnish collateral at least equal in value or market price to the amount of their repurchase obligations. Under a repurchase agreement, a fund acquires a money market instrument (generally a U.S. Government security) which is subject to resale by the fund on a specified date (within one week) at a specified price (which price reflects an agreed-upon interest rate effective for the period of time the fund holds the investment and is unrelated to the interest rate on the instrument). Repurchase agreements entered into by a fund will be fully collateralized by obligations with a market value, monitored daily by the portfolio manager, of not less than 100% of the obligation plus accrued interest. Collateral will be held in a segregated, safekeeping account for the benefit of the fund. The staff of the SEC has taken the position that repurchase agreements of more than seven days' duration are illiquid securities.
Lending of Portfolio Securities (Growth Fund and Small Cap Fund only). Each of Growth Fund and Small Cap Fund may earn additional income by lending portfolio securities to broker/dealers that are members of the New York Stock Exchange and other financial institutions under agreements which require that the loans be secured continuously by collateral in cash, cash equivalents or United States Treasury bills maintained on a current basis at an amount at least equal to the market value of the securities loaned. However, neither fund will make loans of portfolio securities that represent more than 5% of its net assets. A fund will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and also will receive compensation based on investment of the collateral. A fund will not, however, have the right to vote any securities having voting rights during the existence of the loan, but will attempt to call the loan in anticipation of an important vote to be taken among holders of the securities or of an opportunity to give or withhold consent on a material matter affecting the investment.
Temporary Defensive Investments (each fund). When in the judgment of its subadviser adverse market conditions warrant, each fund may adopt a temporary defensive position by investing up to 100% of its assets in cash, repurchase agreements and money market instruments, including short-term U.S. Government securities, bankers' acceptances, commercial paper rated at least A3 by Standard & Poor's, Prime by Moody's or, if not rated, determined to be of equivalent quality by the fund's subadviser.
Short Sales Against the Box (each fund). Each fund may engage in short sales against the box. In a short sale against the box, the fund agrees to sell at a future date a security that it either contemporaneously owns or has the right to acquire at no extra cost. If the price of the
security has declined at the time the fund is required to deliver the security, the fund will benefit from the difference in the price. If the price of the security has increased, the fund will be required to pay the difference.
When-Issued Securities (each fund). Each fund may purchase securities on a when-issued basis and may purchase or sell securities on a delayed delivery basis. These terms refer to securities that have been created and for which a market exists, but which are not available for immediate delivery.
RISK FACTORS
Foreign Securities (Growth Fund and Small Cap Fund). Changes in foreign currency exchange rates will affect the value of foreign securities that are denominated in foreign currencies and investment in such securities may result in higher expenses due to costs associated with converting U.S. dollars to foreign currencies. In addition, investment in foreign securities generally presents a greater degree of risk than investment in domestic securities because of the possibility of less publicly-available financial and other information, more volatile and less liquid securities markets, less securities regulation, higher brokerage costs, imposition of foreign withholding and other taxes, war, expropriation or other adverse governmental actions.
Fixed Income Securities (each fund). Corporate debt obligations are subject to the risk of an issuer's inability to meet principal and interest payments on obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of creditworthiness of the issuer and general market liquidity. Zero coupon securities are securities sold at a discount to par value and on which interest payments are not made during the life of the security. Each fund's investments in zero coupon, stripped or certain other fixed income securities with original issue discount (or market discount if an election is made to take market discount into account annually) could require the fund to sell certain of its portfolio securities in order to generate sufficient cash to satisfy certain income distribution requirements.
High Yield Securities (Tax-Exempt Bond Fund only) Tax-Exempt Bond Fund may invest up to 30% of its assets in securities rated below investment-grade. Securities rated below investment-grade are referred to as high yield securities or "junk bonds." Junk bonds are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest. Investment in such securities involves substantial risk. Issuers of junk bonds may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally are greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of junk bonds may be more likely to experience financial stress, especially if such issuers are highly leveraged. In addition, the market for junk bonds is relatively new and has not weathered a major economic recession, and it is unknown what effects such a recession might have on such securities. During such periods, such issuers may not have sufficient cash flows to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to the creditors of the issuer. While most of the junk bonds in which the funds may invest do not include securities
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.
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.
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.
A fund may not:
(1) invest more than 5% of its assets in commodities or commodity
contracts, except that each fund may invest without regard to
the 5% limitation in interest rate futures contracts, options
on securities, securities indices, currency and other
financial instruments, futures contracts on securities,
securities indices, currency and other financial instruments,
options on such futures contracts, forward commitments,
securities index put and call warrants and repurchase
agreements entered into in accordance with the fund's
investment policies;
(2) underwrite any issue of securities;
(3) make loans to any person except by (a) the acquisition of debt
securities and making portfolio investments, (b) entering into
repurchase agreements, or (c) lending portfolio securities;
(4) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions;
(5) borrow money or issue senior securities, except as permitted
by the Investment Company Act of 1940, as amended (the "1940
Act");
(6) invest more than 25% of its total assets in securities of
issuers in any one industry except that this limitation does
not apply to (i) obligations of the U.S. Government or any of
its agencies or instrumentalities (i.e., U.S. Government
securities), or (ii) Clearwater Growth Fund to the extent that
the manager or subadviser determines that investment without
regard to the stated limits is necessary in order to pursue
Clearwater Growth Fund's policy of tracking the Russell 1000
Index or any substitute index.
(7) with respect to 75% of its total assets, purchase any security
(other than U.S. Government securities) if, immediately after
and as a result of such purchase, (a) more than 5% of the
value of the fund's total assets would be invested in
securities of the issuer or (b) the fund would hold more than
10% of the voting securities of the issuer.
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Nonfundamental Investment Restrictions. The following investment restrictions are designated as nonfundamental and may be changed by the trust's Board of Trustees without shareholder approval.
A fund may not:
(1) buy or sell real estate in the ordinary course of its
business; provided, however, that the fund may (i) invest in
readily marketable debt securities secured by real estate or
interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or
interests therein and (ii) hold and sell real estate acquired
as the result of its ownership of securities;
(2) invest in companies for the purpose of exercising control or
management;
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(3) purchase any security, including any repurchase agreement
maturing in more than seven days, which is not readily
marketable, if more than 15% of the net assets of the fund,
taken at market value, would be invested in such securities;
or
(4) sell securities short, except to the extent that the fund
contemporaneously owns or has the right to acquire at no
additional cost securities identical to those sold short.
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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
may pay an unaffiliated broker or dealer that provides "brokerage and research services" (as defined in the 1934 Act) an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the applicable portfolio subadviser determines in good faith that the amount of commissions charged by the broker is reasonable in relation to the value of the brokerage and research services provided by such broker. The subadvisers of the funds have advised the manager that neither of them has paid any such excess in connection with brokerage transactions for the funds. Nevertheless, the subadvisers have received brokerage and research services consisting of written research reports, access to investment analysis and information services and related electronic components, all of which may be used for any of their respective clients.
During the three years ended December 31, 1996, 1997 and 1998, Growth Fund paid brokerage commissions in the amounts of $156,583, $88,681 and $8,659, respectively. During the three years ended December 31, 1996, 1997 and 1998, Small Cap Fund paid brokerage commissions in the amounts of $94,093, $165,105 and $82,266, respectively.
During the three years ended December 31, 1996, 1997 and 1998, (i) Growth Fund paid brokerage commissions of $495.00 (0.32% of brokerage commissions paid) to Weeden & Co., LP in 1996 only and (ii) Small Cap Fund paid brokerage commissions of $3,402 (2.52% of brokerage commissions paid) to Weeden & Co., LP in 1997 only. One of the funds' trustees is also a director of Weeden Securities Corporation, the general partner of Weeden & Co., LP.
MANAGEMENT, ADVISORY AND OTHER SERVICES
Trustees and Officers
The trust's Board of Trustees has overall responsibility for management and supervision of the funds. By virtue of the functions performed by Clearwater Management Co., Inc., the Trust's manager (the "manager"), the trust requires no employees other than its executive officers, all of whom receive their compensation from the manager or other sources.
Manager
Clearwater Management Co., Inc. Clearwater Investment Trust has contracted with Clearwater Management Co., Inc., 332 Minnesota Street, Suite 2100, St. Paul, Minnesota, to act as manager of the trust. The initial term of the management contract between the trust and the manager is two years and is renewable annually for successive one year terms.
Under the terms of the management contract, the manager supervises all of the trust's business operations and is responsible for formulating and implementing investment strategies for the funds. The manager performs all administrative and other management functions necessary to the supervision and conduct of the affairs of the funds.
Pursuant to the management contract, the manager pays for office space and equipment, clerical, secretarial and administrative services and executive and other personnel as are necessary to fulfill its responsibilities and all other ordinary operating expenses related to its services for the trust, including executive salaries of the trust. Pursuant to the management
contract, the manager also pays all of the funds' other expenses, except brokerage, taxes, interest and extraordinary expenses.
As compensation for its management services and expenses assumed, the manager receives a management fee at the annual rate of 0.45% and 1.35% of the net assets of Growth Fund and Small Cap Fund, respectively. Prior to November 1, 1997, the management fee for Growth Fund was 1.10% of the fund's average annual net assets. The manager's fees are calculated and accrued daily as a percentage of each fund's daily net assets, and are paid quarterly. During the three years ended December 31, 1996, 1997 and 1998, the total dollar amounts paid to the manager by Growth Fund were $977,32I, $1,012,399 and $558,531, respectively. During the three years ended December 31, 1996, 1997 and 1998 the total dollar amounts paid to the manager by Small Cap Fund were $392,202, $534,172 and $606,738 respectively.
