<PAGE>
THE COMMERCE FUNDS(TM)
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
AGGRESSIVE GROWTH FUND
INTERNATIONAL EQUITY FUND
SUPPLEMENT DATED JULY 5, 1995
TO THE PROSPECTUS DATED NOVEMBER 9, 1994,
AS REVISED NOVEMBER 15, 1994
FINANCIAL HIGHLIGHTS
The following unaudited "Financial Highlights" set forth certain
historic investment results for shares of each Fund. Further information about
the performance of the Funds is available in the Funds' Semi-Annual Report to
Shareholders. Both the Statement of Additional Information and the Semi-Annual
Report to Shareholders may be obtained from The Commerce Funds free of charge by
calling the number on the cover page of the Prospectus.
<TABLE>
<CAPTION>
Short-Term
Government Aggressive International
Fund Bond Fund Balanced Fund Growth Fund Growth Fund Equity Fund
--------------- --------------- --------------- --------------- --------------- -----------------
Dec. 12, Dec. 12, Dec. 12, Dec. 12, Dec. 12, Dec. 12,
1994/(1)/ 1994/(1)/ 1994/(1)/ 1994/(1)/ 1994/(1)/ 1994/(1)/
through through through through through through
April 30, 1995 April 30, 1995 April 30, 1995 April 30, 1995 April 30, 1995 April 30, 1995
Per Share Data (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
- -------------- -------------- --------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.......... $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00
------- ------- ------- -------- ------- -------
Income from investment
operations:
Net investment income
(loss).................... 0.46 0.51 0.32 0.08 (0.02) 0.06
Net realized and un-
realized gain (loss) on
investments/(2)/.......... 0.42 0.62 1.70 2.97 3.61 (0.03)
Net realized and un-
realized gain on
foreign currency
related
transactions/(2)/......... --- --- --- --- --- 0.05
------- ------- ------- -------- ------- -------
Total from investment
operations................ 0.88 1.13 2.02 3.05 3.59 0.08
------- ------- ------- -------- ------- -------
Less distributions to
shareholders:
From net investment
income.................... (0.46) (0.51) (0.26) (0.07) --- (0.03)
------- ------- ------- -------- ------- -------
Total distributions........ (0.46) (0.51) (0.26) (0.07) --- (0.03)
------- ------- ------- -------- ------- -------
Net asset value, end of
period....................... $ 18.42 $ 18.62 $ 19.76 $ 20.98 $ 21.59 $ 18.05
======= ======= ======= ======== ======= =======
Total return/(3)/............. 4.92% 6.38% 11.19% 16.95% 19.94% 0.44%
======= ======= ======= ======== ======= =======
Ratios/supplemental data
Net assets at end of
period $(000)............. 16,589 84,672 37,251 113,837 21,099 11,167
Ratio of net expenses to
average net assets/(4)/... 0.68% 0.88% 1.13% 1.13% 1.56% 1.94%
Ratio of net investment
income to average net
assets/(4)/............... 6.46% 7.23% 4.14% 0.99% (0.36)% 1.15%
Portfolio turnover rate.... 111% 27% 36% 12% 31% 27%
Ratio of expenses to
average net assets
without waivers
and reimbursements/(4)/... 1.18% 0.95% 1.52% 1.18% 1.56% 4.14%
Ratio of net investment
income to average net
assets without waivers
and reimbursements/(4)/... 5.96% 7.16% 3.75% 0.94% (0.36)% (1.05)%
- ----------------------------
</TABLE>
(1) Commencement of operations.
(2) Includes the balancing effect of calculating per share amounts.
(3) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charge. Total return would be reduced if a sales charge were taken into
account.
(4) Annualized.
<PAGE>
Revised Investment Policy for the Bond Fund
The first and second sentences of the Bond Fund's Investment Strategy
on page 6 of the Prospectus is revised to read as follows:
In pursuing its investment objective, the Fund will invest,
during normal market conditions, at least 65% of its total assets in
fixed income debt securities rated at the time of purchase A- or
better by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., including corporate debt obligations such as fixed and
variable-rate bonds, zero coupon bonds and debentures, obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and money market instruments. All of the fixed
income securities acquired by the Fund other than those subject to the
65% requirement described above will be rated investment grade at the
time of purchase.
Revised Sales Load Exemptions
The fourth bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 28 of the Prospectus is revised to read as follows:
. plans qualified under Section 401 of the Internal Revenue Code of
1986, as amended (the "Code") (including corporate retirement plans,
Keogh plans, and Section 401(k) plans), custodial accounts treated as
tax-sheltered annuities under Section 403(b) of the Code, and deferred
compensation plans for public, religious and other tax-exempt
employers (including plans described in Section 457 of the Code)
maintained by an Investment Management Group (Trust Department) within
a bank affiliated, or within banks that have signed a definitive
agreement to become affiliated, with Commerce Bancshares, Inc.;
The fifth bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 28 of the Prospectus is revised to read as follows:
. shares purchased for and held in a trust, management agency, custodial
or other account maintained by an Investment Management Group (Trust
Department) within a bank affiliated, or within banks that have signed
a definitive agreement to become affiliated, with Commerce Bancshares,
Inc. (including shares purchased with distributions from such
accounts);
The seventh bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 28 of the Prospectus is revised to read as follows:
<PAGE>
. employees, directors, officers and retirees (as well as their spouses
and legal dependents) of Commerce Bancshares, Inc., Goldman, Sachs &
Co. or their subsidiaries or affiliates;
The eighth bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 28 of the Prospectus is revised to read as follows:
. employees, directors, officers and retirees (as well as their spouses
and legal dependents) of banks that have signed a definitive agreement
to become affiliated with Commerce Bancshares, Inc.;
Additional Minimum Investment Requirements
The following sentence and chart should be inserted at the end of "How
To Buy Shares - What Is My Minimum Investment For Each Fund?" on page 27 of the
Prospectus :
In addition to the above, a minimum initial investment
requirement of $250 for initial purchases and $25 for subsequent
purchases will apply to employees, directors, officers and retirees
(as well as their spouses and legal dependents) of Commerce
Bancshares, Inc., Goldman, Sachs & Co. and their subsidiaries or
affiliates, although it may differ in certain circumstances as shown
below.
Investment Minimums For Certain Types of Investors
<TABLE>
<CAPTION>
Initial Subsequent
Investment Investment
---------- ----------
<S> <C> <C>
Regular Account....................................... $250 $25
Automatic Investment Feature.......................... $100 $25
Individual Retirement Accounts (including SEP-IRAs),
Keogh Plans,........................................ $100 $25
</TABLE>
<PAGE>
THE COMMERCE FUNDS(TM)
National Tax-Free Bond Fund
Missouri Tax-Free Bond Fund
SUPPLEMENT DATED JULY 5, 1995
TO THE PROSPECTUS DATED NOVEMBER 15, 1994
FINANCIAL HIGHLIGHTS
The following unaudited "Financial Highlights" set forth certain historic
investment results for shares of each Fund. Further information about the
performance of the Funds is available in the Funds' Semi-Annual Report to
Shareholders. Both the Statement of Additional Information and the Semi-Annual
Report to Shareholders may be obtained from The Commerce Funds free of charge by
calling the number on the cover page of the Prospectus.
<TABLE>
<CAPTION>
National Tax-Free Missouri Tax-Free
Bond Fund Bond Fund
----------------------- -----------------------
February 21, 1995/(1)/ February 21, 1995/(1)/
through through
April 30, 1995 April 30, 1995
Per Share Data (unaudited) (unaudited)
- -------------- ----------------------- -----------------------
<S> <C> <C>
Net asset value, beginning
of period..................... $18.00 $18.00
------ ------
Income from investment
operations:
Net investment income....... 0.16 0.17
Net realized and
unrealized gain (losses)
on investments/(2)/....... (0.05) 0.01
------ ------
Total from operations....... 0.11 0.18
------ ------
Less distributions to
shareholders:
From net investment income.. (0.16) (0.17)
------ ------
Total distributions......... (0.16) (0.17)
------ ------
Net asset value, end of
period........................ $17.95 $18.01
====== ======
Total return/(3)/.............. 0.58% 0.98%
====== ======
Ratios/supplemental data
Net assets at end of
period $(000).............. 5,630 4,197
Ratio of net expenses to
average net assets/(4)/.... 0.85% 0.65%
Ratio of net investment
income to average net
assets/(4)/................ 4.56% 4.87%
Portfolio turnover rate..... 11% 21%
Ratio of expenses to
average net assets
without waivers and
reimbursements/(4)/........ 2.91% 3.60%
Ratio of net investment
income to average
net assets without
waivers and
reimbursements/(4)/........ 2.50% 1.92%
- ---------------------------
</TABLE>
(1) Commencement of operations.
(2) Includes the balancing effect of calculating per share amounts.
(3) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charge. Total return would be reduced if a sales charge were taken into
account.
(4) Annualized.
<PAGE>
Revised Sales Load Exemptions
The fourth bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 17 of the Prospectus is revised to read as follows:
. shares purchased for and held in a trust, management agency, custodial
or other account maintained by an Investment Management Group (Trust
Department) within a bank affiliated, or within banks that have signed
a definitive agreement to become affiliated, with Commerce Bancshares,
Inc. (including shares purchased with distributions from such
accounts);
The sixth bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 17 of the Prospectus is revised to read as follows:
. employees, directors, officers and retirees (as well as their spouses
and legal dependents) of Commerce Bancshares, Inc., Goldman, Sachs &
Co. or their subsidiaries or affiliates;
The seventh bullet under "How To Buy Shares - When There Is No Sales
Charge" on page 17 of the Prospectus is revised to read as follows:
. employees, directors, officers and retirees (as well as their spouses
and legal dependents) of banks that have signed a definitive agreement
to become affiliated with Commerce Bancshares, Inc.;
Additional Minimum Investment Requirements
The following sentence and chart should be inserted at the end of "How
To Buy Shares - What Is My Minimum Investment For Each Fund?" on page 16 of the
Prospectus:
In addition to the above, a minimum initial investment
requirement of $250 for initial purchases and $25 for subsequent
purchases will apply to employees, directors, officers and retirees
(as well as their spouses and legal dependents) of Commerce
Bancshares, Inc., Goldman Sachs & Co. and their subsidiaries or
affiliates, although it may differ in certain circumstances as shown
below.
Investment Minimums For Certain Types of Investors
Initial Subsequent
Investment Investment
---------- ----------
Regular Account.......................... $250 $25
Automatic Investment Feature............. $100 $25
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
Aggressive Growth Fund
International Equity Fund
National Tax-Free Bond Fund
Missouri Tax-Free Bond Fund
November 9, 1994 as revised
July 5, 1995
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
Investment Objectives, Policies and Risk Factors
Net Asset Value...................................
Additional Purchase and Redemption Information....
Description of Shares.............................
Additional Information Concerning Taxes...........
Management of The Commerce Funds..................
Independent Auditors..............................
Counsel...........................................
Additional Information on Performance.............
Financial Statements.............................. FS-1
Appendix A........................................ A-1
Appendix B........................................ B-1
</TABLE>
This Statement of Additional Information, is meant to be read in
conjunction with The Commerce Funds' Prospectuses dated November 9, 1994, as
revised November 15, 1994, for the Commerce Short-Term Government, Bond,
Balanced, Growth, Aggressive Growth, International Equity, National Tax-Free
Bond and Missouri Tax-Free Bond Funds (each, a "Fund" and collectively, the
"Funds"). This Statement of Additional Information is incorporated by reference
in its entirety into the Prospectuses. Because this Statement of Additional
Information is not itself a prospectus, no investment in the Funds should be
made solely upon the information contained herein. Copies of the Prospectuses
may be obtained by calling 1-800-305-2140. Capitalized terms used but not
defined herein have the same meanings as in the Prospectuses.
-1-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the discussion of the Funds'
respective investment objectives and policies as set forth in the Prospectuses.
Portfolio Transactions
- ----------------------
The annualized portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Fund turnover may vary greatly
from year to year as well as within a particular year, and may be affected by
cash requirements for redemption of shares and by requirements which enable the
Fund to receive favorable tax treatment. Fund turnover will not be a limiting
factor in making portfolio decisions, and each Fund may engage in short-term
trading to achieve its investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions in the
over-the-counter market are generally principal transactions with dealers and
the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the Advisor will
normally deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere or as described below. Unlike transactions on U.S. stock
exchanges which involve the payment of negotiated brokerage commissions,
transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
Debt securities purchased and sold by the Funds are generally traded
in the over-the-counter market on a net basis (i.e., without commission) through
----
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Advisory Agreement for the Funds provides that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition, the Agreement
-2-
<PAGE>
authorizes the Advisor, subject to the prior approval of the Board of Trustees,
to cause the Funds to pay a broker-dealer furnishing brokerage and research
services a higher commission than that which might be charged by another broker-
dealer for effecting the same transaction, provided that they determine in good
faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the overall responsibilities of the
Advisor to the particular Fund and to The Commerce Funds. Such brokerage and
research services might consist of reports and statistics of specific companies
or industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy and advice to the value of
securities, markets and the economy as well as the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable by the Funds. The Board of Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
A Fund's portfolio securities will not be purchased from or sold to
(and savings deposits will not be made in and repurchase and reverse repurchase
agreements will not be entered into with) the Advisor, Sub-Advisor, Goldman,
Sachs & Co. or any affiliated person (as such term is defined in the 1940 Act)
thereof acting as principal or broker, except to the extent permitted by the
Securities and Exchange Commission. However, The Commerce Funds' Board of
Trustees has authorized the Advisor to allocate purchase and sale orders for
portfolio securities to broker/dealers and other financial institutions
including, in the case of agency transactions, institutions which are affiliated
with the Advisor, to take into account the sale of Fund shares if the Advisor
believes that the quality of the transaction and the amount of the commission
are comparable to what they would be with other qualified brokerage firms,
provided such transactions comply with the requirements of Rule 17e-1 under the
1940 Act. In addition, the Funds will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Advisor, Goldman, Sachs & Co., or any affiliated person thereof is a member,
except to the extent permitted by the Securities and Exchange Commission. Under
certain circumstances, the Funds may be at a disadvantage when compared to other
investment companies which have similar investment objectives but that are not
subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also
-3-
<PAGE>
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of any Fund and
another investment company or account, that transaction will be aggregated
(where not inconsistent with the policies set forth in the Prospectuses) and
allocated as to amount in a manner which the Advisor believes to be equitable
and consistent with its fiduciary obligations to the Fund involved and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained by the Fund.
The Commerce Funds is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) or their
parents held by the Funds since commencement of operations. During the period
December 12, 1994 (commencement of operations) through April 30, 1995, the Bond
Fund acquired securities of Smith Barney Holdings, Inc., the parent of one of
its regular broker/dealers. At April 30, 1995, the Bond Fund's aggregate
holding of these securities amounted to $1,907,360. During the same period, the
Balanced Fund acquired securities of Lehman Brothers Holdings, Inc. and Smith
Barney Holdings, Inc. (each a regular broker/dealer or parent). At April 30,
1995, the Balanced Fund's aggregate holding of these securities amounted to
$504,180 and $476,840, respectively.
During the period ended April 30, 1995, the respective Funds purchased
repurchase agreements issued by State Street Bank & Trust Company, which was one
of the brokers or dealers which engaged as principal in the largest dollar
amount of portfolio transactions with the Funds. At April 30, 1995, the Funds
held the following amounts of repurchase agreements with State Street Bank &
Trust Company:
<TABLE>
<S> <C>
Short-Term Government Fund $ 982,000
Bond Fund 3,394,000
Balanced Fund 2,165,000
Growth Fund 5,598,000
Aggressive Growth Fund 2,735,000
International Equity Fund 4,829,000
National Tax-Free Bond Fund 357,000
Missouri Tax-Free Bond Fund 303,000
</TABLE>
-4-
<PAGE>
For the period December 12, 1994 (commencement of operations) through
April 30, 1995, each of the following Funds paid brokerage commissions as
follows:
<TABLE>
<CAPTION>
Total
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transactions Paid to
Brokerage Paid to on Which Brokers Who
Commissions Affiliated Commissions Provided
Paid Persons Paid Research
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balanced Fund $ 9,927 $ 660 $ 3,638,122 $2,622
Growth Fund $54,788 $1,460 $24,996,768 $8,670
Aggressive
Growth Fund $22,380 $ 300 $ 6,319,575 $2,160
International
Equity Fund $19,908 $ 0 $ 5,823,079 $ 0
</TABLE>
Ratings of Securities
- ---------------------
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch
Investors Service, Inc., Thomson Bank Watch and IBCA Inc., as NRSROs, represent
their opinions as to the quality of debt securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
debt securities with the same maturity, interest rate and rating may have
different yields while debt securities of the same maturity and interest rate
with different ratings may have the same yield. Subsequent to its purchase by a
Fund, an issue of debt securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by a Fund. The Advisor
will consider such an event in conjunction with the particular Fund's investment
policy when determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its debt securities
may be materially adversely affected by litigation or other conditions.
-5-
<PAGE>
Attached to this Statement of Additional Information is Appendix A,
which contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Funds may invest.
Variable and Floating Rate Instruments
- --------------------------------------
The Funds may purchase variable rate and floating rate obligations as
described in the Prospectuses. Such instruments are frequently not rated by
credit rating agencies. However, in determining the creditworthiness of unrated
variable and floating rate instruments and their eligibility for purchase by the
Funds, the Advisor will consider the earning power, cash flows and other
liquidity ratios of the issuers and guarantors of such obligations and, if the
obligation is subject to a demand feature, will monitor their financial status
to meet payment on demand. In determining average weighted portfolio maturity,
an instrument will usually be deemed to have a maturity equal to the longer of
the period remaining to the next interest rate adjustment or the time a Fund can
recover payment of principal as specified in the instrument.
Variable and floating rate demand instruments acquired by the National
Tax-Free Bond and Missouri Tax-Free Bond Funds may include participation in
Municipal Obligations purchased from and owned by financial institutions
(primarily banks). Participation interests provide the Fund with a specified
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice, not to exceed thirty days. Each participation interest is backed by an
irrevocable letter of credit or guarantee of a bank that the Advisor has
determined meets the prescribed quality standards for the Fund. The bank
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
U.S. Government Obligations
- ---------------------------
As stated in the Prospectuses, pursuant to their investment objective,
the Funds may invest in U.S. Government Obligations. Government Obligations
with nominal remaining maturities in excess of five years that have variable or
floating interest rates or demand or put features may nonetheless be deemed to
have remaining maturities of five years or less so as to be permissible
investments as follows: (a) a government security with a variable or floating
rate of interest will be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate; (b) a government security with
a demand or put feature that entitles the holder to receive the principal amount
of the underlying security at the time of or sometime after the holder gives
notice of demand or exercise of the put will be deemed to have a maturity equal
to the period remaining until the principal amount can be recovered through
demand or exercise of the put; and (c) a government security with both a
variable or floating rate of interest as described in clause (a) and a demand or
put feature as described in clause (b) will be deemed to have a maturity
-6-
<PAGE>
equal to the shorter of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand or exercise of the put.
Mortgage-Backed and Asset-Backed Securities
- -------------------------------------------
The Bond and Balanced Funds may purchase mortgage and asset-backed
securities (the Short-Term Government Fund may purchase only mortgage-backed
securities) that are secured by entities such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), commercial banks, trusts, financial
companies, finance subsidiaries of industrial companies, savings and loan
associations, mortgage banks and investment banks.
Mortgage-Related Securities. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued
by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
A Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple
-7-
<PAGE>
class securities may be issued by U.S. Government agencies or instrumentalities,
including FNMA and FHLMC, or by trusts formed by private originators of, or
investors in, mortgage loans. In general, CMOs and REMICs are debt obligations
of a legal entity that are collateralized by, and multiple class pass-through
securities represent direct ownership interests in, a pool of residential
mortgage loans or mortgage pass-through securities (the "Mortgage Assets"), the
payments on which are used to make payments on the CMOs or multiple pass-through
securities. Investors may purchase beneficial interests in REMICs, which are
known as "regular" interests or "residual" interests. The Funds do not intend
to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest
-8-
<PAGE>
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend
to have market prices and yields that are much more volatile than the PAC
classes.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
Asset-Backed Securities. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
-9-
<PAGE>
Options Trading
- ---------------
As stated in the Prospectuses, each of the Funds may purchase put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not to exceed 5% of
a Fund's net assets. Such options relate to particular securities. This is a
highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves. A listed call option gives
the purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by a Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
The Funds will write only "covered" call options on securities. The
option is "covered" if a Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its custodian)
upon conversion or exchange of other securities held by it. A call option is
also covered if a Fund holds a call on the same security as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its custodian.
A Fund's obligation to sell a security subject to a covered call
option written by it, or to purchase a security subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., the same
----
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The
cost of such a liquidation purchase plus transaction costs may be greater than
the premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. An option position may be closed out only
on an exchange which provides a secondary market for an option of the same
series. There is no assurance that a
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<PAGE>
liquid secondary market on an exchange will exist for any particular option. A
covered call option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Fund will write an option on a
particular security only if the Advisor believes that a liquid secondary market
will exist on an exchange for options of the same series which will permit the
Fund to make a closing purchase transaction in order to close out its position.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if a Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
As noted previously, there are risks associated with transactions in
options on securities. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
The Fund will likely be unable to control losses by closing its position where a
liquid secondary market does
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<PAGE>
not exist. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Futures Contracts and Related Options
- -------------------------------------
The Bond, Balanced, Growth, Aggressive Growth and International Equity
Funds may invest in futures contracts and options thereon (interest rate futures
contracts or index futures contracts, as applicable). Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event
of adverse price movements, a Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if a Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to effectively
hedge.
Successful use of futures by a Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the underlying
security or index. For example, if a Fund has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
-12-
<PAGE>
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Hybrid Instruments
- ------------------
Hybrid Instruments have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depository share, trust
certificate, certificate of deposit or other evidence of indebtedness on which a
portion of or all interest payments, and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by reference to
prices, changes in prices, or differences between prices of securities,
currencies, intangibles, goods, articles or commodities (collectively,
"Underlying Assets") or by another objective index, economic factor or other
measure, such a interest rates, currency exchange rates, commodity indices, and
securities indices (collectively, "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar-
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<PAGE>
denominated Hybrid Instrument whose redemption price is linked to the average
three year interest rate in a designated group of countries. The redemption
price formula would provide for payoffs of greater than par if the average
interest rate was lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so that
the principal paid at maturity could not be below a predetermined minimum level
if interest rates were to rise significantly. The purpose of this arrangement,
known as a structured security with an embedded put option, would be to give the
Fund the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Fund could lose money if,
for example, interest rates do not move as anticipated or credit problems
develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand of the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to
the discussion of futures, options, and forward contracts herein for a
discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
-14-
<PAGE>
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity futures
by U.S. persons, the SEC, which regulates the offer and sale of securities by
and to U.S. persons, or any other governmental regulatory authority.