Portfolio Subadvisers
General. Under the terms of the management contract, the manager is authorized to enter into subadvisory contracts with one or more investment advisers which will have responsibility for rendering investment advice to all or a portion of the funds' portfolios.
Parametric Portfolio Associates. In connection with the management of Growth Fund, the trust, the manager and Parametric Portfolio Associates ("Parametric ") entered into a subadvisory contract dated November 1, 1997 (the "Growth subadvisory contract"). Parametric, a registered investment adviser under the Investment Advisers Act of 1940, was founded in 1987 as a global equity manager and is a sub-partnership of PIMCO Advisors, L.P., a publicly traded investment management organization. Parametric is located at 701 Fifth Avenue, Suite 7310, Seattle, Washington 98104-7090. Parametric combines indexing with tax management to increase the potential for higher after-tax return for taxable investors.
Under the Growth subadvisory contract, Parametric develops, recommends and implements an investment program and strategy for Growth Fund which is consistent with the fund's investment objectives and policies. Parametric is also responsible for making all portfolio and brokerage decisions. As compensation, Parametric receives a fee that is based on Growth Fund's net assets. This fee is calculated and accrued on a monthly basis as a percentage of Growth Fund's month-end net assets. The annualized compensation paid to Parametric with respect to Growth Fund for the period from November 1, 1997 through December 31, 1997 was .15% of Growth Fund's net assets. For the period January 1, 1997 to October 31, 1997 SIT Investment Associates, Inc. ("SIT") served as the subadviser to the fund . The annualized compensation paid to SIT with respect to Growth Fund for the period January 1, 1997 to October 31, 1997, was .53% of Growth Fund's net assets. Under the Growth subadvisory contract, the manager, and not Growth Fund, is responsible for payment of subadvisory fees to Parametric.
During the year ended December 31, 1996 and the period January 1, 1997 through October 31, 1997 the manager paid subadvisory fees of $507,628 and $450,753, respectively to SIT (the previous subadviser). During the period from November 1, 1997 through December 31, 1997, and the year ended December 31, 1998, the manager paid subadvisory fees of $28,999 and $213,736, respectively, to Parametric.
Kennedy Capital Management. Kennedy Capital Management ("KCM"), a Missouri corporation that is a registered investment adviser under the Investment Advisers Act of 1940 has managed
Small Cap Fund's portfolio since January 1, 1994. In connection with the management of Small Cap Fund, the trust, the manager and KCM have entered into an interim subadvisory contract (the "Small Cap subadvisory contract") which was approved by the board of trustees on April 16, 1998, and is subject to shareholder approval. KCM devotes full time to investment counseling and provides advice, management and other services to investors and accounts. KCM's address is 10829 Olive Boulevard, St. Louis, Missouri 63141-7739.
Under the Small Cap subadvisory contract, KCM develops, recommends and implements an investment program and strategy for Small Cap Fund which is consistent with the fund's investment objectives and policies. KCM is also responsible for making all portfolio and brokerage decisions. As compensation, KCM receives a fee that is based on Small Cap Fund's net assets. This fee is calculated and accrued on a monthly basis as a percentage of Small Cap Fund's month-end net assets.
Fees payable to KCM are calculated and accrued monthly on the basis of month-end net assets, and are paid quarterly by the manager according to the following schedule:
Percent Net Assets 0.85% Up to and including $50 million 0.80% More than $50 million |
The compensation paid to KCM with respect to the Small Cap Fund for the year ended December 31, 1998 was 0.81% of Small Cap Fund's net assets.
Small Cap Fund is not responsible for payment of the subadvisory fees to KCM. During the years ended December 31, 1996, 1997 and 1998, the manager paid subadvisory fees of $298,894, $346,861 and $357,313 respectively to KCM.
Sit Fixed Income Advisors II, L.L.M. In connection with the management of Tax-Exempt Bond Fund, the trust, the Manager and Sit Fixed Income Advisors II L.L.C. ("SIT"), a subsidiary of Sit Investment Associates, Inc. entered into a subadvisory contract dated _______________, 1999 ("Tax-Exempt Bond subadvisory contract"). SIT, which is incorporated in Minnesota and is registered under the Investment Advisers Act of 1940, devoted full time to investment counseling and provides advice, management and other services to investors and accounts, including other mutual funds. SIT's address is 4600 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402-4130.
Under the Tax-Exempt Bond subadvisory contract, SIT develops, recommends and implements an investment program and strategy for Tax-Exempt Bond Fund which is consistent with the fund's investment objectives and policies. SIT is also responsible for making all portfolio and brokerage decisions. As compensation, SIT receives a fee that is based on Tax-Exempt Bond Fund's net assets. This fee is calculated and accrued on a monthly basis as a percentage of Tax-Exempt Bond Fund's month-end net assets.
Fees payable to SIT are calculated and accrued monthly on the basis of month-end net assets, and are paid quarterly by the manager according to the following schedule:
Percent .........Net Assets 0.40% .........Up to and including $20 million 0.30% .........Next $30 million 0.25% .........Next $25 million 0.20% .........Over $75 million |
Other Provisions of the Contracts. Any amendment to the management contract or either of the subadvisory contracts requires approval by vote of (a) a majority of the outstanding voting securities of the affected fund and (b) a majority of the trustees who are not interested persons of the trust or of any other party to such contract. Each contract terminates automatically in the event of its assignment and the subadvisory contracts terminate automatically upon termination of the management contract. Also, each contract may be terminated by not more than 60 days nor less than 30 days' written notice by either the trust or the manager or upon not less than 120 days' notice by the subadviser. Each contract provides that the manager or the subadviser shall not be liable to the trust, to any shareholder of the trust, or to any other person, except for loss resulting from willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
Subject to the above-described termination provisions, each contract has an initial term of two years and will continue in effect thereafter if such continuance is approved at least annually by (a) a majority of the trustees who are not interested persons of the trust or of any other party to such contract and (b) either (i) a majority of all of the trustees of the trust or (ii) by vote of a majority of the outstanding voting securities of the affected funds.
EXECUTIVE OFFICERS AND TRUSTEES
The trustees and executive officers of the trust are listed below, together with their principal occupations during the past five years and their ages and addresses.
Philip W. Pascoe* (53), Trustee
Chairman and Treasurer of the Trust
Chairman, Clearwater Management Co., Inc. (1996/Present)
Managing Director, Investments of Piper Jaffray, Inc. (1996/Present)
Senior Vice President, Dean Witter Reynolds, Inc. (1996)
Associate Vice President, Dean Witter Reynolds, Inc. (1982-1996)
1145 Broadway, Suite 1500
P.O. Box 1278
Tacoma, Washington 98401
Samuel B. Carr, Jr. (44), Trustee
Managing Director, Alpha Windward, L.L.C. (1998/present)
President and Chief Investment Officer, Alpha Windward, L.L.C.
(formerly S. B. Carr Investments, Inc.) (1990/1998)
200 Louder Brook Drive
Westwood, MA 02090-1178
Stanley R. Day, Jr. (41), Trustee
President and Director, SRAM Corporation, (1987/present)
361 West Chestnut Street
Chicago, Illinois 60611
Robert J. Phares (36), Trustee
Chief Executive Officer, Battle Ridge Ranch Company, (1986/present)
7180 Jackson Creek Road
Bozeman, Montana 59715
Daniel C. Titcomb (46), Vice President and Secretary President and Director, Research Engineering and Design, Inc., (1994/Present) President and Director, Titcomb Associates, Inc., (1987/1994) 332 Minnesota Street, Suite 2100 St. Paul, Minnesota 55101
Frederick T. Weyerhaeuser* (68), Trustee Chairman, Clearwater Management Co., Inc. (1987/1996) Director, Potlatch Corporation, a forest products company (1960/present) Trustee, The Minnesota Mutual Life Insurance Company (1968/present) Director, Weeden Securities Corporation (1987/present) 332 Minnesota Street, Suite 2090 St. Paul, Minnesota 55101
The business address of all officers of the trust is 332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101.
As of September 30, 1999, all of the trustees and officers of the trust, as a group, owned of record 1.25% of the outstanding shares of Growth Fund and 1.74% of the outstanding shares of Small Cap Fund.
*Messrs. Philip W. Pascoe and Frederick T. Weyerhaeuser are "interested persons" (as defined in the 1940 Act) of the trust.
Compensation of Trustees and Officers
The trust pays no salaries or compensation to any of its officers. Pursuant to the management contract, the manager, on behalf of the trust, pays each of the trustees an annual fee of $2,000, plus $500 per meeting attended; expenses incurred by trustees in attending meetings are reimbursed. Such fees and expenses are reimbursed by the manager to the trust under the management contract. The following table sets forth the amounts of compensation received by each trustee during the fiscal year ended December 31, 1998.
Compensation With Respect
Name of Trustees to Trust/Complex
Philip W. Pascoe $ -0-
Samuel B. Carr, Jr. $ 4,000
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Stanley R. Day, Jr. $ 3,000
Robert J. Phares $ 4,000
Frederick T. Weyerhaeuser $ 4,000
Total $15,000
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NET ASSET VALUE
The net asset value per share of each fund is determined as of the close of regular trading on the New York Stock Exchange (the "Closing Time") on each day that the Exchange is open for trading if such determination is then required to properly process a purchase order, redemption request or exchange request for shares of such fund. The New York Stock Exchange is closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and the previous Friday or following Monday if any holiday falls on a Saturday or Sunday. Net asset value per share is determined by dividing the value of all of a fund's assets, less its liabilities, by the number of shares outstanding. Investments in securities are valued at the Closing Time at the last available sale price on the principal exchange or market where they are traded. Securities which have not traded on the date of valuation or securities for which sales prices are not generally reported are valued at the mean between the last bid and asked prices. Securities for which no market quotations are readily available (including those for which trading has been suspended) will be valued at fair value as determined in good faith by the board of trustees, although the actual computations may be made by persons acting at the direction of the board of trustees. The price at which a purchase order is filled is the net asset value per share next computed after payment and a properly completed application are received by the transfer agent, unless a later computation date is specified by the investor on the purchase order.
HOW ARE SHARES PURCHASED?
Shares may be purchased directly from each fund. There is no sales charge or underwriting commission on purchases of shares of the funds. In order to purchase shares of either fund, an investor must either send a check or wire funds to the transfer agent and deliver to the transfer agent a completed Purchase Order and Account Application.
Minimum Purchases. No initial or subsequent investment of less than $1,000 will be accepted by the funds. However, reinvestments of dividends and capital gain distributions will be permitted, even if the amount of any such reinvestment is less than $1,000.
Minimum Account Size. If a shareholder holds shares of a fund in an account which, as a result of redemptions, has an aggregate net asset value of less than $1,000, the fund may redeem the shares held in such account at net asset value if the shareholder has not increased the net asset value of such shares in the account to at least $1,000 within three months of notice in writing by the fund to the shareholder of the fund's intention to redeem such shareholder's shares. During the three months following the mailing of such notice, each shareholder so notified has the opportunity to increase the value of his or her account to $1,000 and avoid redemption. An involuntary redemption consummated at a price below the shareholder's cost would result in a loss to the shareholder.
The trust reserves the right in its sole discretion to withdraw all or any part of the offering of shares of the funds when, in the judgment of the trustees or the manager, such withdrawal is in the best interests of the trust. An order to purchase shares is not binding on, and may be rejected by, the trust until it has been confirmed in writing.
Fund Accounts. When a shareholder first purchases shares of a fund, an account is opened in his or her name on the records of that fund. This account provides a convenient means to make additional investments and provides for regular transaction statements without the necessity of receiving and storing certificates. When a shareholder purchases or sells shares of a fund, an account statement showing the details of such transaction will be sent to the shareholder.
Share Certificates. Certificates representing shares of a fund ordinarily will not be issued. However, the board of trustees may, in its sole discretion, authorize the issuance of certificates for shares of a fund to shareholders who make a specific written request for share certificates.
EXCHANGE OF SHARES
Subject to the restrictions set forth below, some or all of the shares of a fund, including shares purchased with reinvested dividends and/or capital gain distributions, may be exchanged for shares of the other fund on the basis of the net asset value per share of each fund at the time of exchange.
Instructions for exchanges are made by delivery to the transfer agent of an exchange request signed by the record owner(s) exactly as the shares being exchanged are registered. New accounts must be established with the same registration information as the account from which the exchange is to be made. The dollar amount exchanged must at least equal the $1,000 minimum investment required for each of the funds. However, exchanges of shares of one fund for shares of the other fund in which the shareholder has an existing account will be permitted, even if the value of the shares exchanged is less than $1,000.
A shareholder should consider the differences in investment objectives and policies of the funds, as described in this Prospectus, before making any exchange. For federal and (generally) state income tax purposes, an exchange of shares is treated as a redemption of the shares exchanged followed by the purchase of new shares and, therefore, is a taxable transaction for the shareholder making the exchange.
Currently, there is no charge for the exchange privilege or limitation as to the frequency of exchanges. The trust may terminate or suspend the right to make exchange requests, or impose a limit on the number of exchanges that may be effected by a shareholder within any calendar year, or impose a transaction fee in connection with any exchange, at any time with notice to shareholders as required by law.
HOW ARE SHARES REDEEMED?
Any shareholder of any of the Clearwater funds has the right to offer shares for redemption by the trust. Redemptions will be effected at the net asset value per share next determined after receipt by the transfer agent of all required documents from the redeeming shareholder, unless a later redemption date is specified by the investor on the redemption request. Payment will be made within seven days after a redemption has been effected. However, if shares to be redeemed were recently purchased by check, a fund may delay transmittal of redemption proceeds until it has assured itself that good funds have been collected for the purchase of such shares. This may take up to 15 days. A fund may effect redemptions in kind (i.e., pay redemption proceeds consisting of portfolio securities or other non-cash assets) for redemptions in excess of $1 million if the manager determines, in its sole discretion, that any such redemption would be in the best interests of the fund. In order to redeem shares of a fund, a shareholder must deliver to the transfer agent a redemption request which has been endorsed by the recordholder(s) exactly as the shares are registered with signature(s) guaranteed by any one of the following institutions: (i) a bank; (ii) a securities broker or dealer, including a government or municipal securities broker or dealer, that is a member of a clearing corporation or has net capital of at least $100,000; (iii) a credit union having authority to issue signature guarantees; (iv) a savings and loan association, a building and loan association, a cooperative bank, a federal savings bank or association; or (v) a national securities exchange, a registered securities exchange or a clearing agency, provided that any such institution satisfies the standards established by the transfer agent.
If a share certificate has been issued at the discretion of the trustees, the shares represented by such certificate may be redeemed only if the share certificate is included with such redemption request and the certificate is properly endorsed with signature(s) so guaranteed or is accompanied by a properly endorsed stock power with signature(s) so guaranteed.
Net asset value per share for the purpose of redemption is determined in the manner described in "Net Asset Value." The net asset value per share received upon redemption may be more or less than the cost of shares to an investor, and a redemption is a taxable transaction for the redeeming shareholder.
Redemptions may be suspended or payment postponed during any period in which any of the following conditions exists: the New York Stock Exchange is closed or trading on the Exchange is restricted; an emergency exists as a result of which disposal by the trust of securities owned by a fund is not reasonably practicable or it is not reasonably practicable for the custodian fairly to determine the value of the fund's net assets; or the SEC, by order, so permits.
TAXES
General. Under the Tax Code, each fund is treated as a separate taxpayer for federal income tax purposes. The funds do not expect to incur other than nominal state income tax liability.
Each fund is treated as a separate entity for federal income tax purposes, has elected or, in the case of Tax-Exempt Bond Fund, intends to elect to be treated as a "regulated investment company" under the Tax Code, and intends to qualify for such treatment for each taxable year. To qualify as a regulated investment company under the Tax Code and be free from any federal income tax on income and gains distributed to shareholders in accordance with the Tax
Code, each fund must satisfy certain requirements relating to the sources of its income, diversification of its assets and distribution of its income to shareholders.
4% Excise Tax. Under the Tax Code, each of the funds will be subject to a nondeductible 4% excise tax on substantially all of its undistributed ordinary income (not including tax-exempt interest) and capital gain if it fails to meet certain distribution requirements by the end of each calendar year.
For federal income tax purposes, the Growth Fund had a capital loss carryover of $205,323 at December 31, 1998, that will expire in 2006 if not offset by capital gains.
Each of Growth Fund and Small Cap Fund may be subject to foreign withholding or other foreign taxes on its income (possibly including, in some cases, capital gains) from certain of its foreign investments, if any, and neither fund will be eligible to elect to pass such taxes and associated foreign tax credits or deductions through to its shareholders.
Foreign Exchange Gains and Losses. Foreign exchange gains and losses realized by a fund in connection with certain transactions involving foreign currency denominated debt securities, forward foreign currency contracts (if any), foreign currencies, or payables or receivables denominated in a foreign currency are subject to Section 988 of the Tax Code, which generally causes such gains and losses to be treated as ordinary income and losses and may affect the amount, timing and character of distributions to shareholders.
Passive Foreign Investment Companies. If Growth Fund or Small Cap Fund acquires stock, including certain options, in certain non-U.S. corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties, or capital gain) or hold at least 50% of their assets in investments producing such passive income ("passive foreign investment companies"), the fund could be subject to federal income tax and additional interest charges on "excess distributions" received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the fund is timely distributed to its shareholders. A fund would not be able to pass through to its shareholders any credit or deduction for such a tax. An election may generally be available that would ameliorate these adverse tax consequences, but any such election could require the fund to recognize taxable income or gain (subject to tax distribution requirements) without the concurrent receipt of cash. These investments could also result in the treatment of associated capital gains as ordinary income.
Other Investments. Investment by a fund in zero coupon, stripped or certain other securities with original issue discount or market discount (if the fund elects to include market discount in income on a current basis) or in certain options or futures contracts that are subject to mark-to-market rules could require the fund to recognize income or gain prior to the receipt of cash and hence require it to liquidate investments in order to generate cash for distributions required by the Tax Code with respect to such income or gain. Management of the funds will consider these potential adverse tax consequences in evaluating the appropriateness of these investments.
A fund's transactions involving options and futures contracts will be subject to special tax rules, the effect of which may be to accelerate the fund's recognition of income, defer fund losses, cause adjustments in the holding periods of securities or otherwise affect the treatment as long-term or short-term of certain capital gains or losses. A fund may also be required to recognize gain upon entering into a short sale against the box or any other transaction that is treated
under the Tax Code as a constructive sale of an appreciated financial position of the fund. These rules could therefore affect the amount, timing and character of distributions to shareholders.