Interest Rate Swaps, Floors and Caps
- ------------------------------------
In order to hedge against fluctuations in interest rates, the Short-
Term Government, Bond, Balanced, National Tax-Free Bond and Missouri Tax-Free
Bond Funds may enter into interest rate and mortgage swaps and interest rate
caps and floors. A Fund typically uses interest rate and mortgage swaps to
preserve a return on a particular investment or portion of its portfolio or to
shorten the effective duration of its portfolio securities. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. The purchase of an interest rate floor or cap entitles the purchaser
to receive payments of interest on a notional principal amount from the seller,
to the extent that a specified index falls below (floor) or exceeds (cap) a
predetermined interest rate. In a typical cap or floor arrangement, one party
agrees to make payments only under specified circumstances, usually in return
for payment of a fee by the other party. For example, the buyer of an interest
rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed upon level, while the seller of an interest rate
floor is obligated to make payments to the extent that a specified interest rate
falls below an agreed upon level. Since interest rate swaps, mortgage swaps and
interest rate caps and floors are individually negotiated, the Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its interest rate swaps, mortgage swaps and interest rate caps and floors
positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch
as these transactions are entered into for good faith hedging purposes, the Fund
and the Advisor believe that such obligations do not constitute senior
securities as defined in the 1940 Act and, accordingly, do not treat them as
being subject to the Fund's borrowing restrictions. The net amount of the
excess, if
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<PAGE>
any, of the Fund's obligations over its entitlements with respect to each
interest rate or mortgage swaps is accrued on a daily basis and an amount of
cash or liquid debt securities rated in one of the top three ratings categories
by S&P or Moody's or the equivalent rating of another NRSRO or if unrated by
such rating organizations, deemed by the Advisor to be of comparable quality
("High Grade Debt Securities") having an aggregate net asset value at least
equal to such accrued excess, is maintained in a segregated account by the
Fund's custodian.
A Fund does not enter into any interest rate or mortgage swap or
interest cap or floor transaction unless the unsecured commercial paper, senior
debt or the claims-paying ability of the other party thereto is rated either AA
or A-1 or Aa or P-1 or better by S&P or Moody's or the equivalent rating of
another NRSRO or if unrated by such rating organizations, determined by the
Advisor to be of comparable credit quality. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with the markets for other similar instruments which are traded in
the relevant market. However, the staff of the SEC takes the position that
swaps, caps and floors are illiquid for purposes of the Fund's limitation on
investments in illiquid securities.
Rights Offerings and Warrants
- -----------------------------
As stated in their Prospectus, the Balanced, Growth, Aggressive Growth
and International Equity Funds may participate in rights offerings and may
purchase warrants, which are privileges issued by corporations enabling the
owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that a Fund could lose the purchase
value of a right or warrant if the right to subscribe to additional shares is
not exercised prior to the expiration of the rights and warrants. Also, the
purchase of rights and/or warrants involves the risk that the effective price
paid for the right and/or warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its total assets, taken at market value, in warrants,
or more than 2% of its total assets, taken at market value, in warrants not
listed on the New York or American Stock Exchanges. Warrants acquired by a Fund
in units or attached to other securities are not subject to this restriction.
Lending Securities
- ------------------
Each Fund may lend its portfolio securities. Collateral for
securities loans may include cash, securities of the U.S. Government, its
agencies or instrumentalities, or an irrevocable letter of credit issued by a
bank that meets the investment standards stated under
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<PAGE>
"Money Market Instruments" in the Tax-Free Prospectus or those defined as "money
market instruments" in "Temporary Instruments" in the equity Prospectus, or any
combination thereof. When a Fund lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash loan collateral which will be invested in
readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by the Fund if a material event affecting the investment
is to occur.
Repurchase Agreements
- ---------------------
The repurchase price under the repurchase agreements described in the
Funds' Prospectuses generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds' Custodian (or
sub-custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans under the 1940 Act.
Bank Obligations
- ----------------
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in
obligations issued by foreign banks and foreign branches of U.S. banks may
involve risks that are different from investments in obligations of domestic
branches of U.S. banks. These risks may include future unfavorable political
and economic developments, possible withholding taxes on interest income,
seizure or nationalization of foreign deposits, currency controls, interest
limitations, or other governmental restrictions which might affect the payment
of principal or interest on the securities held by the Fund. Additionally,
these institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping requirements than
those applicable to domestic branches of U.S. banks.
Certificates of Deposit issued by domestic branches of domestic banks
do not benefit materially, and Certificates of Deposit issued by foreign
branches of domestic banks do not benefit at all, from insurance from the
Federal Deposit Insurance Corporation.
Both domestic banks and foreign branches of domestic banks are subject
to extensive governmental regulations which may limit both the amount and types
of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry is dependent largely upon
the availability and costs of funds for the purpose of financing and lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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<PAGE>
Stripped Government Obligations
- -------------------------------
The Federal Reserve has established an investment program known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." The Bond and Balanced Funds may purchase securities registered
under this program. This allows the Funds to be able to have their beneficial
ownership of zero coupon securities recorded directly in the book-entry record-
keeping system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities. The Treasury Department
has, within the past several years, facilitated transfers of such securities by
accounting separately for the beneficial ownership of particular interest coupon
and principal payments on Treasury securities through the Federal Reserve book-
entry record-keeping system.
In addition, the Funds may acquire U.S. Government Obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are ostensibly owned by the bearer or holder), in
trust on behalf of the owners. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
Obligations for federal tax purposes. The Commerce Funds is unaware of any
binding legislative, judicial or administrative authority on this issue.
Investments by a Fund in these securities will not exceed 5% of the value of the
Fund's total assets.
The Prospectus discusses other types of stripped securities that may
be purchased by the Funds, including stripped mortgage-backed securities.
Municipal Obligations
- ---------------------
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities.
As described in the Prospectuses, the two principal classifications of
Municipal Obligations consist of "general obligation" and "revenue" issues, and
the respective portfolios may include "moral obligation" issues, which are
normally issued by special purpose
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<PAGE>
authorities. There are, of course, variations in the quality of Municipal
Obligations both within a particular classification and between classifications,
and the yields on Municipal Obligations depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
As stated in their Prospectus, the Bond and Balanced Funds may, when
deemed appropriate by the Advisor in light of the particular Fund's investment
objective, invest in obligations issued by state and local governmental issuers.
Dividends which are derived from the interest of Municipal Obligations would be
taxable to the Funds' shareowners for federal income tax purposes.
Although the National Tax-Free Bond and Missouri Tax-Free Bond Funds
will invest most of their assets, under normal circumstances, in intermediate-
term Municipal Obligations, the Funds may also purchase short-term Project
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes, Tax-Exempt Commercial Paper, and other forms of short-term tax-exempt
loans. Such instruments are issued with a short-term maturity in anticipation
of the receipt of tax funds, the proceeds of bond placements or other revenues.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference. The
Commerce Funds cannot predict what legislation, if any, may be proposed or
enacted in the future regarding the federal tax status of interest on such
obligations or, with respect to the Missouri Tax-Free Bond Fund, what
legislation may be proposed in the Missouri Legislature relating to the status
of the Missouri income tax on interest on Missouri obligations. Such proposals,
whether pending or enacted, might materially and adversely affect the
availability of Municipal or Missouri Obligations for investment by the
particular Fund and the liquidity and value of its respective portfolio. In
such an event, the Fund would re-evaluate its investment objective and policies
and consider possible changes in its structure or possible dissolution.
Certain of the Municipal Obligations held by the Fund may be insured
as to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of its
original issuance. In the event that the issuer defaults on interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. The
National Tax-Free Bond and Missouri Tax-Free Bond Funds may, from time to time,
invest more than 25% of their assets in Municipal Obligations covered by
insurance policies.
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Foreign Investments
- -------------------
As indicated in their Prospectus, the Bond, Growth, Aggressive Growth
and International Equity Funds may invest up to 20%, 10%, 10% and 100%,
respectively, of their total assets, and the Balanced Fund may invest up to 20%
and 10% of the fixed income and equity portions of its portfolio, respectively,
in securities issued by foreign issuers, including American Depository Receipts
("ADRs") and, in the case of the International Equity Fund, European Depository
Receipts ("EDRs"), wherever organized ("Foreign Securities"). In considering
whether to invest in the securities of foreign issuers, the Advisor will
consider such factors as the characteristics of the particular issuer,
differences between economic trends and the performance of securities markets
within the U.S. and those within other countries, and also factors relating to
the general economic, governmental and social conditions of the country or
countries where the issuer is located.
Foreign Currency Transactions
- -----------------------------
In order to protect against a possible loss on investments resulting
from a decline or appreciation in the value of a particular foreign currency
against the U.S. dollar or another foreign currency or for other reasons, the
International Equity Fund is authorized to enter into forward currency exchange
contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather may allow a Fund to establish a rate of exchange
for a future point in time.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When entering into a contract for the purchase or sale
of a security, the Fund may enter into a contract for the amount of the purchase
or sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
When the Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Fund may enter into a forward contract to sell, for
a fixed amount, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency.
Similarly, when the securities held by the Fund create a short position in a
foreign currency, the Fund may enter into a forward contract to buy, for a fixed
amount, an amount of foreign currency approximating the short position. With
respect to any forward foreign currency contract, it will generally not be
possible to precisely match the amount covered by that contract and the value of
the securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. While forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such
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currency. The Fund will also incur costs in connection with forward foreign
currency exchange contracts and conversions of foreign currencies and U.S.
dollars. In addition, the Advisor may purchase or sell forward foreign currency
exchange contracts for the Fund for non-hedging purposes when the Advisor
anticipates that the foreign currency will appreciate or depreciate in value.
Securities, however, denominated in foreign currency do not in the Advisor's
view present attractive investment opportunities, and accordingly, will not be
held by the Fund.
A separate account consisting of liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations, equal to the
amount of the Fund's assets that could be required to consummate forward
contracts will be established with the Fund's Custodian except to the extent the
contracts are otherwise "covered." For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if the Fund holds a
forward contract (or put option) permitting the Fund to sell the same currency
at a price as high as or higher than the Fund's price to buy the currency.
Stand-By Commitments
- --------------------
The National Tax-Free Bond and Missouri Tax-Free Bond Funds may
acquire stand-by commitments with respect to Municipal Obligations held within
their respective portfolios. Under a stand-by commitment, a dealer or bank
agrees to purchase from a Fund, at the Fund's option, specified Municipal
Obligations at their amortized cost value to the Fund plus accrued interest, if
any. Stand-by commitments may be sold, transferred or assigned by a Fund only
with the underlying instrument.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where a Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
The Funds intend to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Advisor's opinion, present minimal credit
risks. The Funds' reliance upon the credit of these dealers, banks and broker-
dealers will be secured by the
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value of the underlying Municipal Obligations that are subject to the
commitment. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Advisor will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund would be valued at
zero in determining net asset value.
Borrowing
- ---------
When a Fund enters into a reverse repurchase agreement (an agreement
under which the Fund sells portfolio securities and agrees to repurchase them at
an agreed-upon date and price), it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high grade debt
securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
that such value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price of the securities it is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act.
When-Issued Purchases and Forward Commitments
- ---------------------------------------------
Each Fund may purchase securities on a when-issued basis or enter into
forward commitment transactions. When a Fund agrees to purchase securities on a
when-issued basis or enters into a forward commitment to purchase securities,
the Custodian will set aside cash, U.S. government securities or other liquid
high grade debt obligations equal to the amount of the purchase or the
commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored if such market value declines, the Fund will be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitments. Because a Fund will set aside cash or liquid high grade
debt securities in the manner described, the Fund's liquidity and ability to
manage its portfolio might be affected in the event its when-issued purchases or
forward commitments ever exceeded 25% of the value of its assets. In the case
of a forward commitment to sell portfolio securities, the Custodian will hold
the portfolio securities in a segregated account while the commitment is
outstanding.
The Funds will make commitments to purchase securities on a when-
issued basis or to purchase or sell securities on a forward commitment basis
only with the intention of completing the transaction and actually purchasing or
selling the securities. If deemed advisable as a matter of investment strategy,
however, the Funds may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to
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<PAGE>
purchase before those securities are delivered to the Funds on the settlement
date. In these cases the Funds may realize a capital gain or loss.
When the Funds engage in when-issued and forward commitment
transactions, they rely on the other party to consummate the trade. Failure of
such party to do so may result in the Funds' incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining a Fund's net asset value
starting on the day that Fund agrees to purchase the securities. A Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When a Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets, and fluctuations in the value of
the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
Convertible Securities
- ----------------------
As indicated in their Prospectus, the Bond, Balanced, Growth,
Aggressive Growth and International Equity Funds may invest in convertible
securities. Convertible securities entitle the holder to receive interest paid
or accrued on debt or the dividend paid on preferred stock until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in the corporate capital structure and,
therefore, generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities, the Advisor will consider, among
other factors, their evaluation of the creditworthiness of the issuers of the
securities, the interest or dividend income generated by the securities, the
potential for capital appreciation of the securities and the underlying stocks,
the prices of the securities relative to other comparable securities and to the
underlying stocks, whether the securities are entitled to the benefits of
sinking funds or other protective conditions, the diversification of the Funds
as to issuers and whether the securities are rated by Moody's or S&P and, if so,
the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying stock). The investment value of convertible securities is influenced
by changes in interest rates, with investment value declining as interest
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rates increase and increasing as interest rates decline, and by the credit
standing of the issuer and other factors. The conversion value of convertible
securities is determined by the market price of the underlying stock. If the
conversion value is low relative to the investment value, the price of the
convertible securities is governed principally by their investment value. To
the extent the market price of the underlying stock approaches or exceeds the
conversion price, the price of the convertible securities will be increasingly
influenced by their conversion value. In addition, convertible securities
generally sell at a premium over their conversion value determined by the extent
to which investors place value on the right to acquire the underlying stock
while holding fixed income securities.
Special Considerations Regarding Investment in Missouri Obligations
- -------------------------------------------------------------------
The following highlights some of the more important economic and
financial trends and considerations and is based on information from official
statements, prospectuses and other publicly available documents relating to,
among other things, securities offerings of the State of Missouri, its agencies
and instrumentalities, as available on the date of this Statement of Additional
Information. The Commerce Funds has not independently verified any of the
information contained in such statements or other documents.
Missouri's population was 5,117,073 according to the 1990 decennial
census of the United States Bureau of Census, which represented an increase of
4.1% from the 1980 decennial census of 4,916,686 inhabitants. In 1990, St.
Louis and the surrounding metropolitan area constituted the 17th largest
Metropolitan Statistical Area (MSA) in the nation with approximately 2.44
million inhabitants, more than half of which were Missouri residents. St. Louis
is located on the eastern boundary of the State on the Mississippi River and is
a distribution center and an important site for banking and manufacturing
activity. Anchoring the western boundary is Kansas City, which is Missouri's
second largest metropolitan area. In 1990, Kansas City was the 25th largest MSA
nationally with approximately 1.57 million inhabitants, more than half of which
were Missouri residents. Kansas City is a major agri-business center for the
United States and is an important center for finance and industry. Springfield,
St. Joseph, Joplin and Columbia are also important population and industrial
centers in the State. Per capita personal income in Missouri grew 4.8% between
1991 and 1992 while during the same period per capita personal income nationally
grew 3.9%.
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the economy and yielded a large portion of the State's
revenues. Although the concentration in farming remains above the national
average, with increasing urbanization, significant income-generating activity
has shifted from agriculture to manufacturing and services. Earnings and
employment are distributed among the manufacturing, trade and service sectors in
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1992, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and
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manufacturing ranking third. In 1992, these three economic sectors accounted
for 67.5% of the State's nonagricultural employment. Manufacturing, which
accounts for approximately 17.7% of employment, is concentrated in defense,
transportation equipment and other durable goods. To the extent that the
economy suffers a recession, the manufacturing sector, in particular, could be
adversely affected. For example, Missouri's largest employer as of December,
1991, McDonnell Douglas Corporation implemented substantial staff reductions.
Trans World Airlines, Missouri's third largest employer at the end of 1991,
entered voluntary bankruptcy in 1992. It emerged from bankruptcy in August,
1993 and will be moving its headquarters to St. Louis.
Defense-related businesses play an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards.
Over the past decade, Missouri annually ranked among the top six states in total
military contract awards. The continued decline in defense appropriations by
the U.S. Congress have had and will continue to have an impact on the State.
During the summer of 1993, extensive flooding occurred from Kansas
City to St. Louis, along the Missouri River, and along the entire eastern border
of the State, all of which is bounded by the Mississippi River. Although the
full impact of this flooding has not yet been determined, it has resulted in a
significant economic impact on agriculture and related enterprises and
businesses in the affected areas. Governor Mel Carnahan has announced
preliminary estimates of $4.0 billion in damages from the flooding. A
significant portion of the damage is not insured and will be dependent upon
State and federal aid to recover and rebuild. These developments could
adversely affect tax revenues of the State, and certain of its political
subdivisions, and may cause unbudgeted expenditures to be made by them for the
repair and replacement of damaged property, assistance programs and other flood-
related costs and expenses.
Limitations on State debt and bond issues are contained in Article
III, Section 37 of the Constitution of Missouri. Pursuant to this section, the
General Assembly may issue general obligation bonds solely (1) to refund
outstanding bonds (provided that the refunding bonds must mature within 25 years
of issuance) or (2) upon the recommendation of the Governor, to incur a
temporary liability by reason of unforeseen emergency or of deficiency in
revenue, in an amount not to exceed $1,000,000 for any one year and to be paid
in not more than five years. When the liability exceeds $1,000,000, the General
Assembly, or the people by initiative, may submit the proposition to incur
indebtedness to the voters of the State, and the bonds may be issued if approved
by a majority of those voting. Such bonds must be retired serially and by
installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the payment
of principal and interest and may provide for an annual tax on all taxable
property in an amount sufficient for that purpose.
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<PAGE>
Certain water pollution bonds and State building bonds are also
authorized pursuant to Sections 37(b)-(e), inclusive. In 1971, Missouri voters
approved a constitutional amendment providing for the issuance of $150,000,000
of general obligation bonds for the protection of the environment through the
control of water pollution. In 1979, voters approved a constitutional amendment
authorizing an additional $200,000,000 State Water Pollution Control Bonds. In
1982 State voters approved a constitutional amendment authorizing the issuance
of $600,000,000 Third State Building Bonds. Proceeds from the Third State
Building Bonds are used to provide funds for improvement of State buildings and
property, including education, mental health, parks, corrections and other State
facilities, and for water, sewer, transportation, soil conservation and other
economic development projects. In 1988, Missouri voters approved a
constitutional amendment authorizing the issuance of bonds in the aggregate sum
of $275,000,000 for controlling water pollution and making improvements to
drinking water systems.
Article III, Section 36 of the Constitution of Missouri requires that
the General Assembly appropriate the annual principal and interest requirements
for outstanding general obligation bonds before any other appropriations are
made. Such amounts must be transferred from the General Revenue Fund to bond
interest and sinking funds. Authorization for these transfers, as well as the
actual payments of principal and interest, are provided in the first
appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic which are
authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the "Tax
Limitation Amendment"), imposes a limit on the amount of taxes and other revenue
enhancement charges such as user fees which may be imposed by the State or a
political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit for any fiscal
year equals the product of the ratio of total state revenues in fiscal year
1980-1981 divided by the aggregate personal income received by persons in
Missouri from all sources ("Personal Income of Missouri") in calendar year 1979
multiplied by the Personal Income of Missouri in either the calendar year prior
to the calendar year in which appropriations for the fiscal year for which the
calculation is being made, or the average of Personal Income of Missouri in the
previous three calendar years, whichever is greater. If the revenue limit is
exceeded by 1% or more in any fiscal year, a refund of the excess revenues
collected by the State is required. If the excess revenues collected are less
than 1%, then they are not refunded but are transferred to the General Revenue
Fund. The details of the Tax Limitation Amendment are complex and clarification
from subsequent legislation and judicial decisions may be necessary for the Tax
Limitation Amendment to be fully implemented. The revenue limit can be exceeded
only if the General Assembly approves by a two-thirds vote of each house an
emergency declaration as requested by the Governor. The revenue limitation does
not apply to taxes
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imposed for payment of principal and interest on bonds that have been approved
by the voters, as authorized by the Missouri Constitution. The Tax Limitation
Amendment could adversely affect the repayment capabilities of certain non-
general obligation issues if payment is dependent upon increases in taxes or
appropriations by the State's General Assembly. In the spring of 1993, the
Missouri legislature passed into law a $315 million tax increase, with most of
the increase being allocated for state-wide education needs. The tax increase
is being challenged in court on numerous grounds, including violation of the Tax
Limitation Amendment, and may or may not be upheld.
General revenue collections for the fiscal year ended June 30, 1993
("Fiscal Year 1993") were $4,350.4 million, excluding $197.5 million from the
state lottery and other transfers. Expenditures for Fiscal Year 1993 were
$4,361.4 million. For the fiscal year ending June 30, 1994 ("Fiscal Year
1994"), general revenues are projected to be $4,665.6 million. This projection
does not include an estimated $36.4 million in proceeds from other transfers.
Expenditures are projected at $4,824.0 million.
Investment Limitations
- ----------------------
The Funds are subject to the investment limitations enumerated below
which may not be changed without the approval of the lesser of (1) 67% of The
Commerce Funds' shares present at a meeting of shareowners if the holders of
more than 50% of the outstanding shares are present in person or by proxy or (2)
more than 50% of The Commerce Funds' outstanding shares. Other restrictions in
the form of non-fundamental policies are subject to change by The Commerce
Funds' Board of Trustees without shareowner approval. If a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of a Fund's investments
will not constitute a violation of such limitation, except that any borrowing by
a Fund that exceeds the fundamental investment limitations stated above must be
reduced to meet such limitations within the period required by the 1940 Act
(currently three days). Otherwise, a Fund may continue to hold a security even
though it causes the Fund to exceed a percentage limitation because of the
fluctuation in the value of the Fund's assets.
As a matter of fundamental policy, no Fund may:
1. Purchase or sell real estate, except that a Fund may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein and may
hold and sell real estate acquired by a Fund as a result of the ownership of
securities.
2. Make loans to other persons, except that the purchase of all or a
portion of an issue of securities or obligations of the type in which a Fund may
invest shall not be deemed to be the making of a loan, and except further that a
Fund may enter into repurchase agreements in accordance with its investment
objective and policies and may lend its portfolio securities in an amount not to
exceed 33 1/3% of the value of its total assets.
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3. Borrow money, issue senior securities or pledge its assets,
except that the Fund may borrow from banks and enter into reverse repurchase
agreements as a temporary measure for extraordinary or emergency purposes or to
meet redemptions in amounts not exceeding 33 1/3% (taken at market value) of its
total assets (including the amount borrowed) and pledge its assets to secure
such borrowings. No Fund will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Fund's investment practices are not deemed to be
pledged for purposes of this limitation.
4. Purchase securities on margin, except (i) that a Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, (ii) that a Fund may pay initial or variation
margin in connection with futures and related option transactions, and (iii)
this investment limitation shall not apply to a Fund's transactions in futures
contracts and related options or to a Fund's transactions in securities on a
when-issued or forward commitment basis.
5. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933 in
purchasing and selling portfolio securities and except insofar as such
underwriting would comply with the limits set forth in the 1940 Act.
6. Purchase or sell commodities or contracts on commodities, except
to the extent a Fund may do so in accordance with applicable law and a Fund's
current prospectus and statement of additional information, as it may be amended
from time to time, and without registering as a commodity pool operator under
the Commodities Exchange Act.