Taxation of Shareholders. Each of Growth Fund and Small Cap Fund intends to distribute all of its net investment income, any excess of net short-term capital gain over net long-term capital loss, and any excess of net long-term capital gain over net short-term capital loss, after taking into account any capital loss carryovers of the fund, if any, at least once each year. Tax-Exempt Bond Fund will declare its dividends from investment income daily and distribute these dividends monthly. Distributions from net investment income (other than exempt-interest dividends paid by Tax-Exempt Bond Fund, as described below), certain net foreign currency gains and the excess of net short-term capital gain over net long-term capital loss will be taxable to shareholders as ordinary income. Distributions from the excess of net long-term capital gain over net short-term capital loss will be taxable to shareholders as long-term capital gain, regardless of the shareholder's holding period for the shares. Certain distributions paid by a fund in January of a given year will be taxable to shareholders as if received on December 31 of the prior year.
Special Tax Issues Affecting Tax-Exempt Bond Fund's Shareholders. Under the Tax Code and applicable regulations, interest on indebtedness incurred or continued to purchase or carry shares of an investment company paying exempt-interest dividends, such as Tax-Exempt Bond Fund, will not be deductible by a shareholder in proportion to the ratio of exempt-interest dividends to all dividends (both taxable and tax-exempt) other than those treated as long-term capital gains. Indebtedness may be allocated to shares of Tax-Exempt Bond Fund even though not directly traceable to the purchase of such shares. Federal law also restricts the deductibility of other expenses allocable to shares of such fund.
Tax-Exempt Bond Fund intends to take all actions required under the Tax Code to ensure that the fund may pay "exempt-interest dividends." Distributions of net interest income from tax-exempt obligations that are designated by the fund as exempt-interest dividends are excludable from the gross income of the fund's shareholders. The fund's present policy is to designate exempt-interest dividends annually. The fund will calculate exempt-interest dividends based on the average annual method and the percentage of income designated as tax-exempt for any particular distribution may be substantially different from the percentage of income that was tax-exempt during the period covered by the distribution. Shareholders are required for information purposes to report exempt-interest dividends and other tax-exempt interest on their tax return. Distributions paid from taxable interest income, from any net realized short-term capital gains and certain other taxable sources (possibly including certain swamp payments, income from securities lending or repurchase agreements, certain income from options or futures, realized market discount, or certain other income) will be taxable to shareholders as ordinary income, whether received in cash or in additional shares.
For federal income tax purposes, an alternative minimum tax ("AMT") is imposed on taxpayers to the extent that such tax exceeds a taxpayer's regular income tax liability (with certain adjustments). Exempt-interest dividends attributable to interest income on certain tax-exempt obligations issued after August 7, 1986 to finance certain private activities are treated as an item of tax preference that is included in alternative minimum taxable income for purposes of computing the federal AMT for all taxpayers. The Tax-Exempt Bond Fund may invest up to 20% of its assets in securities that generate interest that is treated as an item of tax preference. In addition, a portion of all other tax-exempt interest received by a corporation, including exempt-
interest dividends, will be included in adjusted current earnings and in earnings and profits for purposes of determining the federal corporate AMT and the branch profits tax imposed on foreign corporations under Section 884 of the Tax Code.
Because liability for the AMT depends upon the regular tax liability and tax preference items of a specific taxpayer, the extent, if any, to which any tax preference items resulting from investment in Tax-Exempt Bond Fund will be subject to the tax will depend upon each shareholder's individual situation. For shareholders with substantial tax preferences, the AMT could reduce the after-tax economic benefits of an investment in Tax-Exempt Bond Fund. Each shareholder is advised to consult his or her tax adviser with respect to the possible effects of such tax preference items.
Shares of Tax-Exempt Bond Fund may not be an appropriate investment for persons who are "substantial users" of facilities financed by industrial development or private activity bonds, or persons related to "substantial users." Consult your tax adviser if you think this may apply to you.
In addition, shareholders who are or may become recipients of Social Security or certain railroad retirement benefits should be aware that exempt-interest dividends are includable in computing "modified adjusted gross income" for purposes of determining the amount of such benefits, if any, that is required to be included in gross income. The maximum amount of Social Security benefits includable in gross income is 85%.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds which, if not satisfied, could result in loss of tax exemption for interest on such bonds, even retroactively to the date of issuance of the bonds. Proposals may be introduced before Congress in the future, the purpose of which will be to further restrict or eliminate the federal income tax exemption for tax-exempt securities. Tax-Exempt Bond Fund cannot predict what additional legislation may be enacted that may affect shareholders. The fund will avoid investment in tax-exempt securities which, in the opinion of the investment adviser, pose a material risk of the loss of tax exemption. Further, if a tax-exempt security in the fund's portfolio loses its exempt status, the fund will make every effort to dispose of such investment on terms that are not detrimental to the fund.
Dividends-Received Deduction. For purposes of the 70% dividends-received deduction available to corporations, dividends received by Growth Fund or Small Cap Fund, if any, from U.S. domestic corporations in respect of any share of stock with a tax holding period of at least 46 days (91 days in the case of certain preferred stock) that is satisfied during a prescribed period before and after each dividend in an unleveraged position and distributed and properly designated by the fund may be treated as qualifying dividends. Any corporate shareholder should consult its tax advisor regarding the possibility that its tax basis in its shares may be reduced, for Federal income tax purposes, by reason of "extraordinary dividends" received with respect to the shares and, to the extent such basis would be reduced below zero, current recognition of income may be required. Corporate shareholders must meet the minimum holding period requirement stated above (46 or 91 days), taking into account any holding period reductions from certain hedging or other positions that diminish risk of loss, with respect to their fund shares in order to qualify for the deduction and, if they borrow to acquire fund shares, may be denied a portion of the dividends-received deduction. The entire qualifying dividend, including the otherwise deductible amount, will be included in determining the excess (if any) of a corporation's adjusted current earnings over its alternative minimum taxable income, which may increase a corporation's alternative minimum tax liability.
Dividends and/or capital gain distributions, if any, may be taken in cash or automatically reinvested in additional shares (at the net asset value per share). All distributions are taxable as described above whether a shareholder takes them in cash or reinvests them in additional shares of a fund. Shareholders who purchase shares prior to a taxable distribution will nevertheless be required to treat the distribution as ordinary income or long-term capital gain as described above, even though economically it may represent a return of a portion of their investment. Information regarding the tax status of each year's distributions will be provided to shareholders annually.
Redemptions. All or a portion of a loss realized on a redemption of shares may be disallowed or recharacterized under tax rules relating to wash sales or redemptions of shares held for six months or less.
Dividends (other than exempt-interest dividends), capital gain distributions and the proceeds of redemptions, exchanges or repurchases of shares of a fund paid to an individual or other non-exempt payee will be subject to 31% backup withholding of federal income tax if such shareholder does not provide the fund with his or her correct taxpayer identification number and certain certifications required by the Internal Revenue Service ("IRS") or if the trust is notified by the IRS or a broker that the shareholder is subject to such withholding. Please refer to the purchase order and account application for additional information.
Special tax rules apply to IRA or other retirement plans or accounts and to other special classes of investors, such as tax-exempt organizations, banks and insurance companies. You should consult with your own tax adviser regarding the application of any such rules in your particular circumstances.
The description above relates only to U.S. federal income tax consequences for shareholders who are U.S. persons (i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts, or estates) and who are subject to federal income tax. In addition to federal taxes, a shareholder may be subject to foreign, state and local taxes on distributions from or on the value of shares of a fund, depending on the laws of the shareholder's place of residence. Shareholders also may inquire about these and other matters by calling the Transfer Agent at (888) 228-0935.
Non-U.S. Shareholders. Shareholders who are not U.S. persons, as defined above, are subject to different tax rules, including a possible U.S. withholding tax at rates up to 30% on certain dividends treated as ordinary income, and should consult their tax advisers for information on the application of these rules to their particular situations.
PERFORMANCE DATA
The funds' average annual total return quotations, as they may appear in the Prospectus, this SAI or in advertising and sales material, are calculated by standard methods prescribed by the SEC.
Average annual total return quotations are computed by finding the average
annual compounded rates of return that would cause a hypothetical investment
made on the first day of a designated period (assuming all dividends and
distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
designated period at the end of the
designated period (or fractional portion
thereof)
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For purposes of the above computation, it is assumed that all dividends and distributions made by the funds are reinvested at net asset value during the designated period. The average annual total return quotation is determined to the nearest 1/100 of 1%. Computations of average annual total return of a fund will not take into account any required payments of federal or state income taxes.
In determining the average annual total return (calculated as provided above) of each fund, recurring fees, if any, that are charged to all shareholder accounts are taken into consideration. For any account fees that vary with the size of the account, the account fees used for purposes of the above computation are assumed to be the fees that would be charged to the mean account size of such fund.
The average annual total return of each fund will vary from time to time depending on market conditions, the composition of the fund's portfolio and operating expenses of the fund. These factors and possible differences in the methods used in calculating returns should be considered when comparing performance information regarding a fund to information published for other investment companies and other investment vehicles. Any return quotation should also be considered relative to changes in the values of a fund's shares and the risks associated with that fund's investment objectives and policies. At any time in the future, any return quotation may be higher or lower than a past return quotation and there can be no assurance that any historical return quotation will continue in the future.
The average annual total return of Growth Fund for the one, five and ten year periods ended December 31, 1998, were 22.69%, 20.75% and 17.81% respectively. The average annual total return of Small Cap Fund for the one and five year periods ended December 31, 1998 and the period since Small Cap Fund commenced operations on January 31, 1989 through December 31, 1998 were (7.09)%, 12.03% and 10.72%, respectively. The foregoing average annual total return figures were determined based on expenses in effect for the funds during the covered periods.
Yield. Yield is computed by dividing the net investment income per share (as defined under SEC rules and regulations) earned during the computation period by the maximum offering price per share on the last day of the period, according to the following formula:
a = dividends and interest earned during the periods; b = expenses accrued for the period (net of reimbursements); c = the average daily number of shares outstanding during the period that were entitled to receive dividends; and d = the maximum offering price per share on the last day of the period.
The formula assumes values for a, b, c, and d will be calculated based on a 30-day period.
Taxable Equivalent Yield. The Tax-Exempt Bond Fund may state a taxable equivalent yield which is computed by dividing that portion of the yield of the fund which is tax-exempt by one minus a stated income tax rate and adding the product to that portion, if any, of the yield of the fund that is not tax-exempt.
MORE INFORMATION ABOUT THE FUNDS
General. As a Massachusetts business trust, the trust's operations are governed by its Declaration of Trust dated January 12, 1987 as amended and restated March 1, 1998 (the "Declaration of Trust"), a copy of which is on file with the office of the Secretary of the Commonwealth of the Commonwealth of Massachusetts. Unless otherwise required by the Investment Company Act of 1940, as amended, ordinarily it will not be necessary for the trust to hold annual meetings of shareholders. As a result, shareholders may not consider the election of trustees or the appointment of independent accountants for the trust on an annual basis. The Board of Trustees, however, will call a special meeting of shareholders for the purpose of electing trustees if, at any time, less than a majority of trustees holding office at the time were elected by shareholders. The Board of Trustees may remove a trustee by the affirmative vote of at least a majority of the remaining trustees. Under certain circumstances, shareholders may communicate with other shareholders in connection with requesting a special meeting of shareholders.
Under Massachusetts law, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable for the obligations of such trust. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the trust or its trustees. Moreover, the Declaration of Trust provides for the indemnification out of trust property of any shareholders held personally liable for any obligations of the trust. Thus, the risk of a shareholder incurring financial loss beyond his or her investment because of shareholder liability would be limited to circumstances in which the trust itself would be unable to meet its obligations. In light of the nature of the trust's business and the nature and amount of its assets, the possibility of the trust's liabilities exceeding its assets, and therefore a shareholder's risk of personal liability, is extremely remote.
The Declaration of Trust further provides that the trust shall indemnify each of its trustees for any neglect or wrongdoing of any advisory board member, officer, agent, employee, consultant, investment adviser or other adviser, administrator, distributor or principal underwriter, custodian or transfer, dividend disbursing, shareholder servicing or accounting agent of the trust, nor shall any trustee be responsible for the act or omission of any other trustee. The Declaration of Trust does not authorize the trust to indemnify any trustee or officer against any liability to which he or
she would otherwise be subject by reason of or for willful misfeasance, bad faith, gross negligence or reckless disregard of such person's duties.
Voting. Under the Declaration of Trust, the board of trustees is authorized to issue an unlimited number of shares of beneficial interest which may, without shareholder approval, be divided into an unlimited number of series. Shares of the trust are freely transferable, are entitled to dividends as declared by the board of trustees and, in liquidation, are entitled to receive the net assets of their series, but not of any other series. Shareholders are entitled to cast one vote per share (with proportional voting for fractional shares) on any matter requiring a shareholder vote. Shareholders of each series vote separately as a class on any matter submitted to shareholders except when otherwise required by the 1940 Act, in which case the shareholders of all series affected by the matter in question will vote together as one class. If the board of trustees determines that a matter does not affect the interests of a series, then the shareholders of that series will not be entitled to vote on that matter.
As of September 30, 1999, each of the following persons owned five percent or
more of the voting securities of each such fund:
--------------------------------------------------- -------------------------------- -------------------------------
Name Total Shares Total Shares
Clearwater Growth Fund Clearwater Small Cap Fund
--------------------------------------------------- -------------------------------- -------------------------------
W. John Driscoll* 12.66% 10.98%
--------------------------------------------------- -------------------------------- -------------------------------
Frank W. Piasecki* 7.01%
--------------------------------------------------- -------------------------------- -------------------------------
Walter S. Rosenberry, III* 8.70% 6.48%
--------------------------------------------------- -------------------------------- -------------------------------
John W. Titcomb, Jr.** 5.73%
--------------------------------------------------- -------------------------------- -------------------------------
Charles A. Weyerhaeuser* 11.77% 8.52%
--------------------------------------------------- -------------------------------- -------------------------------
David C. Weyerhaeuser* 6.22%
--------------------------------------------------- -------------------------------- -------------------------------
David M. Weyerhaeuser** 9.31% 6.47%
--------------------------------------------------- -------------------------------- -------------------------------
Frederick T. Weyerhaeuser* 13.97% 19.02%
--------------------------------------------------- -------------------------------- -------------------------------
George H. Weyerhaeuser** 24.20% 18.01%
--------------------------------------------------- -------------------------------- -------------------------------
William T. Weyerhaeuser** 27.75% 19.73%
--------------------------------------------------- -------------------------------- -------------------------------
Wendy W. Weyerhaeuser** 10.88%
--------------------------------------------------- -------------------------------- -------------------------------
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* 332 Minnesota Street, Suite 2100, Saint Paul, Minnesota 55101-1394 ** 1145 Broadway, Suite 1500, P.O. Box 1278, Tacoma, Washington 98401
Independent Accountants. KPMG LLP serves as independent public accountants to the trust. In this capacity, KPMG LLP audits and renders an opinion on the funds' financial statements.
FINANCIAL STATEMENTS
The trust's annual report for the fiscal year ended December 31, 1998 accompanies this SAI and is incorporated herein by reference in its entirety.
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.
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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.
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Standard & Poor's applies indicators "+", no character, and "-" to the above rating categories AA through B. The indicators show relative standing within the major rating categories.
Fitch IBCA
Rating Definition
AAA Highest credit quality with exceptional ability to pay
interest and repay principal.
AA Investment grade and very high credit quality ability to pay
interest and repay principal is very strong, although not
quite as strong as AAA.
31
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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.
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+ and - indicators indicate the relative position within the rating category, but are not used in AAA category.
Duff & Phelps Credit Rating Co.
Rating Definition
AAA Highest credit quality, risk factors are negligible. AA High
credit quality with moderate risk.
A Protection factors are average but adequate, however, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors, but still considered
sufficient for prudent investment.
BB Below investment grade but likely to meet obligations when
due.
B Below investment made and possessing risk that obligations
will not be met when due.
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+ 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.
Duff1- High certainty of timely payment.
MUNICIPAL BOND, MUNICIPAL NOTE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
Municipal Bond Ratings
Standard & Poor's Corporation:
Rating Definition
AAA Highest rating; extremely strong security.
AA Very strong security; differs from AAA in only a small degree.
A Strong capacity but more susceptible to adverse economic
effects than two above categories.
BBB Adequate capacity but adverse economic conditions more likel
to weaken capacity.
BB Judged to be speculative with some inadequacy to meet timely
interest and principal payments.
B Has greater vulnerability to default than other speculative
grade securities. Adverse economic conditions will likely
impair capacity or willingness to pay interest and principal.
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Standard & Poor's applies indicators "+", no character, and "-" to the above rating categories AA through B. The indicators show relative standing within the major rating categories.
Moody's Investors Services, Inc.:
Rating Definition
Aaa Best quality; carry the smallest degree of investment risk.
Aa High quality; margins of protection not quite as large as the
Aaa bonds.
A Upper medium grade; security adequate but could be susceptible
to impairment.
Baa Medium grade; neither highly protected nor poorly
secured--lack outstanding investment characteristics and
sensitive to changes in economic circumstances.
Ba Judged to have speculative elements. Protection of interes
and principal payments may be very moderate.
B Generally lack characteristics of a desirable investment.
Assurance of interest and principal payments over any long
period of time may be small.
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Moody's also applies numerical indicators, 1, 2, and 3, to rating categories Aa through Ba. The modifier 1 indicates that the security is in the higher end of the rating category; the modifier 2 indicates a mid-range ranking; and 3 indicates a ranking toward the lower end of the category.
Fitch IBCA:
Rating Definition
AAA Highest credit quality with exceptional ability to pay
interest and repay principal.
AA Investment grade and very high credit quality ability to pay
interest and repay principal is very strong, although not
quite as strong as AAA.
A Investment grade with high credit quality. Ability to pay
interest and repay principal is strong.
33
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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.
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+ and - indicators indicate the relative position within the rating category, but are not used in AAA category.
Duff & Phelps Credit Rating Co.:
Rating Definition
AAA Highest credit quality, risk factors are negligible.
AA High credit quality with moderate risk.
A Protection factors are average but adequate, however, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors, but still considered
sufficient for prudent investment.
BB Below investment grade but likely to meet obligations when
due.
B Below investment grade and possessing risk that obligation
will not be met when due.
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+ 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.
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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.
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.
CLEARWATER INVESTMENT TRUST
Clearwater Growth Fund
Clearwater Small Cap Fund
Clearwater Tax-Exempt Bond Fund
332 Minnesota Street, Suite 2100
St. Paul, MN 55101
EXECUTIVE OFFICERS: TRUSTEES:
Philip W. Pascoe Philip W. Pascoe
Chairman of the Board Samuel B. Carr, Jr.
Treasurer Stanley R. Day, Jr.