As a matter of non-fundamental policy, no Fund may:
1. Purchase securities of other investment companies except (a)
purchases which are part of a plan of merger, consolidation, reorganization, or
acquisition, and (b) other purchases of the securities of investment companies
only if the purchases are of open-ended, no-load funds, are conditioned on the
waiver of management fees and further, if immediately thereafter (i) not more
than 3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) not more than 5% of the Fund's total assets, taken at market value,
would be invested in such securities, (iii) the Fund, together with other
investment companies having the same investment adviser and companies controlled
by such companies, owns not more than 10% of the total outstanding stock of any
one investment company.
2. Make short sales of securities or maintain a short position
except that a Fund may make short sales against-the-box (defined as the extent
to which a Fund contemporaneously owns or has the right to obtain at no added
cost securities identical to those sold short).
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3. Invest in restricted securities that are not registered or are
offered in an exempt non-public offering under the Securities Act of 1933
(excluding Rule 144A Securities), if at the time of acquisition more than 5% of
its net assets would be invested in such securities.
4. Invest in restricted securities (including Rule 144A Securities)
when aggregated with investments in securities of companies having a record
together with predecessors, of less than three years of continuous operation if
at the time of acquisition more than 15% of its total assets would be invested
in such securities.
5. Make investments for the purpose of exercising control or
management.
6. Invest in warrants if at the time of acquisition a Fund's
investment in warrants, valued at the lower of cost or market value, would
exceed 5% of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange. For
purposes of this restriction, warrants acquired by a Fund in units or attached
to securities may be deemed to be without value.
7. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
8. Purchase or retain the securities of any issuer, if those
individual officers and Trustees of the Trust, the Advisors or any subsidiary
thereof each owning beneficially more than one half of one percent of the
securities of such issuer own in the aggregate more than 5% of the securities of
such issuer.
9. Invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development programs,
except that a Fund may invest in securities issued by companies that engage in
oil, gas or other mineral exploration of development activities.
10. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof with respect to more than 25% of the value of its net
assets except that the National Tax-Free Bond and Missouri Tax-Free Bond Funds
also may not invest in such securities with respect to more than 5% of their
total assets.
In addition, the fundamental investment limitations listed below are
summarized in each Prospectus and are set forth below in their entirety.
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1. With regard to the Short-Term Government, Bond, Balanced, Growth,
Aggressive Growth and International Equity Funds:
Each Fund will limit its investments so that, with respect to 75% of a
Fund's total assets: (i) not more than 5% will be invested in the
securities or any one issuer; (ii) not more than 25% of a Fund's total
assets will be invested in the securities of issuers in any one
industry; and (iii) not more than 10% of the outstanding voting
securities of any one issuer will be held by a Fund. Securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities are excepted from those limitations. Each Fund may borrow
money from banks for temporary or emergency purposes or to meet
redemption requests and may enter into reverse repurchase agreements,
provided that the Fund maintains asset coverage of at least 300% for
all such borrowings.
2. With regard to the National Tax-Free Bond and Missouri Tax-Free
Bond Funds:
Each Fund will limit its investments so that less than 25% of the
Fund's total assets will be invested in the securities of issuers in
any one industry. For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not
deemed to be industries in connection with the issuance of tax-exempt
securities. Thus, a Fund may invest 25% or more of the value of its
total assets in Municipal Obligations which are related in such a way
that an economic, business or political development or change
affecting one Municipal Obligation would also affect the other
Municipal Obligations. For example, a Fund may so invest in (a)
Municipal Obligations the interest on which is paid solely from
revenues of similar projects such as hospitals, electric utility
systems, multi-family housing, nursing homes, commercial facilities
(including hotels), steel companies or life care facilities, (b)
Municipal Obligations whose issuers are in the same state, or (c)
industrial development obligations. The Funds will not purchase
securities (except U.S. Government Obligations) if more than 5% of its
total assets will be invested in the securities of any one issuer,
except that up to 25% of a Fund's total assets in the case of the
National Tax-Free Bond Fund, and up to 50% in the case of the Missouri
Tax-Free Bond Fund, may be invested without regard to this 5%
limitation. Additionally, a Fund may not borrow money, except from
banks for temporary or short-term purposes as described above,
provided that the Fund maintains asset coverage of 300% for all such
borrowings.
In order to permit the sale of a Fund's shares in certain states, The
Commerce Funds may agree to certain restrictions that may be stricter than the
investment policies and limitations described above. Should a Fund determine
that any such restriction is no longer in
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<PAGE>
such Fund's best interest, it will revoke its agreement by no longer selling
Fund shares in the state involved.
NET ASSET VALUE
The net asset value per share for each Fund of The Commerce Funds is
calculated by adding the value of all portfolio securities and other assets
belonging to the Fund, subtracting the liabilities charged to the Fund, and
dividing the result by the number of shares of the Fund outstanding. Assets
which belong to the Fund consist of the consideration received upon the issuance
of shares of the Fund together with all income, earnings, profits and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of The Commerce Funds not
belonging to a particular investment portfolio. Assets belonging to a Fund are
charged with the direct liabilities of that Fund and with a share of the general
liabilities of The Commerce Funds which are normally allocated in proportion to
the relative net asset values of all of The Commerce Funds' investment
portfolios at the time of allocation.
As stated in their Prospectuses, a Fund's investments will be valued
at market value or, in the absence of a market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
The Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities
traded on only over-the-counter markets are valued on the basis of closing over-
the-counter bid prices. Securities for which there were no transactions are
valued at the average of the current bid and asked prices. Restrictive
securities and securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Board of Trustees.
The value of a Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value; then the fair value of those
securities will be determined through consideration of other factors by or under
the direction of The Commerce Funds' Board of Trustees. Securities trading in
over-the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 P.M. Eastern time. In addition, European and Pacific
Basin securities trading may not take place on all Business Days. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not considered to be Business Days. The
calculation of the net asset value of the Fund may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time
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<PAGE>
their prices are determined and 4:00 P.M. Eastern time, and at other times may
not be reflected in the calculation of net asset value of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis by The
Commerce Funds' Distributor, Goldman, Sachs & Co., acting as agent for The
Commerce Funds.
An illustration of the computation of the initial public offering
price per share of the Funds, based on the value of each Fund's total net assets
and total number of shares outstanding on April 30, 1995, is as follows:
TABLE
-----
<TABLE>
<CAPTION>
Inter- Missouri
Short-Term Aggressive national National Tax-Free
Govt. Bond Balanced Growth Growth Equity Tax-Free Bond
Fund Fund Fund Fund Fund Fund Fund Fund
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets............. $16,589,402 $84,671,874 $37,250,944 $113,836,970 $21,098,643 $11,167,309 $5,629,758 $4,197,407
Number of Shares
Outstanding.......... 900,530 4,548,251 1,885,451 5,425,572 977,204 618,570 313,699 233,091
Net Asset Value
Per Share............ $ 18.42 $ 18.62 $ 19.76 $ 20.98 $ 21.59 $ 18.05 $ 17.95 $ 18.01
Sales Charge, 3.50
percent of offering
price (3.63 percent
of net asset value
per share)........... $ 0.67 $ 0.68 $ 0.72 $ 0.76 $ 0.78 $ 0.66 $ 0.65 $ 0.65
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------
Offering Price to
Public............... $ 19.09 $ 19.30 $ 20.48 $ 21.74 $ 22.37 $ 18.71 $ 18.60 $ 18.66
=========== =========== =========== ============ =========== =========== ========== ==========
</TABLE>
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The Commerce Funds may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectuses under "How
To Sell Shares," The Commerce Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareowner to
make full payment for shares purchased by the shareowner or to collect any
charge relating to a transaction effected for the
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<PAGE>
benefit of a shareowner which is applicable to shares of the Funds as provided
in the Prospectuses.
In an exchange, the redemption of shares being exchanged will be made
at the per-share net asset value of the shares to be redeemed next determined
after the exchange request is received. The shares of the Fund to be acquired
will be purchased at the per-share net asset value of those shares (plus any
applicable sales charge) next determined after acceptance of the purchase order
by The Commerce Funds in accordance with its customary policies for accepting
investments.
A Fund may make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other
property, shareowners may incur additional costs in connection with the
conversion thereof to cash. Redemption in kind is not as liquid as a cash
redemption. Shareowners who receive a redemption in kind may receive less than
the redemption value of their shares upon sale of the securities or property
received, particularly where such securities are sold prior to maturity.
The Commerce Funds currently intends to file an election pursuant to
Rule 18f-1 under the 1940 Act which will provide that each Fund is obligated to
redeem shares solely in cash up to $250,000 or 1% of such Fund's net asset
value, whichever is less, for any one shareowner within a 90-day period. Any
redemption beyond this amount may be made in proceeds other than cash.
Retirement Plans
- ----------------
Profit-Sharing Plan. The Short-Term Government, Bond, Balanced,
-------------------
Growth, Aggressive Growth and International Equity Funds have available a
profit-sharing plan (including a 401(k) option) (the "Profit-Sharing/401(k)
Plan") for use by both self-employed individuals (sole proprietorships and
partnerships) and corporations who wish to use shares of the Funds as a funding
medium for a retirement plan qualified under the Internal Revenue Code.
The Internal Revenue Code provides certain tax benefits for
contributions by a self-employed individual or corporation to the Profit-
Sharing/401(k) Plan. For example, contributions to the Plan are deductible
(subject to certain limits) and earnings on the contributions are not taxed
until distributed. However, distribution of amounts from the Profit-
Sharing/401(k) Plan to a participant before the participant attains age 59 1/2
will (with certain exceptions) result in an additional 10% tax on the amount
included in the participant's gross income.
Individual Retirement Account. The Funds have available a plan (the
-----------------------------
"IRA") for use by individuals with compensation for services rendered (including
earned income from self-employment) who wish to use shares of the Funds as a
funding medium for individual
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<PAGE>
retirement saving. However, except for rollover contributions, an individual
who has attained, or will attain, age 70 1/2 before the end of the taxable year
may only contribute to an IRA for his or her nonworking spouse under age 70 1/2.
The individual's IRA assets (and earnings thereon) may generally not
be withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
In both of these Plans available through the Funds, distributions of
net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the Profit-Sharing/401(k) Plan or IRA available for investment
in the Funds. Any person who wishes to establish a retirement plan account may
do so by contacting that Fund directly. The complete Plan documents and
applications will be provided to existing or prospective shareowners upon
request, without obligation. The Commerce Funds recommends that investors
consult their attorneys or tax advisers to determine if the retirement programs
described herein are appropriate for their needs.
DESCRIPTION OF SHARES
The Commerce Funds is a Delaware business trust organized under
Delaware law on February 7, 1994. Under the Funds' Trust Instrument, the
beneficial interest in The Commerce Funds shall be divided into such
transferable shares of one or more separate and distinct series or classes of a
series, as the Trustees shall from time to time create and establish. The
Trustees may, from time to time and without vote of the shareowners, issue
shares to a party or parties and for such amount and type of consideration and
on such terms, subject to applicable law, as the Trustees may deem appropriate.
The Trustees may issue fractional shares and shares held in the treasury. Also,
the trustees may from time to time divide or combine the shares into a greater
or lesser number without thereby changing the proportionate beneficial interests
in The Commerce Funds. The proceeds received by each Fund for each issue or
sale of its shares, and all net investment income, realized and unrealized gain
and proceeds thereof, subject only to the rights of creditors, will be
specifically allocated to and constitute the underlying assets of that Fund.
The underlying assets of each Fund will be segregated on the books of account.
The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of shareowners
of any series of The Commerce Funds, to establish and designate and to change in
any manner any such series of shares or any classes of initial or additional
series and to fix such relative preferences, voting powers, rights and
privileges of such series or classes thereof as the Trustees may from time to
time determine, to divide or combine the shares or any series or classes thereof
into a greater or lesser number, to classify or reclassify any issued shares or
any series or classes
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<PAGE>
thereof into one or more series or classes of shares, and to take such other
action with respect to the shares as the trustees may deem desirable.
In the event of a liquidation or dissolution of The Commerce Funds or
an individual Fund, the Trustees may sell and convey all or substantially all of
the assets of the trust or series to another entity or to a separate series of
shares thereof, for adequate consideration. The sale or conveyance may include
the assumption of all outstanding obligations, taxes and other liabilities and
may include shares of beneficial interest, stock or other ownership interests.
In the alternative, the Trustees may sell and convert into money all of the
assets of The Commerce Funds or series. After such actions, the Trustees will
distribute the remaining proceeds or assets (as the case may be) of each Series
(or class) ratably among the holders of shares of those series then outstanding.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each investment
portfolio affected by such matter. Rule 18f-2 further provides that an
investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the
ratification of the appointment of independent accountants, the approval of
principal underwriting contracts and the election of Trustees may be effectively
acted upon by shareowners of The Commerce Funds voting together in the aggregate
without regard to a particular investment portfolio.
The shareowners have power to vote only for the election of Trustees,
for the removal of Trustees and with respect to such additional matters relating
to The Commerce Funds as may be required by law, by the Trust Instrument, or as
the Trustees may consider desirable. The Trustees may also determine that a
matter affects only the interests of one or more classes of a series, in which
case any such matter shall be voted on by such class or classes. Each whole
share shall be entitled to one vote as to any matter on which it is entitled to
vote, and each fractional share shall be entitled to a proportionate fractional
vote. There shall be no cumulative voting in the election of Trustees. Shares
may be voted in person or by proxy or in any manner provided for in the By-laws.
A proxy may be given in writing, by telefax, or in any other manner provided for
in the By-laws.
Special meetings of the shareowners of any series may be called by the
Trustees and shall be called by the Trustees upon the written request of
shareowners owning at least one-tenth of the outstanding shares entitled to
vote. Whenever ten or more shareowners meeting the qualifications set forth in
Section 16(c) of the 1940 Act seek the opportunity of
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<PAGE>
furnishing materials to the other shareowners with a view to obtaining
signatures on such a request for a meeting, the Trustees shall provide
shareowners access to The Commerce Funds' list of record shareowners or the
mailing of such materials to such record shareowners, subject to the applicable
provisions of the 1940 Act. Notice shall be sent by mail or such other means as
determined by the Trustees at least 15 days prior to any such meeting. One-
third of the shares entitled to vote in person or by proxy shall be a quorum for
the transaction of business at a shareowners' meeting, except that where any
provision of law or of the Trust Instrument permits or requires that holders of
any series shall vote as a series (or that holders of a class shall vote as a
class), then one-third of the aggregate number of shares of that series (or that
class) entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that series (or that class). Any action which may be
taken by the shareowners of The Commerce Funds or of a series may be taken
without a meeting if shareowners holding more than a majority of the shares
entitled to vote, except when a larger vote is required by law or by any
provision of the Trust Instrument, shall consent to the action in writing,
provided that such action by written consent is approved by the Board of
Trustees.
When used in the Prospectuses or in this Statement of Additional
Information, a "majority" of shareowners means, with respect to the approval of
an investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable Fund present at a meeting if the holders of more
than 50% of the outstanding shares are present in person or by proxy, or (2)
more than 50% of the outstanding shares of the Trust or the applicable
Fund.
As of June 26, 1995, Mori & Co., a nominee of Commerce Bank, N.A.'s
Trust Division, P.O. Box 13366, Kansas City, MO 64141, held of record 8.70%,
3.26%, 1.02%, 1.83%, 7.57%, 12.80%, 93.81% and 85.37% of the outstanding
shares of the Short-Term Government, Bond, Balanced, Growth, Aggressive Growth,
International Equity, National Tax-Free Bond and Missouri Tax-Free Bond Funds,
respectively. As of the same date, Hoco & Co., a nominee of Commerce Bank,
N.A.'s Trust Division, P.O. Box 13366, Kansas City, MO 64141, held of record
86.09%, 91.30%, 96.90%, 90.90%, 88.44%, 86.09%, 5.44% and 10.65% of the Funds,
respectively. The Trustees and Officers of The Commerce Funds, as a group,
owned less than 1% of the outstanding shares of each Fund. Furthermore, as of
June 26, 1995, with respect to the National Tax-Free Bond and Missouri Tax-Free
Bond Funds, the following persons may have beneficially owned 5% or more of the
outstanding shares of such Funds:
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- -----------
<S> <C> <C>
National Tax-Free Bond Fund
- -----------------------------
Robert D. Kelce 19,443 5.60%
Trust Management Agency
c/o Commerce Bank, N.A. (Kansas City)
P.O. Box 419248
Kansas City, MO 64141-6248
Joseph Kraus 19,161 5.52%
Trust Investment Management
6000 W. Washington Street
Belleville, IL 62223
Helen Jacobsen 41,667 12.00%
Trustee Investment Management
12942 Taunton Court
St. Louis, MO 63131
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Missouri Tax-Free Bond Fund
- -----------------------------
Gladys Kaercher
Revocable Trust 14,722 5.03%
21 North Old Orchard Road A-201
St. Louis, MO 63119
Stephen Lambright 21,943 7.50%
Trust Under Management
415 Sheffield Estate Drive
St. Louis, MO 63141
Helen Jacobsen 41,667 14.24%
Trustee Investment Management
12942 Taunton Court
St. Louis, MO 63131
</TABLE>
To The Commerce Funds' knowledge there were no persons who
beneficially owned 5% or more of the outstanding shares of the Short-Term
Government, Bond, Balanced, Growth, Aggressive Growth or International Equity
Funds as of June 26, 1995.
The Trust Instrument provides that the Trustees, when acting in their
capacity, will not be personally liable to any person other than The Commerce
Funds or a beneficial owner for any act, omission or obligation of The Commerce
Funds or any Trustee. A Trustee shall not be liable for any act or omission in
his capacity as Trustee, or for any act or omission of any officer or employee
of The Commerce Funds or of any other person or party, provided that nothing
contained in the Trust Instrument or in the Delaware Business Trust law shall
protect any Trustee against any liability to The Commerce Funds or to
shareowners to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareowners that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or their shareowners, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
Federal - General Information
Each Fund will elect to be taxed separately as a regulated investment
company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Fund is exempt from federal income tax on its net investment
income and realized capital gains that it distributes to shareowners, provided
that it distributes an amount equal to at least the sum of 90% of its tax-exempt
income and 90% of its investment company taxable income (net investment income
and the excess of net short-term capital gain over net long-term capital loss),
if any, for the year (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
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<PAGE>
certain other investments held for less than three months (the "Short-Short
Test"). Interest (including original issue discount and "accrued market
discount") received by a Fund at maturity or on disposition of a security held
for less than three months will not be treated as gross income derived from the
sale or disposition of such security within the meaning of this requirement.
However, any other income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of securities
for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which a Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
In the case of corporate shareowners, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by the Fund for
the year. A dividend usually will be treated as a "qualifying dividend" if it
has been received from a domestic corporation. A portion of the dividends paid
by the Balanced, Growth and Aggressive Growth Funds may constitute "qualifying
dividends." The other Funds, however, are not expected to pay qualifying
dividends.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum nominal rate of 28%. For corporations, long-term
capital gains and ordinary income are both taxable at a maximum nominal rate of
35%.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareowners. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of such Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareowners.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail currently to distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital
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<PAGE>
losses). Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income each
calendar year to avoid liability for this excise tax.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.
See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments, including their treatment under the
Short-Short Test.
Federal - Tax-Exempt Information
As described in their Prospectus, the National Tax-Free Bond and
Missouri Tax-Free Bond Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds would not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans and individual retirement accounts since such plans and accounts are
generally tax-exempt and, therefore, would not gain any additional benefit from
the Funds' dividends being tax-exempt. In addition, the Funds may not be an
appropriate investment for persons or entities that are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person which regularly uses a part of such facilities in its trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, or which occupies more than 5% of the usable
area of such facilities or for which such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, partnerships and its
partners and an S corporation and its shareowners.
In order for the Funds to pay federal exempt-interest dividends with
respect to any taxable year, at the close of each taxable quarter at least 50%
of the aggregate value of the Fund must consist of tax-exempt obligations. An
exempt-interest dividend is any dividend
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<PAGE>
or part thereof (other than a capital gain dividend) paid by a Fund and
designated as an exempt-interest dividend in a written notice mailed to
shareowners not later than 60 days after the close of the Fund's taxable year.
However, the aggregate amount of dividends so designated by a Fund cannot exceed
the excess of the amount of interest exempt from tax under Section 103 of the
Code received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by a Fund with respect to any taxable year which qualifies
as Federal exempt-interest dividends will be the same for all shareowners
receiving dividends from the Fund with respect to such year.
A percentage of the interest on indebtedness incurred by a shareowner
to purchase or carry Fund shares, equal to the percentage of the total non-
capital gain dividends distributed during the shareowner's taxable year that are
exempt-interest dividends, is not deductible for federal income tax purposes.
If a shareowner holds Fund shares for six months or less, any loss on the sale
or exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions where the investment company regularly
distributes at least 90% of its net tax-exempt interest. No such regulations
had been issued as of the date of this Statement of Additional Information.
MANAGEMENT OF THE COMMERCE FUNDS
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
John Eric Helsing, Trustee and Chairman
Retired. Former Professor and Chairman, Department of Business
Administration and Economics of William Jewell College since September 1990.
Lecturer at William Jewell College since January 1989. Director, Valentine
Radford Communications and The Learning Exchange and Trustee, Visiting Nurse
Infusion Therapy and Midwest Research Institute.
-40-
<PAGE>
/*/ Pleasant Voorhees Miller, Trustee and President
Retired.
/*/ Randall D. Barron, Trustee and Treasurer
Retired President, North Division Southwestern Bell Telephone Company
since 1984. Former Director, Commerce Bancshares, Inc.
David L. Bodde, Trustee
Vice President, Midwest Research Institute since January 1991.
Executive Director, Commission on Engineering, National Academy of Sciences from
April 1986 to January 1991; Director, Energy Futures Coalition; Director,
Missouri Technological Corporation. Director, Kansas City Power & Light Company
since 1994.
John Joseph Holland, Trustee
Vice President, and Chief Financial Officer, Butler Manufacturing
Company; since January 1990 and Vice President and Controller prior thereto.
Director, Allendale Insurance Company.
Paul Klug, Vice President
Vice President and Manager, Bank Proprietary Mutual Funds unit within
the Institutional Funds Group of Goldman Sachs Asset Management since 1994.
Chief Operating Officer, Chase Manhattan's Vista Capital Management Group prior
thereto.
Nancy L. Mucker, Vice President
Vice President, Goldman Sachs since April 1985. Co-Manager of Funds
Group Shareholder Services of Goldman Sachs Asset Management since November
1989.
Pauline Taylor, Vice President
Vice President, Goldman Sachs since June 1992. Consultant since 1989.
Senior Vice President, Fidelity Investments prior to 1989.
- -----------------
/*/ Trustees who are "interested persons" of the Commerce Funds, as defined in
the 1940 Act.
-41-
<PAGE>
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania.
Scott M. Gilman, Assistant Secretary
Vice President, Goldman Sachs since March 1990. Manager, Arthur
Andersen & Co. prior thereto.
Michael J. Richman, Assistant Secretary
Vice President and Assistant General Counsel of Goldman Sachs and
Counsel to the Funds Group of Goldman Sachs Asset Management since June 1992.
Associate General Counsel to Goldman Sachs Asset Management since February 1994.
Formerly Partner, Hale and Dorr from September 1991 to June 1992. Attorney-at-
law, Gaston & Snow prior thereto.
Howard B. Surloff, Assistant Secretary
Counsel to Goldman Sachs and the Funds Group of Goldman Sachs Asset
Management since November 1993. Vice President of Goldman Sachs since May 1994.
Formerly Associate of Shereff, Friedman, Hoffman & Goodman.