Robert J. Phares
Frederick T. Weyerhaeuser
INVESTMENT MANAGER: CLEARWATER GROWTH FUND
SUBADVISER:
Clearwater Management Co., Inc. Parametric Portfolio Associates
332 Minnesota Street, Suite 2100 701 Fifth Avenue, Suite 7310
St. Paul, MN 55101 Seattle, WA 98014-7090
CUSTODIAN: CLEARWATER SMALL CAP FUND
SUBADVISER:
Investors Fiduciary Trust Company Kennedy Capital Management
801 Pennsylvania 10829 Olive Boulevard
Kansas City , MO 64105 St. Louis, MO 63141-7739
COUNSEL FOR THE FUNDS: CLEARWATER TAX-EXEMPT BOND
FUND SUBADVISER:
Hale and Dorr LLP Sit Fixed Income Advisors II, L.L.C.
60 State Street 4600 Norwest Center
Boston, MA 02109 Minneapolis, MN 55402
INDEPENDENT ACCOUNTANTS: TRANSFER AGENT AND
SHAREHOLDER SERVICES:
KPMG LLP Fiduciary Counselling, Inc.
4200 Norwest Center 332 Minnesota Street, Suite 2100
90 South 7th Street St. Paul, MN 55101-1394
Minneapolis, MN 55402 (888) 228-0935
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STATEMENT OF ADDITIONAL INFORMATION
December __, 1999
CLEARWATER INVESTMENT TRUST
FORM N-1A
PART C. OTHER INFORMATION
Item 23. Exhibits
(a)(1) Declaration of Trust dated January 12, 1987 1
(a)(2) Amendment to Declaration of Trust dated March 25, 1994 1
(a)(3) Amended and Restated Declaration of Trust dated March 1, 1998 2
(a)(4) Certificate of Designation with respect to Clearwater Municipal Bond Fund +
(b)(1) By-Laws 1
(b)(2) Amended and Restated By-Laws dated March 1, 1998 2
(c) None.
(d)(1) Management Contract dated May 1, 1994 1
(d)(2) Management Contract, as amended, dated March 1, 1998 2
(d)(3) Form of Management Contract by and among Clearwater Investment Trust, on behalf of its series, Clearwater Municipal Bond Fund and Clearwater Management Co., Inc. +
(d)(4) Subadvisory Contract with SIT Investment Associates, Inc.for Clearwater Growth Fund dated May 1, 1994 1
(d)(5) Subadvisory Contract with Parametric Portfolio Associates for Clearwater Growth Fund dated November 1, 1997 2
(d)(6) Subadvisory Contract with Kennedy Capital Management for Clearwater Small Cap Fund dated May 1, 1994 1
(d)(7) Amendment to the Subadvisory Contract with Kennedy Capital Management for Clearwater Small Cap Fund dated January 1, 1998 2
(d)(8) Form of Subadvisory Contract by and among Clearwater Investment Trust, on behalf of its series, Clearwater Municipal Bond Fund and Sit Investment Associates, Inc. +
(e) None.
(f) None.
(g)(1) Custodian Agreement with Norwest Bank Minnesota, N.A. dated March 31, 1987 1
(g)(2) Amendment to Custodian Agreement dated March 27, 1991 1
(g)(3) Amendment to Custodian Agreement dated November 4, 1992 1
(g)(4) Custodian Agreement with Investors Fiduciary Trust Company dated September 29, 1997 2
(g)(5) Amendment to Custodian Agreement dated March 1, 1998 3
(h)(1) Investment Company Service Agreement dated March 2, 1987 1
(h)(2) Amendment to Investment Company Service Agreement dated May 1, 1995 1
(h)(3) Accounting Services Agreement dated April 3, 1995 1
(i) None.
(j)(1) Consent of Independent Accountants +
(k) None.
(l)(1) Stock Purchase Agreement dated February 19, 1987 1
(m) None.
(n) None.
(o) None.
n/a Powers of Attorney 3
+ Filed herewith
1 Previously filed as exhibits to post-effective
amendment no. 10 to the Registration Statement on
April 29, 1996 and incorporated herein by reference
(File No. 33-12289).
2 Previously filed as exhibits to post-effective
amendment no. 12 to the Registration Statement on
February 27, 1998 and incorporated herein by
reference (File No. 33-12289).
3 Previously filed as exhibits to post-effective
amendment no. 14 to the Registration Statement on
April 13, 1999 and incorporated herein by reference
(File No. 33-12289).
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Item 24. Persons Controlled by or Under Common Control with the Fund
The Registrant is not directly or indirectly controlled by or under common control with any other person.
Item 25. Indemnification
Except for the Declaration of Trust, dated January 12, 1987, as amended and restated March 1, 1998, establishing the Registrant as a trust under Massachusetts law, there is no contract, arrangement or statute under which any director, officer, underwriter or affiliated person of the Registrant is insured or indemnified. The Declaration of Trust provides that no Trustee or officer will be indemnified against any liability to which the Registrant would otherwise be subject by reason of or for willful misfeasance, bad faith, gross negligence or reckless disregard of such person's duties. See the Registrant's undertaking with respect to indemnification in Item 32 below.
Item 26. Business and Other Connections of Investment Adviser
All of the information required by this item is set forth in the Forms ADV, as amended, of the Manager and the Subadvisers. The following sections of such Forms ADV are incorporated herein by reference:
(a) Items 6 and 8 of Part II;
(b) Section 6, Business Background, of each Schedule D.
Item 27. Principal Underwriter
Not applicable
Item 28. Location of Accounts and Records
The accounts, books, and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder are in the possession of Fiduciary Counselling, Inc., 332 Minnesota Street, Suite 2100, St. Paul, Minnesota 55101-1394.
Item 29. Management Services
The Registrant is a party to four contracts, described in the Prospectus and Statement of Additional Information, under which it receives management services from Clearwater Management Co., Inc. and advisory services from Parametric Portfolio Associates, Kennedy Capital Management and Sit Investment Associates, Inc.
Item 30. Undertaking
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it has duly caused this Post-Effective Amendment to such Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Paul and the State of Minnesota, on the 15th day of October, 1999.
CLEARWATER INVESTMENT TRUST
By: /s/Philip W. Pascoe
----------------------
Philip W. Pascoe
Chairman and Treasurer
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Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement of Clearwater Investment Trust has been signed below by the following persons in the capacities and on the dates indicated:
Signature Date
PRINCIPAL EXECUTIVE, FINANCIAL
AND ACCOUNTING OFFICER:
/s/Philip W. Pascoe October 15, 1999
----------------------
Philip W. Pascoe
Chairman and Treasurer
THE BOARD OF TRUSTEES:
/s/Samuel B. Carr, Jr*
Samuel B. Carr, Jr.
/s/Stanley R. Day, Jr.*
Stanley R. Day, Jr.
/s/Robert J. Phares*
Robert J. Phares
/s/Frederick T. Weyerhaeuser*
Frederick T. Weyerhaeuser
*By /s/Philip W. Pascoe October 15, 1999
----------------------------------
Philip W. Pascoe
Power-of-Attorney
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Exhibit Index
Exhibit
Number
(a)(4) Certificate of Designation
(d)(3) Form of Management Contract
(d)(8) Form of Subadvisory Contract
(j) Consent of Independent Accountants
n/a Powers of Attorney
CLEARWATER INVESTMENT TRUST
2100 First National Bank Building
St. Paul, Minnesota 55101
Certificate of Designation
The undersigned, being a majority of the Board of Trustees ("Trustees") of Clearwater Investment Trust (the "Trust"), a Massachusetts business trust, DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of the Trust by Section 5.5 and Section 8.4 of the Amended and Restated Declaration of Trust, dated March 1, 1998 (the "Declaration of Trust"), and by the affirmative vote of a Majority of the Trustees by written consent dated October 10, 1999, the Declaration of Trust is amended as set forth in this Certificate of Designation.
A. There is hereby established and designated one additional Series of the Trust: "Clearwater Municipal Bond Fund." Such Series shall have all the relative rights and preferences as the other Series established by Trust as incorporated in the Amended and Restated Declaration of Trust.
The Trustees further direct that, upon the execution of this Certificate of Designation, the Trust take all necessary action to file a copy of this Certificate of Designation with the Secretary of State of The Commonwealth of Massachusetts and at any other place required by law or by the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument in duplicate counterparts and have caused a duplicate copy to be lodged among the records of the Trust as of the 10th day of October, 1999.
/s/Philip W. Pascoe /s/Robert J. Phares ------------------------------------ ------------------------------------ Philip W. Pascoe Robert J. Phares Trustee Trustee /s/Samuel B. Carr, Jr /s/Frederick T. Weyerhaeuser ------------------------------------ ------------------------------------ Samuel B. Carr, Jr. Frederick T. Weyerhaeuser Trustee Trustee /s/Stanley R. Day, Jr. ------------------------------------ Stanley R. Day, Jr. Trustee |
MANAGEMENT CONTRACT
AGREEMENT made as of the _____ day of ___________, 1999, by and between CLEARWATER INVESTMENT TRUST, a Massachusetts business trust (the "Trust"), and CLEARWATER MANAGEMENT CO., INC., a Minnesota corporation (the "Manager").