* * *
Certain of the officers and the organizations with which they are
associated have had in the past, and may have in the future, transactions with
Goldman Sachs and its respective affiliates. The Trust has been advised by such
officers that all such transactions have been and are expected to be in the
ordinary course of business and the terms of such transactions, including all
loans and loan commitments by such persons, have been and are expected to be
substantially the same as the prevailing terms for comparable transactions for
other customers. Messrs. Gilman, Klug, Richman and Surloff and Mmes. Mucker
and Taylor hold similar positions with one or more investment companies that are
advised by Goldman Sachs.
Each Trustee receives an annual fee of $5,000. All Trustees are
reimbursed for out of pocket expenses incurred in connection with attendance at
meetings. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receive
legal fees as counsel to the Trust.
Investment Advisor
Information about the Advisor and its duties and compensation as
Advisor is contained in the Prospectus. For the fiscal period ended April 30,
1995, The Commerce Funds paid the Advisor fees for advisory services as follows:
-42-
<PAGE>
<TABLE>
<S> <C>
Short-Term Government Fund (1) $ 20,558
Bond Fund (1) 155,940
Balanced Fund (1) 108,347
Growth Fund (1) 302,844
Aggressive Growth Fund (1) 46,098
International Equity Fund (1) 18,785
National Tax-Free Bond Fund (2) 4,680
Missouri Tax-Free Bond Fund (2) 2,065
</TABLE>
---------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
For the period ended April 30, 1995, the Advisor has voluntarily
agreed to waive a portion of its advisory fee for certain portfolios.
Accordingly, net of waivers, the annual rate of the advisory fee is .30% for the
Short-Term Government Fund, .75% for the Balanced Fund, .90% for the
International Equity Fund and .30% for the Missouri Tax-Free Fund. During the
period, these waivers reduced advisory fees by $13,706, $36,116, $12,523, and
$1,377 for the Short-Term Government, Balanced, International Equity, and
Missouri Tax-Free Bond Funds, respectively.
In addition, during the period ended April 30, 1995, the Advisor
voluntarily agreed to reimburse expenses (excluding interest, taxes, and
extraordinary expenses) to the extent that such expenses exceed, on an
annualized basis, .68%, .88%, 1.13%, 1.13%, .85% and .65% of the average net
assets of the Short-Term Government, Bond, Balanced, Growth, National Tax-Free
Bond, and Missouri Tax-Free Bond Funds, respectively. The effect of these
reimbursements and reimbursements of the International Equity Fund's expenses
during the period was to reduce expenses by $20,478, $21,438, $19,654, $19,638,
$19,210, $18,941 and $33,393 for the Short-Term Government, Bond, Balanced,
Growth, National Tax-Free Bond, Missouri Tax-Free Bond and International Equity
Funds, respectively.
The Advisor's own investment portfolio may include bank certificates
of deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by The Commerce Funds. Joint purchase of investments for
The Commerce Funds and for the Advisor's own investment portfolio will not be
made. The Advisor's Commercial Banking Department may have deposit, loan and
other commercial banking relationships with issuers of securities purchased by
The Commerce Funds, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by The
Commerce Funds.
The Advisor has agreed that it will reimburse The Commerce Funds such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on The Commerce Funds as a result of changes in
current state laws and regulations in those states
-43-
<PAGE>
where The Commerce Funds has qualified its shares, or by a decision of The
Commerce Funds to qualify the shares in other states having restrictive expense
limitations. To The Commerce Funds' knowledge, of the expense limitations in
effect on the date of this Statement of Additional Information none is more
restrictive than two and one-half percent (2-1/2%) of the first $30 million of
the portfolio's average annual net assets, two percent (2%) of the next $70
million of the average annual net assets and one and one-half percent (1-1/2%)
of the remaining average annual net assets.
Under the terms of the Advisory Agreement, the Advisor is obligated to
manage the investment of the Funds' assets in accordance with applicable laws
and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers of
national banks. These regulations provide, in general, that assets managed by a
national bank as fiduciary may not be invested in stock or obligations of, or
property acquired from, the bank, its affiliates or their directors, officers or
employees, and further provide that fiduciary assets may not be sold or
transferred, by loan or otherwise, to the bank or persons connected with the
bank as described above.
The Advisor will not accept The Commerce Funds' shares as collateral
for a loan which is for the purpose of purchasing The Commerce Funds' shares,
and will not make loans to The Commerce Funds. Inadvertent overdrafts of The
Commerce Funds' account with the Custodian occasioned by clerical error or by
failure of a shareowner to provide available funds in connection with the
purchase of shares will not be deemed to be the making of a loan to The Commerce
Funds by the Advisor.
Under the Advisory Agreement, the Advisor is not liable for any error
of judgment or mistake of law or for any loss suffered by The Commerce Fund in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Advisor in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
Investment Sub-Advisor
Information about the Sub-Advisor and its duties and compensation as
Sub-Advisor is contained in the Prospectus. For the period December 12, 1995
(commencement of operations) through April 30, 1995, the amount of the fees for
services payable by the Advisor to the Sub-Advisor was $15,654.
Under the Sub Advisory Agreement, Price Fleming provides the
International Equity Fund with investment advisory services. Specifically,
Price-Fleming is responsible for supervising and directing the investments of
the Fund in accordance with the Fund's investment objective, policies and
restrictions as provided in the Prospectus and this Statement of Additional
Information. Price-Fleming is also responsible for effecting all security
-44-
<PAGE>
transactions on behalf of the Fund, including the negotiation of commissions and
the allocation of principal business and portfolio brokerage.
The Sub-Advisory Agreement also provides that Price-Fleming, its
directors, officers or employees will only be liable to the Fund for losses
resulting from bad faith, willful misconduct or gross negligence for losses
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services.
Under the Sub-Advisory Agreement, Price-Fleming is permitted to
utilize the services or facilities of others to provide it or the Funds with
statistical and other factual information, advice regarding economic factors and
trends, advice as to occasional transactions in specific securities, and such
other information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the Sub-
Advisory Agreement or otherwise helpful to the Funds.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment
Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment
research and administrative support to Price-Fleming. FIM is a wholly-owned
subsidiary of Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming Holdings"). JFIH
is an indirect wholly-owned subsidiary of Jardine Fleming Group Limited. Under
the letters of agreement, these companies will provide Price-Fleming with
research material containing statistical and other factual information, advice
regarding economic factors and trends, advice on the allocation of investments
among countries and as between debt and equity classes of securities, and
research and occasional advice with respect to specific companies.
Robert Fleming Holdings personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct contact with
companies in the research universe. Robert Fleming personnel, who frequently
speak the local language, have access to the full range of research products
available in the market place and are encouraged to produce independent works
dedicated solely to portfolio investment management, which adds value to that
generally available.
The Glass-Steagall Act and Proposed Legislation
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
------------------------------------
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under
-45-
<PAGE>
the Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any
non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, but do not prohibit such a holding company or affiliate from acting
as investment adviser, transfer agent and custodian to such an investment
company. In 1981, the United States Supreme Court held in Board of Governors of
---------------------
the Federal Reserve System v. Investment Company Institute that the Board did
- ----------------------------------------------------------
not exceed its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their non-
bank affiliates to act as investment advisers to registered closed-end
investment companies.
The Advisor believes that if the question were properly presented, a
court should hold that the Advisors may perform the services for the Funds
contemplated by the Advisory Agreement, the Prospectuses, and this Statement of
Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. It should be noted, however, that there
have been no cases deciding whether a national bank may perform services
comparable to those performed by the Advisor and that future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent the Advisor from continuing to
perform such services for the Funds or from continuing to purchase Fund shares
for the accounts of its customers. If the Advisor or its affiliates were
required to discontinue all or part of its shareowner servicing activities,
their customers would be permitted to remain the beneficial owners of Fund
shares and alternative means for continuing the servicing of such customers
would be sought. The Commerce Funds does not anticipate that investors would
suffer any adverse financial consequences as a result of these occurrences.
From time to time, legislation modifying the Glass-Steagall
restrictions have been introduced in Congress which, if enacted, would permit a
bank holding company to establish a non-bank subsidiary having the authority to
organize, sponsor and distribute shares of an investment company. If this or
similar legislation were enacted, The Commerce Funds expects that the Advisor's
parent bank holding company would consider the possibility of one of its non-
bank subsidiaries offering to perform some or all of the services now provided
by the Administrator/Distributor. It is not possible, of course, to predict
whether or in what form such legislation might be enacted or the terms upon
which the Advisor or such a non-bank affiliate might offer to provide services
for consideration by The Commerce Funds' Board of Trustees.
Shareowner Servicing Plan
- -------------------------
As stated in the Prospectuses, The Commerce Funds may enter into
Shareowner Servicing Agreements with Service Organizations which may include the
Adviser and its affiliates. The Shareowner Servicing Agreements provide that
the Service Organizations will render shareowner administrative support services
to their customers who are the beneficial
-46-
<PAGE>
owners of Fund shares in consideration for the Funds' payment of up to 0.25% (on
an annualized basis) of the average daily net asset value of the shares
beneficially owned by such customers and held by the Service Organizations and,
at the Commerce Funds option, it may reimburse the Service Organizations' out-
of-pocket expenses. Such services may include: (i) processing dividend and
distribution payments from a Fund; (ii) providing information periodically to
customers showing their share positions; (iii) arranging for bank wires; (iv)
responding to customer inquiries; (v) providing subaccounting with respect to
shares beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareowner communications; (vii) processing share
exchange and redemption requests from customers; (viii) assisting customers in
changing dividend options, account designations and addresses; and (ix) other
similar services requested by the Commerce Funds. Banks acting as Service
Organizations are prohibited from engaging in any activity primarily intended to
result in the sale of Fund shares. However, Service Organizations other than
banks may be requested to provide marketing assistance (e.g., forwarding sales
literature and advertising to their customers) in connection with the
distribution of Fund shares.
The Board of Trustees reviews, at least quarterly, a written report of
the amounts expended in connection with The Commerce Funds' arrangements with
the Service Organizations and the purposes for which the expenditures were made.
In addition, such arrangements are approved annually by a majority of the
Trustees, including a majority of the Trustees who are not "interested persons"
of The Commerce Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
Any material amendment to The Commerce Funds' arrangements with the
Service Organizations under the Shareowner Servicing Agreements must be approved
by a majority of the Board of Trustees (including a majority of the
Disinterested Trustees). There were no Shareowner Servicing Agreements in
effect as of April 30, 1995.
Custodian and Transfer Agent
State Street Bank serves as Custodian of each Fund's assets pursuant
to a Custody Agreement under which it has agreed, among other things, to (i)
maintain a separate account in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
investments; (iv) make periodic reports to The Commerce Funds concerning each
Fund's operations; and (v) provide various accounting services to The Commerce
Funds and to the Administrator for the benefit of The Commerce Funds. The
Custodian is authorized to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the Custodian shall
remain liable for the performance of all of its duties under its respective
Custody Agreement and will hold The Commerce Funds and Funds harmless from
losses caused by the negligence or willful misconduct of any bank or trust
company serving as sub-custodian.
-47-
<PAGE>
As compensation for custodial services provided, The Commerce Funds
will pay the Custodian fees of 1/100th of 1% of a Fund's average monthly net
assets up to one billion, 1/133th of 1% of the next one billion of such assets
and 1/200th of 1% of such assets in excess of two billion based on the aggregate
average daily net assets of the Funds, plus a transaction charge for certain
transactions and out-of-pocket expenses.
For the fiscal period ended April 30, 1995, the fees for the Funds'
custodial services (and in the case of the International Equity Fund, its fees
for foreign custodial services) were:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $ 9,801
Bond Fund (1) 11,282
Balanced Fund (1) 12,066
Growth Fund (1) 12,022
Aggressive Growth Fund (1) 13,764
International Equity Fund (1) 32,494
National Tax-Free Bond Fund (2) 7,036
Missouri Tax-Free Bond Fund (2) 7,455
</TABLE>
-------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
State Street Bank also serves as the Funds' Transfer Agent and
dividend disbursing agent. State Street has appointed NFDS, an indirect
subsidiary, to act as the Funds' Transfer Agent, as permitted in the Transfer
Agency Agreement, provided that State Street Bank shall remain liable for the
performance of all of its duties and will hold The Commerce Funds and Fund or
Funds harmless from losses caused by the negligence or willful misconduct of any
appointee. Under the Transfer Agency Agreement, NFDS will, among other things,
(i) receive purchase orders and redemption requests for shares of the Funds;
(ii) issue and redeem shares of the Funds; (iii) effect transfers of shares of
the Funds; (iv) prepare and transmit payments for dividends and distributions
declared by the Funds; (v) maintain records of accounts for the Funds,
shareowners and advise each shareowner to the foregoing; (vi) record the
issuance of shares of each Fund and maintain a record of and provide the Fund on
a regular basis with the total number of shares of each Fund which are
authorized, issued and outstanding; (vii) perform the customary services of a
transfer agent, a dividend disbursing agent and custodian of certain retirement
plans and, as relevant, agent in connection with accumulation, open account or
similar plans; and (viii) provide a system enabling the Funds to monitor the
total number of shares sold in each State.
For the fiscal period ended April 30, 1995, the fees for the Funds'
Transfer Agency services were:
-48-
<PAGE>
<TABLE>
<S> <C>
Short-Term Government Fund (1) $ 7,405
Bond Fund (1) 12,196
Balanced Fund (1) 8,712
Growth Fund (1) 13,939
Aggressive Growth Fund (1) 7,405
International Equity Fund (1) 6,752
National Tax-Free Bond Fund (2) 3,545
Missouri Tax-Free Bond Fund (2) 3,409
</TABLE>
-------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
Distributor
The Commerce Funds' shares are offered on a continuous basis through
Goldman Sachs & Co., which acts under the Distribution Agreement as Distributor
for The Commerce Funds. Goldman, Sachs & Co. may receive a portion of the sales
load imposed on the sale of shares of the Funds and has advised The Commerce
Funds that it has retained approximately $5,500 for the period ended April 30,
1995.
Administrator
Information about GSAM and its duties and compensation as
Administrator is contained in the Prospectus. For the fiscal period ended April
30, 1995, the fees for the Funds for Administration services were:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $10,279
Bond Fund (1) 46,782
Balanced Fund (1) 21,669
Growth Fund (1) 60,569
Aggressive Growth Fund (1) 9,220
International Equity Fund (1) 3,131
National Tax-Free Bond Fund (2) 1,404
Missouri Tax-Free Bond Fund (2) 1,033
</TABLE>
-------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
-49-
<PAGE>
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 1000 Walnut Street, Suite 1600, Kansas City,
Missouri 64106, serves as independent auditors for The Commerce Funds.
COUNSEL
Drinker Biddle & Reath, (of which Mr. McConnel, Secretary of The
Commerce Funds, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to The Commerce Funds.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, shareowner reports or other
communications to shareowners.
Yield Calculations. A Fund's yield is calculated by dividing its net
------------------
investment income per share (as described below) earned during a 30-day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Fund's net investment income per share earned during
the period may be different than that determined for accounting purposes and is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
Yield = 2 [(a-b + 1]/6/ - 1
---
cd)
Where: a = dividends and interest earned during the period.
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.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the
-50-
<PAGE>
security is held in its portfolio. A Fund calculates interest earned on any
debt obligations held in its portfolio by computing the yield to maturity of
each obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest), and dividing the
result by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is in
the portfolio. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
With respect to mortgage-related obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), (a) gain or
loss attributable to actual monthly pay downs are accounted for as an increase
or decrease to interest income during the period; and (b) a Fund may elect
either (i) to amortize the discount and premium on the remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if any, if
the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
Undeclared earned income may be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
Based on the foregoing calculations, for the 30 day period ended April
30, 1995, the yields for the Short-Term Government, Bond, National Tax-Free and
Missouri Tax-Free Funds, were as follows:
-51-
<PAGE>
<TABLE>
<CAPTION>
Yield Assuming
Yield Assuming Maximum Sales Load
Maximum Sales Load and Without Fee
and With Fee Waivers Waivers or
and Reimbursements Reimbursements
------------------ --------------
<S> <C> <C>
Short-Term 5.97% 5.65%
Government Fund
Bond Fund 6.65% N/A
National Tax-Free 4.31% 3.41%
Bond Fund
Missouri Tax-Free 4.48% 3.06%
Bond Fund
</TABLE>
The Distribution Rate for a specified period is calculated by dividing
the total distribution per unit by the maximum offering price or net asset value
on the last day of the period and then annualizing such amount. For the 30 day
period ended April 30, 1995, the Distribution Rate for the Short-Term
Government, Bond, National Tax-Free and Missouri Tax-Free Funds, were as
follows:
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Maximum Sales Sales Load and Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Short-Term 6.45% 6.13% 6.69% 6.36%
Government Fund
Bond Fund 6.53% N/A 6.77% N/A
National Tax- 4.48% 3.58% 4.64% 3.71%
Free Bond Fund
Missouri Tax- 4.53% 3.12% 4.70% 3.23%
Free Bond Fund
</TABLE>
A tax-exempt Fund's "tax-equivalent" yield is computed as follows:
(a) by dividing the portion of the Fund's yield (calculated as above) that is
exempt from both federal and state income taxes by one minus a stated combined
federal and state income tax rate; (b) dividing the portion of the Fund's yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate; and (c) adding the quotient to that portion, if
any, of the Fund's yield that is not exempt from federal income tax.
The tax-equivalent yields for the 30-day period ended April 30, 1995
for the National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund, with and
without fee waivers (assuming 39.6% federal tax rate for both Funds and a 6.0%
Missouri tax rate for the Missouri Tax-Free Bond Fund) were as follows:
-52-
<PAGE>
<TABLE>
<CAPTION>
Yield Assuming
Yield Assuming Maximum Sales Load
Maximum Sales Load and Without Fee
and With Fee Waivers Waivers or
and Reimbursements Reimbursements
------------------ --------------
<S> <C> <C>
National Tax-Free 7.14% 5.65%
Bond Fund
Missouri Tax-Free 7.89% 5.39%
Bond Fund
</TABLE>
Total Return Calculations. Each Fund computes its "average annual
-------------------------
total return" by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
T = [ERV(/1/n/) - 1
---
P]
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their "aggregate total return" by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
T = (ERV - 1
---
P)
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment
-53-
<PAGE>
dates during the period and include all recurring fees charged to all shareowner
accounts, assuming an account size equal to the Fund's mean (or median) account
size for any fees that vary with the size of the account. The maximum sales
load and other charges deducted from payments are deducted from the initial
$1,000 payment (variable "P" in the formula). The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Based on the foregoing calculations, for the period from the
respective commencement of operations to April 30, 1995, the aggregate total
returns for the Funds, after fee waivers, were as follows:
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load and No Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Short-Term 1.26% 1.07% 4.92% 4.72%
Government Fund
Bond Fund 2.67% 2.63% 6.38% 6.34%
Balanced Fund 7.32% 7.24% 11.19% 11.10%
Growth Fund 12.88% 12.86% 16.95% 16.94%
Aggressive 15.76% N/A 19.94% N/A
Growth Fund
International (3.06%) (3.34%) 0.44% 0.15%
Equity Fund
National Tax- (2.92%) (3.31%) 0.58% 0.18%
Free Bond Fund
Missouri Tax- (2.54%) (3.10%) 0.98% 0.40%
Free Bond Fund
</TABLE>
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its total return for the period
of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however,
disclose the maximum sales charge and will also disclose that the
-54-
<PAGE>
performance data do not reflect sales charges and that inclusion of sale charges
would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Literature may summarize the substance of information contained in shareowner
reports (including the investment composition of the Fund), as well as the views
of the Advisor as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Literature charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Literature may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds,
shareowner profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Literature may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
-55-
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
Independent Auditors' Report
The Board of Trustees and Shareholder
The Commerce Funds:
We have audited the accompanying statements of assets and liabilities of the
Short-Term Government Fund, the Bond Fund, the Balanced Fund, the Growth Fund,
the Aggressive Growth Fund, the International Equity Fund, the National Tax-Free
Bond Fund and the Missouri Tax-Free Bond Fund of The Commerce Funds as of
September 2, 1994. These financial statements are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of assets and liabilities are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of assets and
liabilities. Our procedures included confirmation of cash in bank by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the Short-
Term Government Fund, the Bond Fund, the Balanced Fund, the Growth Fund, the
Aggressive Growth Fund, the International Equity Fund, the National Tax-Free
Bond Fund and the Missouri Tax-Free Bond Fund of The Commerce Funds as of
September 2, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
September 6, 1994
<PAGE>
THE COMMERCE FUNDS
LETTER TO SHAREHOLDERS
DEAR SHAREHOLDERS:
I am pleased to send you our first report to shareholders. In addition to
this letter with our market outlook for each portfolio, it contains financial
statements including each portfolio's statement of investments.
MARKET OVERVIEW
The driving factor behind the strong performance of the U.S. bond and stock
markets since November 1994 continues to be the decline in interest rates in
all but the money market sector. This decline in interest rates is attribut-
able to two primary factors.
The first is a positive inflation outlook. Inflation as measured by the Con-
sumer Price Index ended in 1994 at a lower rate of increase than it ended
1993. This confirmed our view that inflation would not become a serious prob-
lem in this cycle and would likely peak in the 3.0% to 3.5% range in the first
half of 1995. This would represent another important milestone in the longer
term decline from the high inflationary peak of the early 1980s. The primary
factors behind this excellent performance have been the early and resolute ac-
tion of the Federal Reserve and important structural changes in the U.S. econ-
omy. We remain convinced that the U.S. is headed toward a prolonged period of
low and stable inflation.
The second reason for the decline in interest rates has been a clear slowing
in the rate of economic growth. After growing at a rate in excess of 4% in
1994, the U.S. economy appears set to slow to a more modest 2.8% to 3.0% rate
on a year-over-year basis. While we do not anticipate a recession, we do ex-
pect economic growth to be quite modest over the balance of 1995. This will
lower credit demands and capacity constraints, thereby reducing potential in-
flationary pressures.
The decline in interest rates has propelled the bond market to significant
gains since last November, reversing, in part, the sharp sell-off over the
course of 1994. Against the background of improved valuation and continued
strength in corporate profits, the stock market rallied sharply over the same
period in tandem with the decline in interest rates. Looking ahead, as eco-
nomic growth moderates, questions will likely emerge with regard to the out-
look for the sustainability of corporate profit increases. This raises some
potential risks for the stock market over the near term. While a period of
consolidation should be expected, we believe that a further decline in inter-
est rates and the absence of a recession will provide a positive underpinning
for the stock market.
Longer term, we remain quite optimistic with regard to the outlook for the
U.S. financial markets, especially the stock market. Important economic, demo-
graphic and political trends are emerging that we expect will provide powerful
stimuli to both markets. As such, we remain fully invested in our portfolios
as discussed below.
SHORT-TERM GOVERNMENT FUND
This fund has a total return since inception (December 12, 1994) through
April 30, 1995 of 4.92% based on net asset value versus the Lipper Short U.S.
Government Funds Index return of 4.64% and the Salomon Brothers
Treasury/Government 1-5 Index return of 5.13%. The fund distributed $.46 per
share from net investment income during the period from inception through
April 30, 1995. The fund's return strength is attributed to its longer dura-
tion and average maturity position relative to its peers.
The expectation of a slowdown in the economy, and the subsequent downward
pressure this would place on short-term interest rates, prompted the fund to
add to its duration position in January. The fund's asset mix is made up al-
most completely of U.S. Government Agency Obligations. These securities offer
a spread pickup of, on average, twenty-five basis points over comparable Trea-
suries, with little credit risk. With the recent economic statistics pointing
to a more stable to slowing economy, the Federal Reserve is expected to adopt
a neutral or easing policy in the coming months. Therefore, the fund will con-
tinue to hold its longer maturity position.
BOND FUND
This fund has a total return since inception (December 12, 1994) through
April 30, 1995 of 6.38% based on net asset value versus the Lipper Intermedi-
ate Investment Grade Debt Funds Index return of 5.94% and the Lehman Brothers
Aggregate Bond Index return of 6.80%, for the same time period. The fund dis-
tributed $.51 per share from net investment income during the period from in-
ception through April 30, 1995. The fund's return strength is attributed to
its longer duration and average maturity position relative to its peers.
The intermediate sector of the yield curve has benefitted most from the re-
cent bond rally. As such, the fund has consolidated much of its asset mix into
this intermediate maturity range by liquidating some of its longer maturity
securities. The cash generated from these sales was invested mainly in inter-
mediate-term Treasury securities with maturities of up to eight years. The
fund will continue to hold a portfolio that is longer in duration relative to
other indexes, as the expectation in the market place is for a continued bond
rally, with little upward pressure on interest rates in the coming months.
1
<PAGE>
THE COMMERCE FUNDS
LETTER TO SHAREHOLDERS--(Continued)
BALANCED FUND
This fund has a total return since inception (December 12, 1994) through
April 30, 1995 of 11.19% based on net asset value versus the Lipper Balanced
Funds Index return of 9.87% and a return of 12.40% based on a composite of the
S&P 500 Index (weighted at 60%) and Lehman Brothers Aggregate Bond Index
(weighted at 40%). The fund distributed $.26 per share from net investment in-
come during the period from inception through April 30, 1995. The fund has
continued to add duration within its fixed income portion in order to take ad-
vantage of lower interest rates in the face of a slowdown in the economy. The
fund has also recently made an asset allocation toward equities, reflecting a
relative value judgement within the two market areas.
GROWTH FUND
This fund earned a return of 16.95% based on net asset value from its incep-
tion on December 12, 1994 and ending April 30, 1995. This compares with a
16.25% return for the S&P 500 Index and a 14.51% return for the Lipper Growth
Funds Index.
Over the last five months, the stock market has moved to all-time highs, led
by the strong performance in the technology sector. The fund had over 20% in-
vested in technology issues, nearly twice the weight of the S&P 500 Index.
Semiconductors (Intel Corp. and Texas Instruments, Inc.), rose over 45% during
the period, followed closely by software companies (Microsoft Corp. and Sili-
con Graphics, Inc.).
Financial issues (Green Tree Financial Corp. and Federal National Mortgage
Assn.) responded favorably to the declining long-term interest rates.
Another area of strength for the fund was companies having large interna-
tional sales exposure. With a weak dollar, international earnings have come in
stronger for health care companies (Abbott Laboratories and Johnson & Johnson)
and consumer brand name companies (McDonalds Corp. and Coca Cola Co.).
AGGRESSIVE GROWTH FUND
From its date of inception on December 12, 1994 through April 30, 1995, this
fund earned a return of 19.94% based on net asset value. This compares with a
return of 15.05% for the S&P 400 Mid-Cap Index and a 8.55% return for the
Lipper Mid-Cap Funds Index.
The performance of the fund versus the benchmark was due chiefly to partici-
pation during the period in the strongest performing sectors of the market,
notably electronic technology (Micron Technology and 3-Com), health care
(Cordis Corp. and Stryker Corp.) and financial services (Sunamerica, Inc. and
Synovus Financial Corp.).
In selecting stocks for this fund, we use "bottom-up" security analysis, an
approach to security selection that focuses primarily on the company and com-
pany-related matters. Increased earnings for the companies selected using this
approach as well as declining interest rates were factors that strengthened
the values of companies held in the portfolio.
Stabilizing the portfolio are many companies in the area of producer manu-
facturing (Danaher Corp. and Modine Manufacturing Co.). This is in line with a
thesis we developed in our Long Term Outlook, which said that for the rest of
this decade, relative profitability will swing to the productive side of the
economy at the expense of the consumptive side. So far, this theme seems to be
on the right track, as capital spending continues to grow dramatically, in-
creasing productivity, through the implementation of new technology.
INTERNATIONAL EQUITY FUND
This fund has a total return since inception (December 12, 1994) through
April 30, 1995 of .44%, based on net asset value, which compares with a 2.35%
return for the Lipper International Funds Index and a return of 5.81% for the
Europe Asia Far East ("EAFE") Index.
The international markets have been buffeted by several factors over the
course of the last six months. Most markets were negatively impacted in the
second half of 1994 by rising interest rates in the U.S. and Europe. This fac-
tor carried over into early 1995. Additionally, the Mexico crisis resulted in
sharp declines in that market and, to a somewhat lesser extent, other Latin
American markets. The fallout also impacted other emerging markets as invest-
ors' sense of risk heightened as a result of the Mexican debacle. Finally, the
dollar/yen problem has contributed to renewed downward pressure on the Japa-
nese economy and market in the first part of 1995.
The fund has its heaviest sector concentrations in consumer goods, capital
goods, basic industries and financials with light exposure to energy and util-
ities. The fund maintains an underweight in Japan and a neutral weight in Eu-
rope relative to the EAFE Index. It also has positions in several smaller mar-
kets, many of which are not represented in the EAFE Index. The sharp declines
in Latin America negatively impacted results, although the portfolio's expo-
sure to these markets was small on an absolute basis. After a sharp initial
decline, the fund has now moved above its initial public offering price of
$18.00 as most markets (with the notable exception of Japan) have begun to re-
cover from the weakness of late 1994 and early 1995.
2
<PAGE>
THE COMMERCE FUNDS
LETTER TO SHAREHOLDERS--(Continued)
TAX-EXEMPT MARKET
In the most recent period, the tax-exempt market confronted both a lack of
supply and tax revision conjecture. The former acted to raise prices as demand
exceeded the more limited supply, while the latter served as an excuse to un-
wind some of the excessive tightness that subsequently developed. Tax-exempts
generally lag the taxable market during rallies. Through mid-April we experi-
enced an exception to this. Then the suggestion of a flat tax caused partici-
pants to step back and reassess the relationship between the two sectors, and
a more normal pattern developed.
NATIONAL TAX-FREE BOND FUND
Since the fund's inception on February 21, 1995, its net asset value de-
clined .28% to its April 30, 1995 value of $17.95. Distributions from incep-
tion to April 30, 1995 of $.16 per share brought the total return to .58%
based on net asset value, while the Lipper General Municipal Debt Funds Index
and the Merrill Lynch Municipal Intermediate Index had returns of 1.86% and
2.12%, respectively, for the same time period. Holdings have included state
general obligation bonds, as well as those of cities and counties. Bonds
backed by the revenues of regional electric utilities and local water projects
have also been included.
MISSOURI TAX-FREE BOND FUND
This fund's increase in net asset value to $18.01, coupled with the per
share distribution of $.17, resulted in a total return of .98% based on net
asset value from inception (February 21, 1995) to April 30, 1995. The Lipper
General Municipal Debt Funds Index and the Merrill Lynch Municipal Intermedi-
ate Index earned returns of 1.86% and 2.12%, respectively, for the same time
period. New issue supply was sparse in Missouri during the early part of 1995,
as it was nationally. The political climate emphasizing fiscal conservatism
was not particularly conducive to large public projects.
In conclusion, we appreciate your support and look forward to helping you
meet your investment objectives.
/s/ Peter F. Mackie
Peter F. Mackie
Executive Vice President
Commerce Bank, N.A.
June 1, 1995
3
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
SHORT-TERM GOVERNMENT FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--86.4%
Federal Home Loan Bank
$1,000,000 6.63% 08/28/01 $ 972,520
Federal Home Loan Mortgage Corp.
2,000,000 6.72 10/11/96 2,000,320
2,000,000 7.93 01/20/98 2,050,940
2,000,000 7.82 01/27/98 2,045,940
Federal Land Bank
1,000,000 7.35 01/20/97 1,009,220
Federal National Mortgage Assn.
1,000,000 7.90 08/12/96 1,014,220
1,000,000 9.20 09/11/00 1,093,590
Israel Aid Series 5A
2,000,000 7.75 11/15/99 2,053,320
Tennessee Valley Authority 1989 Series D
2,000,000 8.38 10/01/99 2,098,740
-----------
Total U.S. Government Agency Obligations
(cost $14,018,821).......................... $14,338,810
-----------
U.S. TREASURY OBLIGATIONS--6.1%
United States Treasury Note
$1,000,000 6.88% 04/30/97 $ 1,005,310
-----------
Total U.S. Treasury Obligations
(cost $1,001,719)........................... $ 1,005,310
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------------- ------------ ------------- -----------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--5.9%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$982,450 (U.S. Treasury Note:
$965,000, 7.50%, 12/31/96)
$ 982,000 5.50% 05/01/95 $ 982,000
-----------
Total Repurchase Agreements
(cost $982,000)................................. $ 982,000
-----------
Total Investments
(identified cost $16,002,540(a))................ $16,326,120
===========
- -----------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments
in which value exceeds cost......................... $ 323,580
Gross unrealized loss for investments
in which cost exceeds value......................... 0
-----------
Net unrealized gain.................................. $ 323,580
===========
- -----------------------------------------------------------------------------------------
</TABLE>
(a) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- -----------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES--27.9%
American Express Master Trust Series
1994-3, Class A
$2,000,000 7.85% 08/15/05 $ 2,028,740
Choice Credit Card Master Trust Series
1992, Class 2B
2,000,000 7.20 04/15/99 1,990,000
Discover Card Trust Series 1992-B, Class B
3,000,000 7.50 06/16/00 3,012,180
Green Tree Financial Corp. Series 1993-4,
Class A4
2,000,000 6.60 01/15/19 1,819,360
Green Tree Financial Corp. Series 1993-4,
Class A5
4,000,000 7.05 01/15/19 3,512,480
Green Tree Financial Corp. Series 1994-2,
Class A4
4,000,000 7.90 05/15/19 3,977,480
Standard Credit Card Master Trust Series
1991-6, Class B
2,000,000 8.35 01/07/00 2,056,240
Standard Credit Card Master Trust Series
1995-1, Class A
2,000,000 8.25 01/08/07 2,076,200
Standard Credit Card Master Trust Series
1995-1, Class B
1,000,000 8.45 01/08/07 1,038,100
Standard Credit Card Trust Series 1990-6,
Class 6A
2,000,000 9.38 09/10/98 2,093,120
-----------
Total Asset-Backed Securities
(cost $23,021,356).......................... $23,603,900
-----------
CORPORATE OBLIGATIONS--23.1%
FINANCIAL--14.3%
Bankamerica Corp.
$2,000,000 6.88% 06/01/03 $ 1,884,040
CIT Group Holdings, Inc.
1,000,000 5.63 04/01/98 958,260
Chemical Bank
2,000,000 6.70 08/15/08 1,773,580
Chubb Capital Corp.
2,000,000 6.00 02/01/98 1,941,580
Morgan Stanley Group, Inc.
2,000,000 6.75 03/04/03 1,860,260
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- -----------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS--CONTINUED
FINANCIAL--(Continued)
PNC Funding Corp.
$2,000,000 6.13% 09/01/03 $ 1,774,460
Smith Barney Holdings, Inc.
2,000,000 6.63 06/01/00 1,907,360
-----------
12,099,540
-----------
INDUSTRIAL--4.2%
Pepsico, Inc.
1,000,000 7.75 10/01/98 1,015,870
Phillip Morris Companies, Inc.
500,000 9.45 11/19/97 524,230
Shell Oil Co.
1,000,000 6.95 12/15/98 992,320
Union Pacific Railroad Co.
1,000,000 6.44 01/15/98 983,020
-----------
3,515,440
-----------
UTILITIES--4.6%
Duke Power Corp.
1,000,000 7.37 02/02/04 988,820
Union Electric Co.
2,000,000 6.75 10/15/99 1,950,020
Wisconsin Electric Power Co.
1,000,000 5.88 10/01/97 975,670
-----------
3,914,510
-----------
Total Corporate Obligations
(cost $18,925,375).......................... $19,529,490
-----------
FOREIGN BONDS--1.2%
Hydro Quebec Note
$1,000,000 7.96% 12/17/01 $ 1,017,370
-----------
Total Foreign Bonds
(cost $971,660)............................. $ 1,017,370
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS--32.7%
Federal Home Loan Bank
$1,000,000 6.32% 02/01/00 $ 969,570
Federal Home Loan Mortgage Corp.
1,000,000 6.20 04/15/03 935,160
3,620,488 8.50 02/01/19 3,696,590
4,050,965 8.50 03/01/21 4,135,751
Federal National Mortgage Assn.
2,974,892 9.00 11/01/21 3,095,881
4,165,873 8.00 04/01/24 4,155,459
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--CONTINUED
Government National Mortgage Assn.
$5,233,947 8.00% 02/15/22 $ 5,230,649
5,783,326 7.00 09/15/23 5,474,266
-----------
Total U.S. Government Agency Obligations
(cost $26,659,592).......................... $27,693,326
-----------
U.S. TREASURY OBLIGATIONS--12.2%
United States Treasury Bonds
$4,000,000 7.50% 11/15/16 4,018,120
4,000,000 8.13 08/15/19 4,283,120
United States Treasury Note
2,000,000 7.25 08/15/04 2,023,740
-----------
Total U.S. Treasury Obligations
(cost $10,130,469).......................... $10,324,980
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------------- ------------ ------------- -----------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--4.0%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$3,395,556 (U.S. Treasury Note:
3,330,000, 7.50%, 12/31/96)
$3,394,000 5.50% 05/01/95 $ 3,394,000
-----------
Total Repurchase Agreements
(cost $3,394,000)............................... $ 3,394,000
-----------
Total Investments
(cost $83,102,452(a))........................... $85,563,066
===========
- ------------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost........................................ $ 2,464,101
Gross unrealized loss for investments in which cost
exceeds value....................................... (3,487)
-----------
Net unrealized gain.................................. $ 2,460,614
===========
- ------------------------------------------------------------------------------------------
</TABLE>
(a) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--52.8%
AUTOMOBILES & AUTOMOBILE PARTS--2.7%
20,200 Federal Signal Corp. $ 457,025
4,300 Genuine Parts Co.(a) 166,625
10,600 Harley Davidson, Inc.(a) 253,075
3,300 Modine Manufacturing Co. 111,787
-----------
988,512
-----------
BANKING--2.3%
6,300 First Union Corp.(a) 285,075
17,300 Norwest Corp. 458,450
4,900 Synovus Financial Corp. 101,063
-----------
844,588
-----------
BROADCAST MEDIA--1.0%
4,200 Capital Cities/ABC, Inc.(a) 354,900
-----------
BUILDING MATERIALS & CONSTRUCTION--2.6%
16,700 Clayton Homes, Inc. 281,812
3,400 Flour Corp.(a) 175,100
5,400 Leggett & Platt, Inc. 207,900
8,300 Sherwin Williams Co.(a) 295,688
-----------
960,500
-----------
BUSINESS SERVICES--3.4%
5,700 Automatic Data Processing, Inc. 366,225
8,400 Equifax, Inc. 271,950
4,200 Fiserv, Inc.(b) 111,300
2,800 Omnicom Group 155,750
13,000 Reynolds & Reynolds Co. 344,500
-----------
1,249,725
-----------
CHEMICAL PRODUCTS--0.4%
2,800 Great Lakes Chemical Corp. 164,500
-----------
COMMUNICATIONS--2.0%
9,200 DSC Communications Corp.(a)(b) 340,400
9,300 Southwestern Bell Corp. 410,363
-----------
750,763
-----------
COMPUTER SERVICES/SOFTWARE--3.8%
2,000 Adobe Systems, Inc. 116,500
3,800 Cerner Corp.(b) 201,875
6,900 Computer Sciences Corp.(a)(b) 340,688
4,000 Fair Isaac & Company, Inc. 185,000
2,000 Legent Corp.(b) 54,500
2,900 Microsoft Corp.(b) 237,437
2,700 Parametric Technology Corp.(b) 128,250
6,000 Verifone, Inc.(b) 141,750
-----------
1,406,000
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
ELECTRICAL SERVICES--1.3%
14,000 Union Electric Co. $ 498,750
-----------
ELECTRONICS & OTHER ELECTRICAL
EQUIPMENT--8.2%
6,600 ADC Telecommunications, Inc.(b) 217,800
9,500 Adaptec, Inc.(b) 304,000
9,200 American Power Conversion Co.(b) 156,400
12,200 General Electric Co. 683,200
4,000 Intel Corp. 409,500
1,000 KLA Instruments Corp.(a)(b) 62,000
3,000 Linear Technology Corp. 179,250
7,000 Oak Industries, Inc.(b) 204,750
5,200 Pioneer Standard Electronics, Inc. 101,400
8,600 Sensormatic Electronics Corp. 255,850
8,000 Silicon Graphics, Inc.(b) 300,000
1,600 Texas Instruments, Inc. 169,600
-----------
3,043,750
-----------
FINANCIAL SERVICES--3.5%
6,000 Federal National Mortgage Assn. 529,500
7,300 Franklin Resources, Inc. 293,825
9,200 Green Tree Financial Corp. 376,050
2,300 Sunamerica, Inc. 112,700
-----------
1,312,075
-----------
FOOD & BEVERAGES--2.3%
6,000 CPC International, Inc. 351,750
10,100 McDonalds Corp. 353,500
4,000 Pepsico, Inc. 166,500
-----------
871,750
-----------
HEALTH & MEDICAL SERVICES--7.0%
9,500 Abbott Laboratories 374,063
5,200 Amgen, Inc.(b) 377,975
2,000 Cardinal Health, Inc. 92,250
11,600 Healthcare Compare Corp.(b) 348,725
5,300 Invacare Corp. 209,350
6,300 Johnson & Johnson 409,500
5,300 Manor Care, Inc. 155,687
10,200 Nellcor, Inc.(b) 423,300
1,900 Pacificare Health Systems, Inc.(b) 116,850
2,600 Stryker Corp. 117,325
-----------
2,625,025
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
HOUSEHOLD PRODUCTS--1.7%
4,600 Colgate Palmolive Co. $ 323,150
3,700 Gillette Co. 303,400
-----------
626,550
-----------
INSURANCE SERVICES--0.3%
3,000 Orion Capital Corp.(a) 105,375
-----------
MANUFACTURING--MISCELLANEOUS--1.8%
13,200 Illinois Tool Works, Inc. 661,650
-----------
MINING--METALS/MINERALS--0.3%
3,000 Trinity Industries, Inc. 115,875
-----------
OFFICE & BUSINESS EQUIPMENT--0.7%
5,700 Cabletron Systems, Inc.(b) 270,750
-----------
OIL & GAS--2.0%
7,800 Mobil Corp.(a) 740,025
-----------
PAPER & FOREST PRODUCTS--0.5%
2,600 Alco Standard Corp. 184,275
-----------
PUBLISHING--0.2%
2,800 Banta Corp. 93,800
-----------
RECREATIONAL SERVICES--1.0%
15,000 Mattel, Inc. 356,250
-----------
RETAIL--2.6%
5,600 Circuit City Stores, Inc.(a) 144,900
8,000 Dollar General Corp. 186,000
7,700 Walgreen Co.(a) 361,900
11,500 Walmart Stores, Inc. 273,125
-----------
965,925
-----------
RUBBER & PLASTIC PRODUCTS--0.4%
4,700 Lancaster Colony Corp.(a) 163,325
-----------
TEXTILES--0.3%
2,800 Cintas Corp. 107,800
-----------
TRANSPORTATION/STORAGE--0.5%
8,000 Air Express International Corp. 188,000
-----------
Total Common Stocks
(cost $17,093,411).......... $19,650,438
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------- -------- -------- -----------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES--11.6%
American Express Master Trust Series
1994-3, Class A
$ 500,000 7.85% 08/15/05 $ 507,185
Choice Credit Card Master Trust Series
1992-2, Class B
500,000 7.20 04/15/99 497,500
Discover Card Trust Series 1992-B, Class B
1,000,000 7.50 06/16/00 1,004,060
Green Tree Financial Corp. Series 1993-4,
Class A4
500,000 6.60 01/15/19 454,840
Green Tree Financial Corp. Series 1993-4,
Class A5
1,000,000 7.05 01/15/19 878,120
Green Tree Financial Corp. Series 1994-2,
Class A4
1,000,000 7.90 05/15/19 994,370
-----------
Total Asset-Backed Securities
(cost $4,210,291)............................ $ 4,336,075
-----------
CORPORATE OBLIGATIONS--14.4%
FINANCIAL--10.4%
Bankamerica Corp.
$ 500,000 6.88% 06/01/03 $ 471,010
Chemical Bank
500,000 6.70 08/15/08 443,395
General Electric Capital Corp.
1,000,000 8.30 09/20/09 1,086,490
Lehman Brothers Holdings, Inc.
500,000 8.38 04/01/97 504,180
Morgan Stanley Group, Inc.
500,000 6.75 03/04/03 465,065
PNC Funding Corp.
500,000 6.13 09/01/03 443,615
Smith Barney Holdings, Inc.
500,000 6.63 06/01/00 476,840
-----------
$ 3,890,595
-----------
INDUSTRIAL--1.3%
Gannett, Inc.
500,000 5.25 03/01/98 $ 476,440
-----------
UTILITIES--2.7%
AT&T Corp.
1,000,000 7.13 01/15/02 $ 987,170
-----------
Total Corporate Obligations
(cost $5,130,672)............................ $ 5,354,205
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS--10.3%
Federal Home Loan Bank
$ 750,000 6.63% 08/28/01 $ 729,390
Government National Mortgage Assn.
1,899,816 7.00 09/15/23 1,798,290
Government National Mortgage Assn.
1,308,487 8.00 02/15/22 1,307,662
----------
Total U.S. Government Agency Obligations (cost
$3,651,135)................................... $3,835,342
----------
U.S. TREASURY OBLIGATIONS--5.6%
United States Treasury Bond
$1,000,000 8.13% 08/15/19 $1,070,780
United States Treasury Note
1,000,000 7.25 08/15/04 1,011,870
----------
Total U.S. Treasury Obligations
(cost $2,058,750)............................. $2,082,650
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
---------- -------- -------- -----------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--5.8%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$2,165,992 (U.S. Treasury Note:
$2,125,000, 7.50%, 12/31/96)
$2,165,000 5.50% 05/01/95 $ 2,165,000
-----------
Total Repurchase Agreements
(cost $2,165,000)........................... $ 2,165,000
-----------
Total Investments
(cost $34,309,259(c))....................... $37,423,710
-----------
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost................... $3,223,741
Gross unrealized loss for investments in
which cost exceeds value................... (109,290)
----------
Net unrealized gain......................... $3,114,451
==========
- --------------------------
</TABLE>
(a) There are common stock rights attached to these securities.
(b) Non-income producing security.