WITNESSETH:
WHEREAS, the Trust desires to utilize the services of the Manager as the manager for the Trust on behalf of Clearwater Tax-Exempt Bond Fund (the "Fund"); and
WHEREAS, the Manager is willing to perform such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set forth herein, it is agreed as follows:
1. The Manager's Services.
(a) Subject always to the supervision of the Trustees of the Trust and the investment policies and restrictions applicable to the Fund as set forth in the registration statement of the Trust filed with the Securities and Exchange Commission (the "SEC"), the Manager is hereby authorized and directed and hereby agrees to develop, recommend and implement such investment programs and strategies for the Funds as may from time to time in the circumstances appear most appropriate to the achievement of the investment objective of the Fund as stated in the aforesaid registration statement, to provide research and analysis relative to the investment program and investments of the Fund, to determine what securities should be purchased and sold and what portion of the assets of the Fund should be held in cash or cash equivalents or other assets and to monitor on a continuing basis the performance of the portfolio securities of the Fund. In addition, the Manager will place orders for the purchase and sale of securities and will advise the custodian for the Fund on a prompt basis of each purchase and sale of a portfolio security for the Fund specifying the name of the issuer, the description and amount or number of shares of the security purchased, the market price, commission and gross or net price, trade date, settlement date and identity of the effecting broker or dealer. From time to time as the Trustees of the Trust may reasonably request, the Manager will furnish to the Trust's officers and to each of its Trustees reports on portfolio transactions and reports on issues of securities held in the Fund, all in such detail as any such Trustee may reasonably request. The Manager
will also inform the Trust's officers and Trustees on a current basis of changes in investment strategy or tactics. The Manager will make its officers and employees available to meet with the Trust's officers and Trustees at least quarterly on due notice to review the investments and investment program of the Fund in the light of current and prospective economic and market conditions. In the performance of its duties hereunder, the Manager will comply with the provisions of the Declaration of Trust and By-laws of the Trust, each as amended from time to time, and will use its best efforts to safeguard and promote the welfare of the Trust and to comply with other policies which the Trustees may from time to time adopt and shall exercise the same care and diligence expected of the Trustees.
(b) Except as otherwise provided herein, the Manager, at its own expense, shall furnish the Trust with office space in the offices of the Manager or in such other place as may be agreed upon from time to time, and all necessary office facilities, equipment and personnel for managing the affairs and investments of the Funds, and shall arrange, if desired by the Trust, for members of the Manager's organization to serve as officers or agents of the Trust.
(c) The Manager shall pay directly or reimburse the Trust for all expenses not hereinafter specifically assumed by the Trust or the Fund. The Trust on behalf of the Fund will pay commissions and other direct charges relating to the purchase and sale of portfolio securities and other assets, taxes, interest and extraordinary expenses, including without limitation litigation expenses.
(d) It shall be the duty of the Manager to furnish to the Trustees of the Trust such information as may reasonably be necessary in order for the Trustees to evaluate this Contract or any proposed amendments hereto for the purposes of casting a vote pursuant to Sections 5 or 7 hereof.
(e) In the performance of its duties hereunder, the Manager is and shall be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust in any way or otherwise be deemed to be an agent of the Trust.
2. Subadvisers
It is understood that the Manager may employ one or more subinvestment advisers (each a "Subadviser") to provide investment advisory services to the Fund by entering into a written agreement with each such Subadviser; provided, that any such agreement first shall be approved on behalf of the Fund in accordance with the requirements of the Investment Company Act of 1940, as amended (the "1940 Act"), as such requirements are modified by rule, regulation, interpretation or order of the SEC. The authority given to the Manager in Sections 1 through 7 hereof may be delegated by it under any such agreement; provided, that any Subadviser shall be subject to the same restrictions and limitations on investments and brokerage discretion
as the Manager. The Trust agrees that the Manager shall not be accountable to the Trust or the Fund or the Fund's shareholders for any loss or other liability relating to specific investments directed by any Subadviser, even though the Manager retains the right to reverse any such investment, because, in the event a Subadviser is retained, the Trust and the Manager will rely almost exclusively on the expertise of such Subadviser for the selection and monitoring of specific investments.
3. Other Agreements, etc.
It is understood that any of the shareholders, trustees, officers and employees of the Trust may be a shareholder, director, officer or employee of, or be otherwise interested in, the Manager, any interested person (as defined in the 1940 Act) of the Manager, any organization in which the Manager may have an interest or any organization which may have an interest in the Manager, and that the Manager, any such interested person or any such organization may have an interest in the Trust. It is also understood that the Trust and the Manager may have advisory, management, service or other contracts with other individuals or entities, and may have other interests and business; provided, that the Manager shall not undertake any seriously conflicting duties or loyalties which would affect its prior fiduciary duty to the Trust.
4. Manager's Compensation.
(a) The Trust on behalf of Clearwater Tax-Exempt Bond Fund ("Bond Fund") shall pay to the Manager, as compensation for the Manager's services to the Bond Fund and as reimbursement to the Manager for the payment of the Bond Fund's expenses, a fee at the annual rate of 0.60% of the Bond Fund's average daily net assets. The management fee payable by the Bond Fund hereunder shall be calculated and accrued daily as a percentage of the Fund's average daily net assets and shall be payable quarterly after the end of each calendar quarter on or before the 15th day of January, April, July and October with respect to the preceding quarter. In the event of termination of this Contract with respect to the Bond Fund, the fee provided for in this paragraph shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current quarter as a percentage of the total number of days in such quarter.
(b) The method of determining the net assets of the Fund for purposes of calculating the fee payable to the Manager hereunder shall be the same as the method of determining net assets for purposes of establishing the offering and redemption price of shares of the Fund. If this Contract shall be effective for only a portion of a calendar quarter with respect to the Fund, the applicable fee shall be prorated for that portion of such calendar quarter during which this Contract is in effect.
(c) The Manager may from time to time agree not to impose all or a portion of its fee with respect to the Fund otherwise payable hereunder (in advance of the time
such fee or a portion thereof would otherwise accrue) and/or undertake to pay or reimburse the Fund for all or a portion of its expenses not otherwise required to be borne or reimbursed by the Manager. Any such fee reduction or undertaking may be discontinued or modified by the Manager at any time.
5. Assignment and Amendment
This Contract shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in the 1940 Act); provided, that such termination shall not relieve either party of any liability incurred hereunder. The terms of this Contract shall not be changed unless such change is approved in accordance with the requirements of the 1940 Act, as such requirements are modified by rule, regulation, interpretation or order of the SEC.
6. Avoidance of Inconsistent Position.
(a) In connection with purchases and sales of portfolio securities for the account of the Fund, neither the Manager nor any of its Directors, officers or employees will act as a principal or agent or receive any commission except as permitted by the 1940 Act. The Manager shall arrange for the placing of all orders for the purchase and sale of portfolio securities for the Fund's account with brokers or dealers selected by the Manager. In the selection of such brokers or dealers and the placing of such orders, the Manager is directed at all times to seek for the Fund the most favorable execution and net price available except as described herein. It is understood that it is desirable for the Fund that the Manager have access to supplemental investment and market research and security and economic analyses provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers on the basis of seeking the most favorable price and efficient execution. Therefore, the Manager is authorized to place orders for the purchase and sale of securities for a Fund with such brokers, subject to review by the Trust's Trustees from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Manager in connection with the Manager's services (or its affiliates' services) to other clients.
(b) On occasions when the Manager deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Manager, to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased in order to obtain the best execution and lower brokerage commissions, if any. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Manager in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such clients.
7. Effective Period and Termination of this Contract.
(a) This Contract shall become effective on the date hereof and shall remain in full force and effect as to the Fund until two years from the date set forth above and from year to year thereafter, but only so long as its continuance is approved in accordance with the requirements of the 1940 Act, as such requirements are modified by rule, regulation, interpretation or order of the SEC, subject to the respective rights of the Trust and the Manager to terminate this contract as provided in paragraphs (b) and (c) hereof.
(b) The Trust may at any time and without penalty terminate this
Contract as to the Fund or as to the Trust as a whole by not more than sixty
(60) days' nor less than thirty (30) days' written notice given to the Manager;
or
(c) The Manager may at any time and without penalty terminate this Contract as to the Fund or as to the Trust as a whole by not less than one hundred twenty (120) days' written notice given to the Trust.
8. Complete Agreement
This Contract states the entire agreement of the parties hereto, and is intended to be the complete and exclusive statement of the terms hereof. It may not be added to or changed orally, and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with Section 5 hereof and the applicable requirements of the 1940 Act as such requirements are modified by rule, regulation, interpretation or order of the SEC.
9. Nonliability of the Manager
In the absence of willful misfeasance, bad faith or gross negligence on the part of the Manager, or of reckless disregard of its obligations and duties hereunder, the Manager shall not be subject to any liability to the Trust, to any shareholder of the Trust, or to any person, firm or organization, for any act or omission in the course of, or connected with, rendering services hereunder. Nothing herein, however, shall derogate from the Manager's obligations under applicable federal and state securities laws.
10. Limitation of Liability of the Trustees
Officers and Shareholders. A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations of this instrument with respect to a Fund or to the Trust in general are not binding upon any of the Trustees, officers or shareholders of the Trust but are binding only upon the assets and property of that Fund or of the Trust, as the case may be.
11. Notices
Any notice, instruction, request or other communications required or contemplated by this Contract shall be in writing and shall be duly given when deposited by first-class mail, postage prepaid, or consigned to a nationally recognized overnight delivery service addressed to (or delivered by hand with confirmation to) the Trust or the Manager at the applicable address set forth below:
If to Trust:
Clearwater Investment Trust
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
If to Manager:
Clearwater Management Co., Inc.
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
12. Disclosure Statement
The Trust acknowledges receipt of the Manager's written disclosure statement required by Rule 204-3 under the Investment Advisers Act of 1940 not less than 48 hours prior to entering into this Contract.