(c) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ------------
<C> <S> <C>
COMMON STOCKS--95.9%
AUTOMOBILES & AUTOMOBILE PARTS--6.4%
171,000 Federal Signal Corp. $ 3,868,875
39,600 Genuine Parts Co.(a) 1,534,500
80,500 Harley Davidson, Inc.(a) 1,921,938
------------
7,325,313
------------
BANKING--4.1%
41,500 First Union Corp.(a) 1,877,875
106,000 Norwest Corp. 2,809,000
------------
4,686,875
------------
BROADCAST MEDIA--1.9%
25,200 Capital Cities/ABC, Inc.(a) 2,129,400
------------
BUILDING MATERIALS & CONSTRUCTION--4.8%
104,000 Clayton Homes, Inc. 1,755,000
28,800 Flour Corp.(a) 1,483,200
62,300 Sherwin Williams Co.(a) 2,219,437
------------
5,457,637
------------
BUSINESS SERVICES--5.3%
33,600 Automatic Data Processing, Inc. 2,158,800
51,600 Equifax, Inc. 1,670,550
83,700 Reynolds & Reynolds Co. 2,218,050
------------
6,047,400
------------
COMMUNICATIONS--4.8%
61,200 DSC Communications Corp.(a)(b) 2,264,400
72,000 Southwestern Bell Corp. 3,177,000
------------
5,441,400
------------
COMPUTER SERVICES/SOFTWARE--5.0%
11,200 Cerner Corp.(b) 595,000
45,700 Computer Sciences Corp.(a)(b) 2,256,438
14,300 Microsoft Corp.(b) 1,170,813
35,600 Parametric Technology Corp.(b) 1,691,000
------------
5,713,251
------------
ELECTRICAL SERVICES--3.9%
125,600 Union Electric Co. 4,474,500
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
ELECTRONICS & OTHER ELECTRICAL
EQUIPMENT--15.6%
58,000 Adaptec, Inc.(b) $ 1,856,000
82,900 American Power Conversion Co.(b) 1,409,300
73,800 General Electric Co. 4,132,800
30,000 Intel Corp. 3,071,250
31,000 Linear Technology Corp. 1,852,250
60,700 Sensormatic Electronics Corp. 1,805,825
54,100 Silicon Graphics, Inc.(b) 2,028,750
14,900 Texas Instruments, Inc. 1,579,400
------------
17,735,575
------------
FINANCIAL SERVICES--7.1%
47,000 Federal National Mortgage Assn. 4,147,750
41,800 Franklin Resources, Inc. 1,682,450
54,700 Green Tree Financial Corp. 2,235,863
------------
8,066,063
------------
FOOD & BEVERAGES--6.0%
38,700 CPC International, Inc. 2,268,787
18,400 Coca Cola Co. 1,069,500
60,500 McDonalds Corp. 2,117,500
33,000 Pepsico, Inc. 1,373,625
------------
6,829,412
------------
HEALTH & MEDICAL SERVICES--10.5%
60,000 Abbott Laboratories 2,362,500
34,700 Amgen, Inc.(b) 2,522,256
78,700 Healthcare Compare Corp.(b) 2,365,919
42,000 Johnson & Johnson 2,730,000
46,700 Nellcor, Inc.(b) 1,938,050
------------
11,918,725
------------
HOUSEHOLD PRODUCTS--3.0%
33,100 Colgate Palmolive Co. 2,325,275
12,800 Gillette Co. 1,049,600
------------
3,374,875
------------
MANUFACTURING--MISCELLANEOUS--3.9%
88,000 Illinois Tool Works, Inc. 4,411,000
------------
MINING--METALS/MINERALS--1.5%
45,100 Trinity Industries, Inc. 1,741,987
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
OFFICE & BUSINESS EQUIPMENT--1.5%
35,200 Cabletron Systems, Inc.(b) $ 1,672,000
------------
OIL & GAS--3.9%
47,100 Mobil Corp.(a) 4,468,612
------------
RECREATIONAL SERVICES--2.3%
92,050 Mattel, Inc. 2,186,188
8,000 Walt Disney Co. 443,000
------------
2,629,188
------------
RETAIL--2.8%
43,700 Walgreen Co.(a) 2,053,900
50,000 Walmart Stores, Inc. 1,187,500
------------
3,241,400
------------
RUBBER & PLASTIC PRODUCTS--1.6%
53,000 Lancaster Colony Corp.(a) 1,841,750
------------
Total Common Stocks
(cost $94,014,271)...... $109,206,363
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------------- -------- ------------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--4.9%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$5,600,566 (U.S. Treasury Note:
$5,495,000, 7.50%, 12/31/96)
$5,598,000 5.50% 05/01/95 $ 5,598,000
------------
Total Repurchase Agreements
(cost $5,598,000)............................... $ 5,598,000
------------
Total Investments
(cost $99,612,271(c))........................... $114,804,363
============
- -----------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost........................................ $ 15,556,784
Gross unrealized loss for investments in which cost
exceeds value....................................... (364,692)
------------
Net unrealized gain.................................. $ 15,192,092
============
- -----------------------------------------------------------------------------------------
</TABLE>
(a) There are common stock rights attached to these securities.
(b) Non-income producing security.
(c) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
AGGRESSIVE GROWTH FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--93.7%
AEROSPACE/DEFENSE--1.5%
8,000 Watkins-Johnson Co. $ 317,000
-----------
AUTOMOBILES & AUTOMOBILE PARTS--4.9%
10,000 Echlin, Inc.(a) 365,000
8,000 Magna International, Inc. 277,000
11,500 Modine Manufacturing Co. 389,562
-----------
1,031,562
-----------
BANKING--2.0%
15,200 Synovus Financial Corp. 313,500
4,000 West One Bancorp. 110,500
-----------
424,000
-----------
BUILDING MATERIALS & CONSTRUCTION--3.2%
19,718 Clayton Homes, Inc. 332,741
9,000 Leggett & Platt, Inc. 346,500
-----------
679,241
-----------
BUSINESS SERVICES--10.0%
7,000 DeVry, Inc.(b) 267,750
12,500 Equifax, Inc. 404,688
14,600 Fiserv, Inc.(b) 386,900
5,800 Omnicom Group 322,625
7,600 Paychex, Inc. 361,950
14,000 Reynolds & Reynolds Co. 371,000
-----------
2,114,913
-----------
CHEMICAL PRODUCTS--2.3%
15,000 Om Group, Inc. 358,125
6,000 RPM, Inc. 118,500
-----------
476,625
-----------
COMPUTER SERVICES/SOFTWARE--13.0%
8,000 Adobe Systems, Inc. 466,000
7,200 Autodesk, Inc. 245,250
7,000 Davidson & Associates, Inc.(b) 238,000
7,000 Fair Isaac & Company, Inc. 323,750
13,000 Keane, Inc.(b) 328,250
12,700 Network General Corp.(b) 331,787
9,000 Parametric Technology Corp.(b) 427,500
16,000 Verifone, Inc.(b) 378,000
-----------
2,738,537
-----------
ELECTRICAL SERVICES--4.1%
10,500 LG&E Energy Corp. 405,563
10,500 Scana Corp. 450,188
-----------
855,751
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
ELECTRONICS & OTHER ELECTRICAL
EQUIPMENT--20.0%
9,200 ADC Telecommunications, Inc.(b) $ 303,600
9,300 Arrow Electronics, Inc.(b) 432,450
7,000 Dionex Corp.(a)(b) 290,500
4,400 KLA Instruments Corp.(a)(b) 272,800
7,500 Linear Technology Corp. 448,125
10,000 Littlefuse, Inc.(b) 338,750
11,250 Molex, Inc. 424,688
13,000 Oak Industries, Inc.(b) 380,250
23,250 Pioneer Standard Electronics, Inc. 453,375
10,000 Symbol Technologies, Inc.(b) 331,250
15,900 VLSI Technology, Inc.(b) 338,869
3,517 Vishay Intertechnology, Inc.(b) 207,943
-----------
4,222,600
-----------
FINANCIAL SERVICES--2.1%
9,000 Sunamerica, Inc. 441,000
-----------
HEALTH & MEDICAL SERVICES--12.8%
8,000 Biomet, Inc.(b) 140,000
7,500 Cardinal Health, Inc. 345,937
4,300 Cordis Corp.(b) 308,525
7,500 Invacare Corp. 296,250
15,000 Manor Care, Inc. 440,625
9,000 Nellcor, Inc.(b) 373,500
5,000 Pacificare Health Systems, Inc.(b) 307,500
6,800 Stryker Corp. 306,850
6,000 Sunrise Medical, Inc.(b) 181,500
-----------
2,700,687
-----------
HOUSEHOLD FURNISHINGS & APPLIANCES--0.3%
3,000 Juno Lighting, Inc.(a) 62,250
-----------
INDUSTRIAL MACHINERY--3.7%
13,200 Danaher Corp. 392,700
10,500 Idex Corp. 350,437
2,000 Watts Industries, Inc. 45,125
-----------
788,262
-----------
INSURANCE SERVICES--1.8%
10,875 Orion Capital Corp.(a) 381,984
-----------
PAPER & FOREST PRODUCTS--2.6%
2,200 Alco Standard Corp. 155,925
19,000 American Management Systems, Inc.(b) 401,375
-----------
557,300
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
AGGRESSIVE GROWTH FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------ ----------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
PUBLISHING--1.0%
6,000 Banta Corp. $ 201,000
-----------
RETAIL--4.0%
10,000 Circuit City Stores, Inc.(a) 258,750
12,656 Dollar General Corp. 294,258
12,000 Gymboree Corp.(b) 282,000
-----------
835,008
-----------
RUBBER & PLASTIC PRODUCTS--1.7%
10,400 Lancaster Colony Corp.(a) 361,400
-----------
TEXTILES--1.2%
6,700 Cintas Corp. 257,950
-----------
TRANSPORTATION/STORAGE--1.5%
13,500 Air Express International Corp. 317,250
-----------
Total Common Stocks
(cost $17,382,509).......... $19,764,320
===========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------------- -------- ------------- -----------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--13.0%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$2,736,254 (U.S. Treasury Note:
$2,685,000, 7.50%, 12/31/96)
$2,735,000 5.50% 05/01/95 $ 2,735,000
-----------
Total Repurchase Agreements
(cost $2,735,000)............................... $ 2,735,000
-----------
Total Investments
(cost $20,117,509(c))........................... $22,499,320
===========
- -----------------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost........................................ $ 2,481,411
Gross unrealized loss for investments in which cost
exceeds value....................................... (100,100)
-----------
Net unrealized gain.................................. $ 2,381,311
===========
- -----------------------------------------------------------------------------------------
</TABLE>
(a) There are common stock rights attached to these securities.
(b) Non-income producing security.
(c) The cost for federal income tax purposes is $20,118,009.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--79.4%
ARGENTINE PESOS--0.0%
820 Telefonica De Argentina (Utilities) $ 3,558
----------
AUSTRALIAN DOLLARS--2.2%
6,150 Australian Gas Light Co. (Utilities) 20,129
11,000 Australian National Industries (Industrial Machinery) 11,521
2,000 Broken Hill Proprietary Co.
(Mining--Metals/Minerals) 29,093
5,000 Burns Philp & Co., Ltd. (Retail) 12,655
2,000 Coca-Cola Amatil (Food & Beverages) 12,219
1,000 Lend Lease Corp. (Building Materials & Construction) 12,772
3,000 MIM Holdings, Ltd. (Mining--Metals/Minerals) 4,386
3,000 Mayne Nickless, Ltd. (Transportation/Storage) 14,161
4,000 News Corporation, Ltd. (Broadcast Media) 19,434
4,000 Publishing & Broadcasting, Ltd. (Broadcast Media) 11,492
19,000 TNT, Ltd. (Transportation/Storage) 27,086
5,000 Tab Corp. Holdings, Ltd. (Mining--Metals/Minerals)(a) 11,274
5,500 Western Mining Corp. Holdings, Ltd. (Mining--
Metals/Minerals) 31,122
4,000 Woodside Petroleum, Ltd. (Oil & Gas) 16,350
4,000 Woolworths, Ltd. (Retail) 8,699
----------
242,393
----------
AUSTRIAN SCHILLINGS--0.1%
100 Flughafen Wien AG (Transportation/Storage) 4,451
100 Oesterreichische Elektrizitats (Utilities) 6,594
----------
11,045
----------
BELGIAN FRANCS--1.2%
90 Fortis AG (Insurance Services) 9,274
65 Generale Banque (Financial Services) 20,436
190 Kredietbank (Financial Services) 46,484
60 UCB (Chemical Products) 53,207
----------
129,401
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
BRITISH POUNDS STERLING--12.9%
22,000 ASDA Group (Retail) $ 29,022
8,000 Abbey National (Financial Services) 59,974
5,000 Argos (Retail) 32,738
7,000 Argyll Group (Retail) 32,207
1,000 BAA (Transportation/Storage) 7,625
5,000 British Gas (Oil & Gas) 24,212
3,000 British Petroleum (Oil & Gas) 21,598
8,000 Cable & Wireless (Utilities) 51,609
6,743 Cadbury Schweppes (Food & Beverages) 48,598
14,000 Caradon PLC (Building Materials & Construction) 55,856
6,000 Clyde Petroleum (Oil & Gas) 4,585
5,000 Coats Viyella (Textiles) 16,329
3,600 East Midlands Electricity (Utilities) 38,166
1,000 Eastern Group (Utilities) 10,232
2,000 First National Finance Corp. (Financial Services) 2,413
5,000 Glaxo Wellcome (Health & Medical Services) 59,081
9,000 Grand Metropolitan
(Food & Beverages) 57,770
8,000 Guinness (Food & Beverages) 60,489
1,000 Heath (CE) (Insurance Services) 3,861
2,000 Heywood Williams Group (Building Materials &
Construction) 7,963
4,000 Hillsdown Holdings (Food & Beverages) 11,840
6,000 Kingfisher (Retail) 43,147
7,000 Ladbroke Group (Recreational Services) 20,270
4,000 Laing (John) (Building Materials & Construction) 12,870
4,000 London Electricity (Utilities) 41,120
13,400 National Westminster Bank (Financial Services) 116,409
4,000 RTZ Corp. (Mining--Metals/Minerals) 50,901
6,500 Rank Organisation (Recreational Services) 44,337
8,000 Reed International (Broadcast Media) 102,960
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
BRITISH POUNDS STERLING--Continued
3,000 Rolls-Royce (Automobiles & Automobile Parts) $ 8,253
4,000 Sears Holdings (Retail) 6,725
5,000 Shell Transport & Trading Co. (Oil & Gas) 59,202
3,000 Smith (David S.) Holdings (Textiles) 26,786
13,000 Smith Kline Beecham/ S'Kline Beckman (Health & Medical
Services) 99,027
1,000 South Western Electricity (Utilities) 10,698
8,000 T & N (Automobiles & Automobile Parts) 19,434
6,000 Tesco (Retail) 26,979
17,500 Tomkins (Industrial Machinery) 65,878
6,000 United Newspapers (Broadcast Media) 47,780
----------
1,438,944
----------
CANADIAN DOLLARS--0.2%
840 Alcan Aluminium, Ltd. (Mining--Metals/Minerals) 23,733
----------
DANISH KRONER--0.2%
195 Den Danske Bank AB (Financial Services) 11,710
100 Teledanmark (Utilities) 5,215
160 Unidanmark (Financial Services) 7,316
----------
24,241
----------
DEUTSCHE MARK--4.0%
20 AVA Allegemeine Handels-Der Verbr AG (Retail) 7,497
28 Allianz AG (Insurance Services) 51,245
10 Allianz AG Holdings (Warrants) (Financial Services) 8,780
140 Bayer AG (Chemical Products) 34,412
20 Bayerische Motoren Werke AG (Automobiles & Automobile Parts) 10,236
40 Bilfinger & Berger Bauag (Building Materials & Construction) 18,626
20 Buderus AG (Industrial Machinery) 10,769
66 Deutsche Bank AG (Financial Services) 32,341
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
DEUTSCHE MARK--Continued
120 Gehe AG (Health & Medical Services) $ 51,553
90 Hoechst AG (Chemical Products) 19,177
20 Hornbach (Retail) 23,946
10 Hornbach Baumarkt AG (Retail) 6,314
20 Krones AG (Industrial Machinery) 9,515
175 Mannesmann AG (Industrial Machinery) 47,430
36 Rhoen-Klinikum AG (Health & Medical Services) 34,254
60 Schering AG (Chemical Products) 44,482
100 Veba International Finance (Financial Services) 11,821
100 Volkswagen AG (Automobiles & Automobile Parts) 27,860
----------
450,258
----------
FINNISH MARKKAA--0.1%
340 Nokia (AB) OY (Electronics & Other Electrical Equipment) 13,868
----------
FRENCH FRANCS--7.1%
265 Accor (Recreational Services) 30,356
150 Assurances Generales De France (Insurance Services) 4,954
300 Carnaud Metal Box (Building Materials & Construction) 10,626
130 Carrefour (Retail) 65,086
100 Chargeurs SA (Industrial Machinery) 19,905
970 Eaux (Cie Generale Des) (Utilities) 102,053
175 Ecco Ste (Business Services) 23,886
520 Elf Aquitaine (Oil & Gas) 41,475
150 GTM Entrepose (Building Materials & Construction) 12,552
40 L'Oreal (Household Durables) 10,513
270 LVMH Moet-Hennessy Louis Vuitton (Food & Beverages) 51,275
310 Lafarge-Coppee SA (Building Materials & Construction) 24,115
350 Lapeyre (Building Materials & Construction) 22,933
20 Legrand (Electronics & Other Electrical Equipment) 28,923
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
FRENCH FRANCS--(Continued)
150 Peugeot (Automobiles & Automobile Parts) $ 21,601
100 Pinault (Building Materials & Construction) 22,586
150 Pinault Printemps Redoute (Retail) 33,878
300 Poliet (Building Materials & Construction) 26,505
50 Primagaz (Cie Des Gaz Petrole) (Oil & Gas) 9,363
25 Rexel (Retail) 4,113
460 Saint Gobain (Chemical Products) 59,421
90 Societe Generale (Financial Services) 9,871
30 Sodexho (Food & Beverages) 5,648
560 Television Francais (Broadcast Media) 51,069
590 Total (Oil & Gas) 36,813
1,100 Valeo (Automobiles & Automobile Parts)(a) 62,557
----------
792,077
----------
HONG KONG DOLLARS--2.1%
14,000 Great Eagle Holdings (Real Estate) 25,139
12,000 Hutchison Whampoa (Financial Services) 52,086
26,000 Shanghai Petrochemical (Chemical Products) 7,473
9,000 Swire Pacific Co. (Financial Services) 60,167
22,000 Wharf Holdings (Financial Services) 65,935
52,000 Yizheng Chemical Fibre (Chemical Products) 17,298
----------
228,098
----------
ITALIAN LIRE--2.0%
2,100 Assicurazioni Generali Spa (Insurance Services) 50,455
9,000 Banca Fideuram (Financial Services) 10,892
1,000 Danieli & Co. (Building Materials & Construction) 3,211
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
ITALIAN LIRE--(Continued)
1,000 IMI Spa (Financial Services) $ 6,093
4,000 Istituto National Assicurazioni (Insurance Services)(a) 5,376
2,000 Italgas (Societa Italiana II Gas) Spa (Utilities) 5,257
1,000 Rinascente (La) (Retail) 5,522
3,000 SME (Meridionale Di Finanziaria) (Food & Beverages) 7,145
10,000 STET (Utilities) 28,427
4,000 STET (Di Risp Shares) (Utilities) 9,158
3,000 Sasib (Building Materials &
Construction) 6,771
18,000 Telecom Italia Spa (Utilities) 47,904
15,000 Telecom Italia Spa (Di Risp Shares) (Utilities) 31,222
----------
217,433
----------
JAPANESE YEN--20.2%
2,000 Alps Electric Co. (Electronics & Other Electrical
Equipment) 23,092
4,000 Amada Co., Ltd. (Industrial Machinery) 42,757
1,000 Aoyama Trading Co. (Retail) 19,402
4,000 Canon, Inc. (Electronics & Other Electrical Equipment) 66,183
2,000 Citizen Watch Co. (Electronics & Other Electrical
Equipment) 14,355
3,000 Dai Nippon Screen Manufacturing (Electronics & Other
Electrical Equipment)(a) 19,462
1,000 Daifuku Co., Ltd. (Industrial Machinery) 13,094
3,000 Daiichi Pharmaceutical (Health & Medical Services) 48,566
4,000 Daiwa House Industry Co. (Building Materials &
Construction) 66,659
6 East Japan Railway (Transportation/Storage) 31,211
1,000 Fanuc Co., Ltd. (Electronics & Other Electrical
Equipment) 45,233
6,000 Hitachi (Electronics & Other Electrical Equipment) 61,064
4,000 Hitachi Zosen Corp. (Industrial Machinery) 19,188
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
JAPANESE YEN--(Continued)
2,000 Honda Motor Co., Ltd. (Automobiles & Automobile Parts) $ 32,377
2,000 Inax Corp. (Building Materials & Construction) 21,402
2,000 Ishihara Sangyo Kaisha (Chemical Products)(a) 7,928
1,000 Ito-Yokado Co. (Retail) 53,922
1,000 Kawada Kogyo (Mining--Metals/Minerals) 9,582
2,000 Kokuyo Co., Ltd. (Computer Services/Software) 51,422
6,000 Komatsu, Ltd. (Industrial Machinery) 47,708
2,000 Komori Corp. (Industrial Machinery) 49,756
4,000 Kumagai Gumi Co. (Building Materials & Construction) 22,283
4,000 Kuraray Co. (Chemical Products) 47,566
1,000 Kyocera Corp. (Electronics & Other Electrical Equipment) 77,372
3,000 Makita Corp. (Industrial Machinery) 46,423
3,000 Marui Co., Ltd. (Retail) 46,066
4,000 Matsushita Electric Industrial Co. (Household Durables) 67,135
3,000 Mitsubishi Corp. (Electronics & Other Electrical
Equipment) 37,853
10,000 Mitsubishi Heavy Industries, Ltd. (Industrial Machinery) 72,610
3,000 Mitsubishi Paper Mills, Ltd. (Paper & Forest Products) 21,676
6,000 Mitsui Fudosan Co. (Real Estate) 69,849
2,000 Mitsui Petrochemical Industries (Oil & Gas) 18,950
1,000 Murata Manufacturing Co. (Electronics & Other Electrical
Equipment) 40,233
5,000 NEC Corp. (Electronics & Other Electrical Equipment) 55,350
1,000 National House Industries (Building Materials &
Construction) 20,474
2,000 Nippon Hodo Co. (Building Materials & Construction) 34,758
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
JAPANESE YEN--(Continued)
18,000 Nippon Steel Corp. (Mining--Metals/Minerals) $ 71,563
4,000 Nippondenso Co. (Transportation/Storage) 80,467
2,000 Pioneer Electronic Corp. (Household Durables) 42,138
2,000 Sankyo Co. (Health & Medical Services) 48,090
4,000 Sekisui Chemical Co., Ltd. (Building Materials &
Construction) 49,994
3,000 Sekisui House (Building Materials & Construction) 39,638
4,000 Sharp Corp. (Household Durables) 65,706
1,000 Shinetsu Chemical Co., Ltd. (Chemical Products) 19,402
1,000 Sony Corp. (Household Durables) 50,470
6,000 Sumitomo Corp. (Retail) 59,636
5,000 Sumitomo Electric Industries, Ltd. (Mining--Metals/Minerals) 67,849
2,000 Sumitomo Forestry Co., Ltd. (Building Materials &
Construction) 35,472
1,000 TDK Corp. (Household Durables) 45,709
7,000 Teijin (Chemical Products) 39,495
2,000 Tokio Marine & Fire Insurance Co. (Insurance Services) 23,807
1,000 Tokyo Electron (Electronics & Other Electrical Equipment) 31,187
1,000 Tokyo Steel Manufacturing (Mining--Metals/Minerals) 20,950
1,000 Toppan Printing Co. (Business Services) 14,522
1,000 Yurtec Corp. (Building Materials & Construction) 22,140
----------
2,251,196
----------
MALAYSIAN RINGGITS--2.4%
29,000 Affin Holdings Berhad (Financial Services) 40,599
6,000 Aokam Perdana Berhad
(Paper & Forest Products) 26,947
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
MALAYSIAN RINGGITS--(Continued)
3,000 Commerce Asset-Holdings Berhad (Financial Services) $ 5,584
24,000 Renong Berhad (Industrial Machinery) 36,706
5,000 Resort World Berhad (Recreational Services) 26,300
23,000 Technology Resources Industries (Real Estate)(a) 58,628
13,000 United Engineers (Malaysia) Berhad (Industrial Machinery) 74,691
----------
269,455
----------
MEXICAN PESOS--0.2%
2,420 Grupo Embotellador De Mexico (Paper & Forest Products) 13,525
4,200 Tolmex SA De Cv (Building Materials & Construction) 14,018
----------
27,543
----------
NETHERLANDS GUILDERS--8.2%
680 ABN AMRO Holdings NV (Financial Services) 26,147
590 Ahold NV (Retail) 20,292
310 Akzo Nobel NV (Chemical Products) 35,940
1,340 CSM CVA (Food & Beverages) 61,364
15,670 Elsevier NV (Broadcast Media) 171,577
510 Fortis AMEV NV (Insurance Services) 26,935
130 Hagemeyer (Retail) 11,220
1,090 Internationale Nederlanden Groep (Financial Services) 57,428
620 Koninklijke Ptt Nederland (Transportation/Storage) 21,604
190 Nutricia (Verenigde Bedrijven) (Food & Beverages) 11,601
1,330 Polygram NV (Recreational Services) 75,041
1,080 Royal Dutch Petroleum Co. (Oil & Gas) 133,209
420 Unilever NV (Food & Beverages) 56,185
2,540 Wolters Kluwer (Broadcast Media) 206,622
----------
915,165
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
NEW ZEALAND DOLLARS--1.4%
10,000 Carter Holt Harvey (Paper & Forest Products) $ 25,407
2,000 Fernz Corp. (Chemical Products) 7,393
22,000 Fletcher Challenge (Paper & Forest Products) 59,148
7,000 Fletcher Challenge Forest Division (Paper & Forest
Products) 9,786
2,000 Independant Newspapers (New Zealand) (Broadcast Media) 7,259
10,000 New Zealand Telecom (Utilities) 42,008
----------
151,001
----------
NORWEGIAN KRONER--1.3%
330 Bergesen D-Y AS (Transportation/Storage) 7,196
520 Kvaemer Industrier (Industrial Machinery) 23,763
1,590 Norsk Hydro (Energy) 64,630
1,110 Orkla AS (Industrial Machinery) 47,611
370 Saga Petroleum (Oil & Gas) 5,073
----------
148,273
----------
SINGAPORE DOLLARS--2.3%
7,000 DBS Land (Real Estate) 19,290
2,000 Far East-Levingston Shipbuilding (Industrial Machinery) 8,755
3,000 Hong Kong Land Holdings (Real Estate) 4,047
3,000 Jurong Shipyard (Industrial Machinery) 23,036
1,000 Keppel Corp. (Transportation/Storage) 8,109
6,000 Neptune Orient Lines (Transportation/Storage) 6,889
2,000 Overseas Union Bank (Financial Services) 11,554
3,000 Overseas Union Enterprises (Real Estate) 17,438
4,000 Sembawang Corp. (Industrial Machinery) 27,413
3,000 Singapore Airlines (Transportation/Storage) 28,848
4,000 Singapore Land (Real Estate) 25,834
1,000 Singapore Press Holdings (Broadcast Media) 17,223
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
SINGAPORE DOLLARS--Continued
11,000 United Industrial Corp. (Real Estate) $ 10,262
4,000 United Overseas Bank (Financial Services) 41,622
1,000 United Overseas Bank (Warrants) (Financial Services) 5,239
----------
255,559
----------
SPANISH PESETAS--1.8%
110 Banco De Popular Espanol (Financial Services) 15,034
500 Banco De Santander SA (Financial Services) 18,262
1,660 Centros Comerciales Pryca (Retail) 29,404
1,020 Empresa Nacional De Elec(Endesa) (Utilities)(a) 48,236
180 Fomento De Construcciones Y Constra (Utilities) 16,527
330 Gas Natural Sdg SA (Utilities) 32,981
1,380 Repsol (Oil & Gas) 43,956
----------
204,400
----------
SWEDISH KRONOR--1.8%
240 Asea AB (Electronics & Other Electrical Equipment) 20,238
2,200 Astra AB (Health & Medical Services) 63,215
1,250 Atlas Copco AB (Industrial Machinery) 17,195
690 Electrolux Co. (Household Durables) 35,214
290 Esselte (Broadcast Media) 3,790
340 Hennes & Mauritz AB (Retail) 22,964
290 Sandvik AB (A Shares) (Industrial Machinery) 5,406
1,060 Sandvik AB (B Shares) (Industrial Machinery) 19,685
200 Stora Kopparbergs Bergsl AB (Paper & Forest Products) 13,426
----------
201,133
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
SWISS FRANCS--3.1%
91 BBC AG Brown, Boveri & Cie (Electronics & Other
Electrical Equipment) $ 89,785
48 CS Holdings (Financial Services) 20,058
30 Ciba Geigy AG (Chemical Products) 20,518
75 Nestle SA (Food & Beverages) 73,214
6,885 Roche Holdings AG (Health & Medical Services) 48,050
60 Sandoz AG (Health & Medical Services) 39,204
100 Schweizerischer Bankverein (Financial Services) 32,888
28 Union Bank of Switzerland (Financial Services) 25,745
----------
349,462
----------
THAILAND BAHT--1.1%
500 Advanced Information Services (Alien Market) (Computer
Services/Software) 7,319
200 Advanced Information Services (Local Market) (Computer
Services/Software) 2,944
2,000 Bangkok Bank (Financial Services) 19,354
4,300 Bank of Ayudhya (Financial Services) 19,232
400 Land & House Public Co. (Real Estate) 7,058
400 Shinawatra Computer & Communication Co. (Computer
Services/Software) 8,945
400 Siam Cement Public Co. (Building Materials &
Construction) 22,997
1,500 Siam Commercial Bank Public Co. (Financial Services) 12,686
2,000 Thai Farmers Bank Public (Financial Services) 17,565
700 United Communication Industries (Utilities) 10,246
----------
128,346
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------- ----------- ----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
UNITED STATES DOLLARS--3.5%
310 Baesa (Buenos Aires Ebotelladora) (Food & Beverages) $ 8,525
420 Banco De Galicia Buenos Aires SA (Financial Services) 6,773
1,700 Brazil Fund, Inc. (Financial Services) 44,625
24,310 CIFRA SA De Cv (Retail) 36,951
790 Chile Fund (Financial Services) 37,426
280 Chilectra SA (Utilities) 14,233
610 Grupo Televisa (Broadcast Media) 12,276
14,000 Hong Kong Land Holdings (Real Estate) 26,320
440 Panamerica Beverages (Food & Beverages) 11,440
70 Repsol SA (Oil & Gas) 2,240
1,000 Samsung Electronics (Electronics & Other Electrical
Equipment) 50,000
1,140 Telecomunicacoes Brasilera (Utilities) 40,772
880 Telefonica De Argentina (Utilities) 20,680
1,970 Telefonos De Mexico SA De Cv (Utilities) 59,593
840 YPF Sociedad Anonima (Oil & Gas) 17,010
----------
388,864
----------
Total Common Stocks
(cost $8,692,324)....................................... $8,865,446
----------
PREFERRED STOCKS--0.3%
AUSTRALIAN DOLLARS--0.2%
2,000 News Corporation, Ltd. (Broadcast Media) $ 8,830
4,000 TNT, Ltd. (Transportation/Storage) 6,139
----------
14,969
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
---------- ----------- -----------
<C> <S> <C> <C>
PREFERRED STOCKS--CONTINUED
AUSTRIAN SCHILLINGS--0.0%
70 Creditanstalt Bankverein
(Financial Services) $ 4,006
BRITISH POUNDS STERLING--0.0%
1,000 First National Finance Corp.
(Financial Services) 2,091
DEUTSCHE MARK--0.1%
190 Fielmann AG
(Health & Medical Services) 7,765
-----------
Total Preferred Stocks
(cost $26,236)............... $ 28,831
-----------
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE
---------- -------- ----------------
<C> <S> <C> <C>
CORPORATE OBLIGATIONS--0.0%
BELGIAN FRANCS--0.0%
Kredietbank
$ 1,000 5.75% 11/30/03 $ 2,531
-----------
Total Corporate Obligations
(cost $2,557)................ $ 2,531
-----------
REPURCHASE AGREEMENTS--43.2%
State Street Bank & Trust Company
dated 04/28/95, repurchase price
$4,831,213 (U.S. Treasury Note:
$4,740,000, 7.50%, 12/31/96)
$4,829,000 5.50% 05/01/95 $ 4,829,000
-----------
Total Repurchase Agreements
(cost $4,829,000)............ $ 4,829,000
-----------
Total Investments
(cost $13,550,117(b))........ $13,725,808
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON AND PREFERRED STOCK INDUSTRY
CONCENTRATIONS
- ---------------------------------------------------
<S> <C>
Financial Services 8.9%
Industrial Machinery 6.6%
Utilities 6.2%
Electronics & Other Electrical Equipment 6.0%
Broadcast Media 5.9%
Retail 5.7%
Building Materials & Construction 5.3%
Health & Medical Services 4.5%
Food & Beverages 4.3%
Oil & Gas 3.9%
Chemical Products 3.7%
Mining--Metals/Minerals 2.9%
Household Durables 2.8%
Real Estate 2.4%
Transportation/Storage 2.2%
Recreational Services 1.8%
Automobiles & Automobile Parts 1.6%
Insurance Services 1.6%
Paper & Forest Products 1.5%
Computer Services/Software 0.6%
Energy 0.6%
Textiles 0.4%
Business Services 0.3%
- ---------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS 79.7%
- ---------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in which value exceeds
cost.......................................................... $ 388,577
Gross unrealized loss for investments in which cost exceeds
value......................................................... (222,707)
---------
Net unrealized gain ........................................... $ 165,870
=========
- --------------
</TABLE>
(a) Non-income producing security.
(b) The cost for federal income tax purposes is $13,559,938.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------- -------- -------- ----------
<S> <C> <C> <C>
MUNICIPAL BOND OBLIGATIONS--96.7%
FLORIDA--3.5%
Florida State Board of Education Capital
Outlay GO Bonds Series A (AA/Aa)
$200,000 5.25% 01/01/04 $ 198,476
----------
GEORGIA--3.5%
Georgia State GO Bonds Series D
(AA+/Aaa)
200,000 5.40 11/01/10 194,882
----------
ILLINOIS--4.5%
Evanston GO Bonds (Aaa)
250,000 5.30 12/01/99 254,347
----------
IOWA--8.7%
Iowa City Sewer Revenue Bonds (AMBAC)
(AAA/Aaa)
250,000 6.00 07/01/08 251,418
Polk County GO Bonds (FGIC) (AAA/Aaa)
250,000 5.50 12/01/10 239,645
----------
491,063
----------
KENTUCKY--3.5%
Louisville Water Works Board Water
System Revenue Bonds (Aa/Aa)
200,000 5.63 11/15/06 199,576
----------
MARYLAND--4.4%
Maryland State GO Bonds (AAA/Aaa)
250,000 4.80 04/15/01 246,187
----------
MICHIGAN--7.1%
Greenville Public Schools GO Bonds (MBIA)
(AAA/Aaa)
200,000 5.75 05/01/07 201,456
Michigan State Hospital Financing Authority (Manufacturers National
Detroit LOC)
(A/A-1/A1/VMIG1)
200,000 4.55(a) 06/01/01 200,000
----------
401,456
----------
NEBRASKA--3.6%
Nebraska Public Power District Revenue Bonds Series A (A+/A1)
200,000 6.00 01/01/06 205,962
----------
NEVADA--3.5%
Clark County School District GO Bonds
(FGIC) (AAA/Aaa)
200,000 5.30 05/01/04 195,804
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------- -------- -------- ----------
<S> <C> <C> <C>
MUNICIPAL BOND OBLIGATIONS--CONTINUED
NEW MEXICO--3.6%
Albuquerque Gross Receipts Series A
Revenue Bonds (Canadian Imperial
Bank LOC) (AA/A-1+/Aa3/VMIG1)
$200,000 4.55%(a) 07/01/22 $ 200,000
----------
NORTH CAROLINA--3.6%
Winston-Salem Water & Sewer System
Revenue Bonds (Wachovia Bank SPA)
(AA+/A-1+/Aa/VMIG1)
200,000 4.50(a) 06/01/14 200,000
----------
OKLAHOMA--3.2%
Tulsa GO Bonds (AA/Aa)
185,000 5.40 06/01/07 182,253
----------
SOUTH CAROLINA--4.3%
South Carolina State Capital Improvement
GO Bonds Series A (AA+/Aaa)
250,000 5.00 03/01/05 244,667
----------
TEXAS--10.7%
San Antonio GO Bonds (AA/Aa)
200,000 5.20 08/01/02 199,862
Texas A&M University Revenue Bonds
(AA/Aa)
200,000 5.55 05/15/01 203,784
Texas State GO Bonds Series A (AA/Aa)
200,000 5.65 10/01/08 199,244
----------
602,890
----------
UTAH--8.9%
Alpine School District GO Bonds
(FGIC-TCRS) (AAA/Aaa)
250,000 5.40 03/15/05 247,723
Salt Lake City School District Revenue
Bonds Series A (Aaa)
250,000 5.80 03/01/07 253,338
----------
501,061
----------
VIRGINIA--3.5%
Virginia Beach GO Bonds (AA/Aa)
200,000 5.20 07/15/06 195,342
----------
WASHINGTON--13.0%
King County School District #412 GO
Bonds (MBIA) (AAA/Aaa)
250,000 5.75 06/01/08 247,275
Snohomish County GO Bonds (MBIA)
(AAA/Aaa)
250,000 5.75 12/01/10 243,225
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
- --------- -------- -------- ----------
<S> <C> <C> <C>
MUNICIPAL BOND OBLIGATIONS--CONTINUED
WASHINGTON--Continued
Washington State GO Bonds
Series DD-12 & CC-9 (AA/Aa)
$250,000 5.38% 03/01/08 $ 240,895
----------
731,395
----------
WISCONSIN--3.6%
Wisconsin State GO Bonds Series 3
(AA/Aa)
200,000 5.25 11/01/02 200,242
----------
Total Municipal Bond
Obligations
(cost $5,466,096)............................ $5,445,603
----------
REPURCHASE AGREEMENTS--6.3%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$357,164 (U.S. Treasury Note:
$355,000, 7.50%, 12/31/96)
$357,000 5.50% 05/01/95 $ 357,000
----------
Total Repurchase Agreements
(cost $357,000).............................. $ 357,000
----------
Total Investments
(cost $5,823,096(b))......................... $5,802,603
==========
</TABLE>
<TABLE>
- ------------------------
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments
in which value exceeds cost.................. $ 9,884
Gross unrealized loss for investments
in which cost exceeds value.................. (30,377)
--------
Net unrealized loss........................... $(20,493)
========
- ------------------------
</TABLE>
(a) Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1995.
(b) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
INVESTMENT ABBREVIATIONS:
AMBAC--Insured by American Municipal Bond Assurance Corporation
FGIC --Insured by Financial Guaranty Insurance Company
GO --General Obligation
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance Corporation
SPA --Standby Purchase Agreement
TCRS --Transferable Custodial Receipts
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- ----------
<S> <C> <C> <C>
MISSOURI MUNICIPAL BOND OBLIGATIONS--88.7%
Clay County School District#40 GO Bonds
(CGIC) (AAA/Aaa)
$150,000 6.00% 03/01/14 $ 150,800
Columbia GO Bonds (AA/Aa)
150,000 4.50 10/01/96 150,358
Columbia Special Revenue Bonds (Toronto
Dominion Bank LOC) (Aa2/VMIG1)
200,000 4.60(a) 06/01/08 200,000
Hazelwood School District GO Bonds (Aa)
150,000 5.15 03/01/04 149,358
Jackson County School District GO Bonds
(A1)
150,000 5.50 03/01/07 150,081
Joplin School District GO Bonds (FGIC)
(AAA/Aaa)
150,000 5.63 03/01/13 145,154
Kansas City GO Bonds (AA/Aa)
150,000 5.75 10/01/09 149,698
Missouri State Environmental Improvement
& Energy Resources Authority Water Pollution
Control Series A (Aa)
150,000 5.25 07/01/02 149,547
Missouri State GO Bonds (AAA/Aaa)
205,000 5.70 11/01/02 212,407
Missouri State GO Bonds Series A (AAA/Aaa)
300,000 6.00 04/01/99 312,882
300,000 6.00 04/01/00 314,484
Missouri State Health & Educational Facility
Revenue Bonds (Barnes-Jewish Inc.)
(AA/Aa)
150,000 6.00 05/15/11 150,456
Missouri State Health & Educational Facility
Revenue Bonds Series B (Health Midwest)
(MBIA) (AAA/Aaa)
150,000 6.10 06/01/11 151,675
Missouri State Office Building Special Obligation Revenue Bonds (AA/Aa)
150,000 5.50 12/01/98 153,305
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
--------- -------- -------- ----------
<S> <C> <C> <C>
MISSOURI MUNICIPAL BOND OBLIGATIONS--CONTINUED
Sikeston Electric Revenue Bonds (MBIA)
(AAA/Aaa)
$150,000 5.00% 06/01/96 $ 150,505
Springfield Public Utilities COP (AMBAC)
(AAA/Aaa)
150,000 5.20 12/15/03 146,635
Springfield School District GO Bonds
Series A (MBIA) (AAA/Aaa)
150,000 5.25 03/01/11 139,318
St. Charles County Community College
GO Bonds (AMBAC) (AAA/Aaa)
150,000 4.65 02/15/98 149,526
St. Charles School District GO Bonds
Series A (AMBAC) (AAA/Aaa)
150,000 5.75 03/01/11 148,910
St. Louis County School District GO Bonds
(AA/Aa)
150,000 5.38 02/15/10 144,435
St. Louis Water Revenue Bonds (FGIC)
(AAA/Aaa)
150,000 5.85 07/01/05 154,266
St. Peters GO Bonds (A1)
150,000 5.80 01/01/10 149,840
----------
Total Missouri Municipal Bond Obligations
(cost $3,723,711)............................ $3,723,640
----------
REPURCHASE AGREEMENTS--7.2%
State Street Bank & Trust Company,
dated 04/28/95, repurchase price
$303,139 (U.S. Treasury Note:
$300,000, 7.50%, 12/31/96)
$303,000 5.50% 05/01/95 $ 303,000
----------
Total Repurchase Agreements
(cost $303,000).............................. $ 303,000
----------
Total Investments
(cost $4,026,711(b))......................... $4,026,640
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND--(CONTINUED)
APRIL 30, 1995
(UNAUDITED)
<TABLE>
- -----------------------------------------------
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments
in which value exceeds cost......... $ 7,990
Gross unrealized loss for investments
in which cost exceeds value......... (8,061)
-------
Net unrealized loss.................. $ (71)
=======
- -----------------------------------------------
</TABLE>
(a) Variable rate security. Coupon rate disclosed is that which is in effect at
April 30,1995.
(b) The cost stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
INVESTMENT ABBREVIATIONS:
AMBAC--Insured by American Municipal Bond Assurance Corporation
CGIC --Insured by Capital Guaranty Insurance Corporation
COP --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Company
GO --General Obligation
MBIA --Insured by Municipal Bond Investors Assurance Corporation
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT BOND
FUND FUND
----------- -----------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $16,002,540, $83,102,452, $34,309,259,
$99,612,271, $20,117,509, $13,550,117, $5,823,096,
and $4,026,711, respectively)........................ $16,326,120 $85,563,066
Cash.................................................. 733 559
Receivables:
Investment securities sold............................ -- --
Interest.............................................. 278,158 1,118,600
Dividends............................................. -- --
Fund shares sold...................................... 87,196 148,440
Deferred organization expenses, net................... 45,161 45,161
Other................................................. 3,463 3,103
----------- -----------
Total assets......................................... 16,740,831 86,878,929
----------- -----------
LIABILITIES:
Payables:
Investment securities purchased....................... -- 988,313
Fund shares redeemed.................................. 108,875 1,072,951
Dividends and distributions........................... 7,066 14,933
Advisory fees......................................... 4,371 34,618
Administration fees................................... 2,185 10,386
Accrued expenses and other liabilities................ 28,932 85,854
----------- -----------
Total liabilities.................................... 151,429 2,207,055
----------- -----------
NET ASSETS:
Paid-in capital....................................... 16,171,211 81,980,939
Accumulated undistributed net investment income
(loss)............................................... -- --
Accumulated net realized gain (loss) on investment
transactions......................................... 94,611 230,321
Accumulated net realized foreign currency gain........ -- --
Net unrealized gain (loss) on investments............. 323,580 2,460,614
Net unrealized gain on translation of assets and
liabilities denominated in foreign currencies........ -- --
----------- -----------
Net assets........................................... $16,589,402 $84,671,874
=========== ===========
Net asset value per share
(net assets/shares outstanding)...................... $ 18.42 $ 18.62
----------- -----------
Maximum public offering price per share (NAV per share
X 1 .0363)........................................... $ 19.09 $ 19.30
----------- -----------
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited
number of shares authorized)......................... 900,530 4,548,251
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE INTERNATIONAL NATIONAL MISSOURI
BALANCED GROWTH GROWTH EQUITY TAX-FREE TAX-FREE
FUND FUND FUND FUND BOND FUND BOND FUND
----------- ------------ ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$37,423,710 $114,804,363 $22,499,320 $13,725,808 $5,802,603 $4,026,640
818 139 973 90 156 664
2,143,112 2,748,810 432,569 -- -- --
180,756 2,566 1,254 2,213 73,154 49,764
15,165 113,507 5,721 28,974 -- --
12,385 181,446 462,372 157,916 -- 101,930
45,161 45,161 45,161 45,161 51,447 51,447
2,667 7,297 1,271 32,778 3,911 3,907
----------- ------------ ----------- ----------- ---------- ----------
39,823,774 117,903,289 23,448,641 13,992,940 5,931,271 4,234,352
----------- ------------ ----------- ----------- ---------- ----------
2,497,642 3,737,447 2,302,313 2,764,499 256,799 --
4,269 138,257 -- -- -- --
-- -- -- 3,707 19,857 14,255
22,843 68,111 11,805 6,035 2,217 972
4,568 13,622 2,361 1,005 665 486
43,508 108,882 33,519 50,385 21,975 21,232
----------- ------------ ----------- ----------- ---------- ----------
2,572,830 4,066,319 2,349,998 2,825,631 301,513 36,945
----------- ------------ ----------- ----------- ---------- ----------
33,803,262 97,991,118 18,316,122 10,998,450 5,650,251 4,198,469
104,338 33,564 (21,883) 16,094 -- --
228,893 620,196 422,593 (34,966) -- (991)
-- -- -- 1,442 -- --
3,114,451 15,192,092 2,381,811 (142,210) (20,493) (71)
-- -- -- 328,499 -- --
----------- ------------ ----------- ----------- ---------- ----------
$37,250,944 $113,836,970 $21,098,643 $11,167,309 $5,629,758 $4,197,407
=========== ============ =========== =========== ========== ==========
$ 19.76 $ 20.98 $ 21.59 $ 18.05 $ 17.95 $ 18.01
----------- ------------ ----------- ----------- ---------- ----------
$ 20.48 $ 21.74 $ 22.37 $ 18.71 $ 18.60 $ 18.66
----------- ------------ ----------- ----------- ---------- ----------
1,885,451 5,425,572 977,204 618,570 313,699 233,091
=========== ============ =========== =========== ========== ==========
</TABLE>
27
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 1995 (a)
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT BOND
FUND FUND
---------- ----------
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................. $489,239 $2,528,934
Dividends (b)............................................ -- --
-------- ----------
Total income............................................ 489,239 2,528,934
-------- ----------
EXPENSES:
Advisory fees (c)........................................ 20,558 155,940
Administration fees...................................... 10,279 46,782
Transfer agent fees...................................... 7,405 12,196
Custodian fees........................................... 9,801 11,282
Professional fees........................................ 4,835 21,997
Trustee fees............................................. 653 3,049
Registration fees........................................ 4,835 19,514
Amortization of deferred organization expenses........... 3,833 3,833
Other.................................................... 4,879 21,299
-------- ----------
Total expenses.......................................... 67,078 295,892
Less--Expenses reimbursable by Advisor................... 20,478 21,438
-------- ----------
Net expenses............................................ 46,600 274,454
-------- ----------
Net investment income (loss)............................ 442,639 2,254,480
-------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions...... 94,611 230,321
Net realized gain from foreign currency related
transactions............................................ -- --
Net change in unrealized gain (loss) on investments...... 323,580 2,460,614
Net change in unrealized gain on translation of assets
and liabilities denominated in foreign currencies....... -- --
-------- ----------
Net realized and unrealized gain (loss) on investments
and foreign currency transactions..................... 418,191 2,690,935
-------- ----------
Net increase in net assets resulting from operations... $860,830 $4,945,415
======== ==========
</TABLE>
- -------
(a) The Short-Term Government, Bond, Balanced, Growth, Aggressive Growth, and
International Equity Funds commenced operations on December 12, 1994; the
National Tax-Free Bond Fund and the Missouri Tax-Free Bond Fund commenced
operations on February 21, 1995.