13. Governing Law
This Contract and all performance hereunder shall be governed by, interpreted, construed and enforced in accordance with the laws of the State of Minnesota.
14. Severability
Any term or provision of this Contract which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Contract or affecting the validity or enforceability of any of the terms or provisions of this Contract in any other jurisdiction.
15. Counterparts
This Contract may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed by their duly authorized officers and as of the day and year first written above.
CLEARWATER INVESTMENT TRUST
By:________________________________
Name:
Title:
CLEARWATER MANAGEMENT CO., INC.
By:________________________________
Name:
Title:
FORM OF SUBADVISORY CONTRACT
AGREEMENT made as of the ____ day of _______________, 1999, by and among CLEARWATER INVESTMENT TRUST, a Massachusetts business trust (the "Trust"), CLEARWATER MANAGEMENT CO., INC., a Minnesota corporation (the "Manager"), and SIT FIXED INCOME ADVISORS II, L.L.C., a Minnesota corporation (the "Subadviser") a subsidiary of Sit Investment Associates, Inc.
W I T N E S S E T H:
WHEREAS, the Manager desires to utilize the services of the Subadviser as financial counsel with respect to Clearwater Tax-Exempt Bond Fund (the "Fund"), a separate series of the Trust; and
WHEREAS, the Subadviser is willing to perform such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and benefits herein contained, it is agreed as follows:
1. The Subadviser's Services. The Subadviser will serve the Manager as financial counsel with respect to the Fund which is under the management of the Manager pursuant to the Management Contract dated _____________________, 1999 between the Manager and the Trust. Subject to the supervision of the Manager, the investment policies and restrictions applicable to the Fund as set forth in the registration statement of the Trust filed with the Securities and Exchange Commission and such resolutions as from time to time may be adopted by the Trust's Trustees and furnished to the Subadviser, the Subadviser is hereby authorized and directed and hereby agrees to develop, recommend and implement such investment program and strategy for the Fund as may from time to time in the circumstances appear most appropriate to the achievement of the investment objectives of the Fund as stated in the aforesaid registration statement, to provide research and analysis relative to the investment program and investments of the Fund, to determine what securities should be purchased and sold and what portion of the assets of the Fund should be held in cash or cash equivalents or other assets and to monitor on a continuing basis the performance of the portfolio securities of the Fund. In addition, the Subadviser will place orders for the purchase and sale of portfolio securities and will advise the Manager and the custodian for the Fund on a prompt basis of each purchase and sale of a portfolio security specifying the name of the issuer, the description and amount or number of shares of the security purchased, the market price, commission and gross or
net price, trade date, settlement date and identity of the effecting broker or dealer. From time to time as the Trustees of the Trust or the Manager may reasonably request, the Subadviser will furnish to the Trust's officers and to each of its Trustees reports on portfolio transactions and reports on issues of securities held by the Fund, all in such detail as any such Trustee or the Manager may reasonably request. The Subadviser also will inform the Trust's officers and Trustees on a current basis of changes in investment strategy or tactics. The Subadviser will make its officers and employees available to meet with the Trust's officers and Trustees and the Manager's officers and Directors at least quarterly on due notice to review the investments and investment program of the Fund in the light of current and prospective economic and market conditions.
2. Avoidance of Inconsistent Position.
(a) In connection with purchases and sales of portfolio securities for the account of the Fund, the Subadviser will not act as a principal or agent or receive any commission except as permitted by the Investment Company Act of 1940, as amended (the "1940 Act"). The Subadviser shall arrange for the placing of all orders for the purchase and sale of portfolio securities for the Fund's account with brokers or dealers selected by the Subadviser. In the selection of such brokers or dealers and the placing of such orders, the Subadviser is directed at all times to seek for the Fund the most favorable execution and net price available except as otherwise described herein. It is understood that it is desirable for the Fund that the Subadviser have access to supplemental investment and market research and security and economic analyses provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers on the basis of seeking the most favorable price and efficient execution. Therefore, the Subadviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers consistent with the requirements of Section 28(e) of the Securities Exchange Act of 1934, subject to review by the Trust's Trustees from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Subadviser in connection with its services (and the services of the Subadviser's affiliates) to other clients.
(b) On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Subadviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased in order to obtain the best execution and lower brokerage commissions, if any. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such clients.
3. Other Agreements, etc. It is understood that any of the shareholders, Trustees, officers and employees of the Trust may be a shareholder, director, officer or employee of, or be otherwise interested in, the Subadviser, any interested person (as defined in the 1940 Act) of the Subadviser, any organization in which the Subadviser may have an interest or any organization which may have an interest in the Subadviser and that the Subadviser, any such interested person or any such organization may have an interest in the Trust. It is also understood that the Subadviser, the Manager and the Trust may have advisory, management, service or other contracts with other individuals or entities, and may have other interests and businesses. When a security proposed to be purchased or sold for the Trust is also to be purchased or sold for other accounts managed by the Subadviser at the same time, the Subadviser shall make such purchases or sales on a pro rata, rotating or other equitable basis so as to avoid any one account being preferred over any other account.
4. Subadviser's Compensation. The Manager shall pay to the Subadviser for services hereunder a fee at the annual rate provided in the following schedule based on the Fund's net assets under the Subadviser's management:
Percent Net Assets 0.40% Up to and including $20 million 0.30% Next $30 million 0.25% Next $25 million 0.20% Over $75 million |
Such fee shall be calculated and accrued on a monthly basis as a percentage of the Fund's month end net assets under the Subadviser's management, and shall be payable quarterly after the end of each calendar quarter on or before the 15th day of January, April, July and October of each year with respect to the preceding quarter. If this Contract shall be effective for only a portion of a calendar quarter, the aforesaid fee shall be prorated for that portion of such calendar quarter during which this Contract is in effect.
5. Assignment and Amendment. This Contract shall automatically terminate, without the payment of any penalty, in the event of its assignment (as defined in the 1940 Act) or in the event of the termination of the Management Contract between the Trust and the Manager insofar as it applies to the Fund; provided, that such termination shall not relieve either party of any liability incurred hereunder. The terms of this Contract shall not be changed unless such change is approved in accordance with the requirements of the 1940 Act, and as such requirements may be modified by rule, regulation or order of the Securities and Exchange Commission ("SEC").
6. Effective Period and Termination of this Contract.
(a) This Contract shall become effective on the date hereof and shall remain in full force and effect until two years from the date hereof and from year to year thereafter, but only so long as its continuance is approved annually in accordance with the requirements of the 1940 Act, and as such requirements may be modified by rule, regulation or order of the SEC.
(b) The Trust or the Manager may at any time terminate this Contract by not more than sixty (60) days' nor less than thirty (30) days' written notice given to the Subadviser.
(c) The Subadviser may at any time terminate this Contract by not less than one hundred twenty (120) days' written notice given to the Trust and the Manager.
7. Complete Agreement. This Contract states the entire agreement of the parties hereto, and is intended to be the complete and exclusive statement of the terms hereof. It may not be added to or changed orally, and may not be modified or rescinded except by a writing signed by the parties hereto and in accordance with Section 5 hereof and the applicable requirements of the 1940 Act.
8. Nonliability of the Subadviser. In the absence of willful misfeasance, bad faith or gross negligence on the part of the Subadviser, or of reckless disregard of its obligations and duties hereunder, the Subadviser shall not be subject to any liability to the Manager or the Trust, to any shareholder of the Fund, or to any person, firm or organization, for any act or omission in the course of, or connected with, rendering services hereunder. Nothing herein, however, shall derogate from the Subadviser's obligations under applicable federal and state securities laws.
9. Limitation of Liability of the Trustees, Officers and Shareholders. A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this Contract is executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations under this Contract are not binding upon any of the Trustees, officers or shareholders of the Trust but are binding only upon the assets and property of the Fund.
10. Notices. Any notice, instruction, request or other communications required or contemplated by this Contract shall be in writing and shall be duly given when deposited by first class mail, postage prepaid, addressed to (or delivered by hand with confirmation to) the Trust, the Manager or the Subadviser at the applicable address set forth below:
If to Subadviser:
Sit Fixed Income Advisors II, L.L.C.
4600 Norwest Center
90 South Seventh Street Minneapolis, MN 555402-4130
If to Trust:
Clearwater Investment Trust
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
If to Manager:
Clearwater Management Co., Inc.
332 Minnesota Street, Suite 2100
St. Paul, Minnesota 55101
11. Disclosure Statement. The Manager and the Trust acknowledge receipt of the Subadviser's written disclosure statement required by Rule 204-3 under the Investment Advisers Act of 1940 not less than 48 hours prior to entering into this Contract.
12. Governing Law. This Contract and all performance hereunder shall be governed by, interpreted, construed and enforced in accordance with the laws of the State of Minnesota.
13. Any term or provision of this Contract which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Contract or affecting the validity or enforceability of any of the terms or provisions of this Contract in any other jurisdiction.
14. This Contract may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed by their duly authorized officers and as of the day and year first written above.
CLEARWATER INVESTMENT TRUST
By: Name: Philip W. Pascoe Title: Chairman |
CLEARWATER MANAGEMENT CO., INC.
By: Name: Philip W. Pascoe Title: Chairman |
SIT FIXED INCOME ADVISORS II, L.L.C.
By:
Name:
Title:
The Board of Trustees
Clearwater Investment Trust:
We consent to the use of our report incorporated by reference herein and to the reference to our Firm under the heading "Independent Accountants" in Part B of the Registration Statement.
KPMG LLP
Minneapolis, Minnesota
October 15, 1999