(b) For the Aggressive Growth and International Equity Funds, amount is net of
$144 and $5,941 in foreign withholding taxes, respectively.
(c) During the period ended April 30, 1995, the Advisor waived fees of
$13,706, $36,116, $12,523, and $1,377 for the Short-Term Government,
Balanced, International Equity, and Missouri Tax-Free Bond Funds,
respectively.
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE INTERNATIONAL NATIONAL MISSOURI
BALANCED GROWTH GROWTH EQUITY TAX-FREE TAX-FREE
FUND FUND FUND FUND BOND FUND BOND FUND
---------- ----------- ---------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 670,674 $ 648,902 $ 26,626 $ 33,290 $ 50,592 $38,033
90,816 207,295 47,361 31,035 -- --
---------- ----------- ---------- -------- -------- -------
761,490 856,197 73,987 64,325 50,592 38,033
---------- ----------- ---------- -------- -------- -------
108,347 302,844 46,098 18,785 4,680 2,065
21,669 60,569 9,220 3,131 1,404 1,033
8,712 13,939 7,405 6,752 3,545 3,409
12,066 12,022 13,764 32,494 7,036 7,445
9,452 27,878 4,835 2,527 2,373 1,937
1,307 3,920 653 348 327 273
8,015 24,175 5,401 3,398 3,164 2,782
3,833 3,833 3,833 3,833 2,018 2,018
9,496 26,742 4,661 2,523 2,619 2,453
---------- ----------- ---------- -------- -------- -------
182,897 475,922 95,870 73,791 27,166 23,415
19,654 19,638 -- 33,393 19,210 18,941
---------- ----------- ---------- -------- -------- -------
163,243 456,284 95,870 40,398 7,956 4,474
---------- ----------- ---------- -------- -------- -------
598,247 399,913 (21,883) 23,927 42,636 33,559
---------- ----------- ---------- -------- -------- -------
228,893 620,196 422,593 (34,966) -- (991)
-- -- -- 1,442 -- --
3,114,451 15,192,092 2,381,811 (142,210) (20,493) (71)
-- -- -- 328,499 -- --
---------- ----------- ---------- -------- -------- -------
3,343,344 15,812,288 2,804,404 152,765 ( 20,493) (1,062)
---------- ----------- ---------- -------- -------- -------
$3,941,591 $16,212,201 $2,782,521 $176,692 $ 22,143 $32,497
========== =========== ========== ======== ======== =======
</TABLE>
29
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED APRIL 30, 1995 (a)
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT BOND
FUND FUND
----------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)...................... $ 442,639 $ 2,254,480
Net realized gain (loss) on investment
transactions..................................... 94,611 230,321
Net realized gain from foreign currency related
transactions..................................... -- --
Net change in unrealized gain (loss) on invest-
ments............................................ 323,580 2,460,614
Net change in unrealized gain on translation of
assets and liabilities denominated in foreign
currencies....................................... -- --
----------- ------------
Net increase in net assets resulting from
operations...................................... 860,830 4,945,415
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........................ (442,639) (2,254,480)
----------- ------------
Total distributions to shareholders.............. (442,639) (2,254,480)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares.................. 20,422,560 92,316,307
Reinvestment of dividends and distributions....... 430,729 2,230,497
Cost of shares redeemed........................... (4,682,078) (12,565,865)
----------- ------------
Net increase in net assets resulting from share
transactions.................................... 16,171,211 81,980,939
----------- ------------
Total increase................................... 16,589,402 84,671,874
NET ASSETS:
Beginning of period............................... -- --
----------- ------------
End of period..................................... $16,589,402 $ 84,671,874
=========== ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME (LOSS)...................... $ -- $ --
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Sold.............................................. 1,132,090 5,112,486
Issued on reinvestment of dividends and
distributions.................................... 23,579 121,496
Redeemed.......................................... (255,139) (685,731)
----------- ------------
Increase (decrease) in shares outstanding......... 900,530 4,548,251
=========== ============
</TABLE>
- -------
(a) The Short-Term Government, Bond, Balanced, Growth, Aggressive Growth, and
International Equity Funds commenced operations on December 12, 1994; the
National Tax-Free Bond and the Missouri Tax-Free Bond Funds commenced
operations on February 21, 1995.
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE INTERNATIONAL NATIONAL MISSOURI
BALANCED GROWTH GROWTH EQUITY TAX-FREE TAX-FREE
FUND FUND FUND FUND BOND FUND BOND FUND
----------- ------------ ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 598,247 $ 399,913 $ (21,883) $ 23,927 $ 42,636 $ 33,559
228,893 620,196 422,593 (34,966) -- (991)
-- -- -- 1,442 -- --
3,114,451 15,192,092 2,381,811 (142,210) (20,493) (71)
-- -- -- 328,499 -- --
----------- ------------ ------------- ----------- ---------- ----------
3,941,591 16,212,201 2,782,521 176,692 22,143 32,497
----------- ------------ ------------- ----------- ---------- ----------
(493,909) (366,349) -- (7,833) (42,636) (33,559)
----------- ------------ ------------- ----------- ---------- ----------
(493,909) (366,349) -- (7,833) (42,636) (33,559)
----------- ------------ ------------- ----------- ---------- ----------
40,916,794 110,458,082 19,803,658 13,097,785 5,913,917 4,437,197
493,908 364,619 -- 7,832 1,419 2,055
(7,607,440) (12,831,583) (1,487,536) (2,107,167) (265,085) (240,783)
----------- ------------ ------------- ----------- ---------- ----------
33,803,262 97,991,118 18,316,122 10,998,450 5,650,251 4,198,469
----------- ------------ ------------- ----------- ---------- ----------
37,250,944 113,836,970 21,098,643 11,167,309 5,629,758 4,197,407
-- -- -- -- -- --
----------- ------------ ------------- ----------- ---------- ----------
$37,250,944 $113,836,970 $ 21,098,643 $11,167,309 $5,629,758 $4,197,407
=========== ============ ============= =========== ========== ==========
$ 104,338 $ 33,564 $ (21,883) $ 16,094 $ -- $ --
=========== ============ ============= =========== ========== ==========
2,263,461 6,069,721 1,049,919 739,479 328,296 246,326
25,806 18,286 -- 435 79 114
(403,816) (662,435) (72,715) (121,344) (14,676) (13,349)
----------- ------------ ------------- ----------- ---------- ----------
1,885,451 5,425,572 977,204 618,570 313,699 233,091
=========== ============ ============= =========== ========== ==========
</TABLE>
31
<PAGE>
THE COMMERCE FUNDS
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING FOR THE PERIOD ENDED APRIL 30, 1995 (a)
(UNAUDITED)
<TABLE>
<CAPTION>
DISTRIBUTIONS TO
INCOME FROM INVESTMENT OPERATIONS SHAREHOLDERS
---------------------------------------------------- ------------------------
NET
NET REALIZED AND
REALIZED UNREALIZED GAIN NET NET
AND ON TOTAL INCREASE ASSET
NET ASSET NET UNREALIZED FOREIGN INCOME TOTAL (DECREASE) VALUE,
VALUE, INVESTMENT GAIN CURRENCY FROM FROM NET DISTRIBUTIONS IN NET END
BEGINNING INCOME (LOSS) ON RELATED INVESTMENT INVESTMENT TO ASSET OF
OF PERIOD (LOSS) INVESTMENTS(d) TRANSACTIONS(d) OPERATIONS INCOME SHAREHOLDERS VALUE PERIOD
--------- ---------- -------------- --------------- ---------- ---------- ------------- ---------- ------
SHORT-TERM GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period ended: 4/30/95 $18.00 $ 0.46 $ 0.42 $ -- $0.88 $(0.46) $(0.46) $ 0.42 $18.42
BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.51 0.62 -- 1.13 (0.51) (0.51) 0.62 18.62
BALANCED FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.32 1.70 -- 2.02 (0.26) (0.26) 1.76 19.76
GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.08 2.97 -- 3.05 (0.07) (0.07) 2.98 20.98
AGGRESSIVE GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 (0.02) 3.61 -- 3.59 -- -- 3.59 21.59
INTERNATIONAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.06 (0.03) 0.05 0.08 (0.03) (0.03) 0.05 18.05
NATIONAL TAX-FREE BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.16 (0.05) -- 0.11 (0.16) (0.16) (0.05) 17.95
MISSOURI TAX-FREE BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 18.00 0.17 0.01 -- 0.18 (0.17) (0.17) 0.01 18.01
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
FEES OR EXPENSE
REIMBURSEMENTS
---------------------------
RATIO RATIO
RATIO OF NET OF NET
OF NET INVESTMENT NET RATIO INVESTMENT
EXPENSES INCOME ASSETS AT OF INCOME
TO AVERAGE (LOSS) PORTFOLIO END EXPENSES (LOSS) TO
TOTAL NET TO AVERAGE TURNOVER OF PERIOD TO AVERAGE AVERAGE
RETURN(b) ASSETS(c) NET ASSETS(c) RATE (IN 000'S) NET ASSETS(c) NET ASSETS(c)
--------- ---------- ------------- --------- ---------- ------------- -------------
SHORT-TERM GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Period ended: 4/30/95 4.92% 0.68% 6.46% 111% $ 16,589 1.18% 5.96%
BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 6.38 0.88 7.23 27 84,672 0.95 7.16
BALANCED FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 11.19 1.13 4.14 36 37,251 1.52 3.75
GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 16.95 1.13 0.99 12 113,837 1.18 0.94
AGGRESSIVE GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 19.94 1.56 (0.36) 31 21,099 1.56 (0.36)
INTERNATIONAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 0.44 1.94 1.15 27 11,167 4.14 (1.05)
NATIONAL TAX-FREE BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 0.58 0.85 4.56 11 5,630 2.91 2.50
MISSOURI TAX-FREE BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
Period ended: 4/30/95 0.98 0.65 4.87 21 4,197 3.60 1.92
</TABLE>
- -------------
(a) For the period from commencement of operations to April 30, 1995. The
Short-Term Government, Bond, Balanced, Growth, Aggressive Growth and
International Equity Funds commenced operations on December 12, 1994; the
National Tax-Free Bond and Missouri Tax-Free Bond Funds commenced
operations on February 21, 1995.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
(c) Annualized.
(d) Includes the balancing effect of calculating per share amounts.
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
1. ORGANIZATION
The Commerce Funds (the "Trust") is a Delaware business trust registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end, management investment company. The Trust consists of eight
portfolios (individually, a "Fund" and collectively, the "Funds"): the Short
Term Government Fund, Bond Fund, Balanced Fund, Growth Fund, Aggressive Growth
Fund, International Equity Fund, National Tax-Free Bond Fund and Missouri Tax-
Free Bond Fund. Each Fund is classified as a diversified management investment
company under the 1940 Act, other than the Missouri Tax-Free Bond Fund, which
is classified as a non-diversified Fund under the 1940 Act. The National Tax-
Free Bond Fund and the Missouri Tax-Free Bond Fund commenced investment
operations on February 21, 1995. All other Funds commenced investment
operations on December 12, 1994.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
A. Investment Valuation
Investments in securities traded on a U.S. exchange or the NASDAQ system are
valued at their last sale or closing price on the principal exchange on which
they are traded or NASDAQ, on the valuation day; if no sale occurs, securities
traded on a U.S. exchange or NASDAQ are valued at the mean between the closing
bid and asked prices. The value of a Fund's portfolio securities that are
traded on stock exchanges outside the U.S. are based upon the price on the
exchange as of the close of business of the exchange immediately preceding the
time of valuation, except when an occurrence subsequent to the time a value
was so established is likely to have changed such value; then the fair value
of those securities will be determined through consideration of other factors
by or under the direction of the Board of Trustees. Unlisted equity and debt
securities for which market quotations are available are valued at the mean
between the most recent bid and asked prices. Fixed-income securities are
valued at prices supplied by an independent pricing service, which reflect
broker/dealer-supplied valuations and matrix pricing systems. Short-term debt
obligations maturing in sixty days or less are valued at amortized cost.
Restricted securities, and other securities for which quotations are not
available, are valued at fair value using methods approved by the Board of
Trustees.
B. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
C. Premiums and Discounts on Debt Securities Owned
The National Tax-Free Bond and the Missouri Tax-Free Bond Funds amortize
premiums on debt securities on the effective yield basis, and do not accrete
discounts on debt securities. The Growth, Aggressive Growth and International
Equity Funds amortize market discounts and premiums. The Short-Term
Government, Bond, and Balanced Funds do not accrete discounts or amortize
premiums on long-term debt securities. The Short-Term Government, Bond and
Balanced Funds invest in mortgage-backed securities. Certain mortgage security
paydown gains and losses are taxable as ordinary income. Such paydown gains
and losses increase or decrease taxable ordinary income available for
distributions and are included in interest income in the accompanying
Statements of Operations. Original issue discounts on debt securities are
amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security.
D. Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars. Amounts
denominated in foreign currencies are translated into U.S. dollars on the
following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; and (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions
will represent : (i) foreign exchange gains and losses from the sale and
holdings of foreign currencies and investments; (ii) gains and losses between
trade date
33
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
D. Foreign Currency Translations--(Continued)
and settlement date on investment securities transactions and foreign exchange
contracts; and (iii) gains and losses from the difference between amounts of
dividends and interest recorded and the amounts actually received. Unrealized
gains and losses, not relating to securities, which result from changes in
foreign currency exchange rates, have been included in the net unrealized gain
(loss) on foreign currency transactions.
E. Forward Foreign Currency Exchange Contracts
The International Equity Fund is authorized to enter into forward foreign
currency exchange contracts for the purchase of a specific foreign currency at
a fixed price on a future date as a hedge or cross-hedge against either
specific transactions or portfolio positions. The aggregate principal amounts
of the contracts for which delivery is anticipated are reflected in the Fund's
accounts, while the aggregate principal amounts are reflected in the
accompanying Statements of Assets and Liabilities if the Fund intends to
settle the contract prior to delivery. All commitments are "marked-to-market"
daily at the applicable exchange rates and any resulting unrealized gains or
losses are recorded in the Fund's financial statements. The Fund records
realized gains and losses at the time the forward contract is offset by entry
into a closing transaction or extinguished by delivery of the currency. Risks
may arise upon entering these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
F. Federal Taxes
Each Fund intends to comply with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and to
distribute each year substantially all of its investment company taxable and
tax-exempt income to its shareholders. Accordingly, no federal income tax
provisions are required. The characterization of distributions to shareholders
for financial reporting purposes is determined in accordance with income tax
rules.
G. Deferred Organization Expenses
Organization-related costs are being amortized on a straight-line basis over
a period of five years beginning with the commencement of each of the Fund's
operations. If any or all of the shares held by the Goldman, Sachs & Co.
representing initial capital of the Funds are redeemed during the amortization
period, the redemption proceeds will be reduced by the pro rata portion of the
unamortized organizational cost balance.
H. Expenses
Expenses incurred by the Funds which do not specifically relate to an
individual Fund are allocated to the Funds based on each Fund's relative
average net assets for the period.
I. Repurchase Agreements
During the term of a repurchase agreement, the market value of the
underlying collateral, including accrued interest, is required to equal or
exceed the value of the repurchase agreement. The underlying collateral for
all repurchase agreements is held in safekeeping in the customer-only account
of State Street Bank & Trust Company, the Funds' custodian, or at sub-
custodians. The market value of the underlying collateral is monitored by
daily pricing.
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the security declines, or if the seller enters an
insolvency proceeding, realization of the collateral by the Trust may be
delayed or limited.
J. Dividends and Distributions to Shareholders
Dividends from net investment income are declared daily and paid monthly by
the Short-Term Government, Bond, National Tax-Free Bond and Missouri Tax-Free
Bond Funds; declared and paid quarterly by the Balanced and Growth Funds; and
declared and paid annually by the Aggressive Growth and International Equity
Funds. Each Fund's net realized capital gains (including net short-term
capital gains), if any, are declared and distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
34
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. AGREEMENTS
The Funds have entered into an Advisory Agreement with Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City) (the "Advisor"). Pursuant to
the terms of the Advisory Agreement, the Advisor is responsible for managing
the investments and making investment decisions for each of the Funds. For
these services and for assuming related expenses, the Advisor is entitled to a
fee, computed daily and payable monthly, at the following annual rate of the
corresponding Fund's average daily net assets:
<TABLE>
<S> <C>
Short-Term Government Fund......................................... .50%
Bond Fund.......................................................... .50%
Balanced Fund...................................................... 1.00%
Growth Fund........................................................ .75%
Aggressive Growth Fund............................................. .75%
International Equity Fund.......................................... 1.50%
National Tax-Free Bond Fund........................................ .50%
Missouri Tax-Free Bond Fund........................................ .50%
</TABLE>
As authorized by the Advisory Agreement, the Advisor has entered into a Sub-
Advisory Agreement with Rowe-Price Fleming International, Inc., (the "Sub-
Advisor") whereby the Sub-Advisor manages the investment assets of the
International Equity Fund. As compensation for services rendered under the
Sub-Advisory Agreement, the Sub-Advisor is entitled to a fee from the Advisor
at the following annual rate:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL RATE
------------------------ -----------
<S> <C>
First $20 million.......................................... .75%
Next $30 million........................................... .60%
Over $50 million........................................... .50%
</TABLE>
For the period ended April 30, 1995, the Advisor has voluntarily agreed to
waive a portion of its advisory fee for certain portfolios. The resulting
advisory fees are .30% for the Short-Term Government Fund, .75% for the
Balanced Fund, .90% for the International Equity Fund and .30% for the
Missouri Tax-Free Bond Fund. The effect of these waivers by the Advisor and
Sub-Advisor for the period ended April 30, 1995 was to reduce advisory fees by
approximately $13,700, $36,100, $12,500 and $1,400 for the Short-Term
Government, Balanced, International Equity and Missouri Tax-Free Bond Funds,
respectively.
In addition, for the period ended April 30, 1995, the Advisor has
voluntarily agreed to reimburse expenses (excluding interest, taxes, and
extraordinary expenses) to the extent that such expenses exceed, on an
annualized basis, .68%, .88%, 1.13%, 1.13%, .85% and .65% for the Short-Term
Government, Bond, Balanced, Growth, National Tax-Free Bond, and Missouri Tax-
Free Bond Funds, respectively. For the International Equity Fund, the Advisor
has reimbursed the Fund's expenses at varying amounts. The effect of these
reimbursements by the Advisor for the period ending April 30, 1995 was to
reduce expenses by approximately $20,500, $21,400, $19,700, $19,600, $33,400,
$19,200, and $19,000 for the Short-Term Government, Bond, Balanced, Growth,
International Equity, National Tax-Free Bond and Missouri Tax-Free Bond Funds,
respectively. The amounts reimbursable to the Short-Term Government, Balanced,
International Equity, National Tax-Free Bond, and Missouri Tax-Free Bond were
approximately $1,900, $600, $17,300, $4,100, and $4,100, respectively, and are
reflected in "Other assets" in the accompanying Statements of Assets and
Liabilities. Included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities of the Bond and Growth Funds
are approximately $7,400 and $13,700, respectively, related to excess
reimbursements payable to the Advisor.
Goldman Sachs Asset Management, ("GSAM"), a separate operating division of
Goldman, Sachs & Co., serves as the Trust's administrator, pursuant to an
Administration Agreement. Under the Administration Agreement, GSAM administers
the Trust's business affairs. As compensation for the services rendered under
the Administration Agreement and its assumption of related expenses, GSAM is
entitled to a fee, computed daily and payable monthly, at the annual rate of
.15% of the average daily net assets of the corresponding Fund.
Goldman, Sachs & Co. serves as Distributor of shares of the Funds pursuant
to a Distribution Agreement and may receive a portion of the sales load
imposed on the sale of shares of the Funds. Goldman Sachs has advised the
Trust that it retained approximately $5,500 for the period ended April 30,
1995.
35
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. AGREEMENTS - (CONTINUED)
Pursuant to a Shareholder Servicing Plan adopted by its Board of Trustees,
the Funds may enter into agreements with service organizations such as banks
and financial institutions, which may include the Advisor and its affiliates
("Service Organizations"), under which they will render shareowner
administrative support services. For these services, the Service Organizations
are entitled to receive fees from a Fund at an annual rate of up to .25% of
the average daily net asset value of Fund shares held by such Service
Organizations. There were no Service Organization agreements in effect as of
April 30, 1995.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for
the Short-Term Government, Bond, Balanced, Growth, Aggressive Growth, and
International Equity Funds for the period December 12, 1994 to April 30, 1995,
and for the National Tax-Free Bond and Missouri Tax-Free Bond Funds for the
period February 21, 1995 to April 30, 1995, were as follows:
<TABLE>
<S> <C>
SHORT-TERM GOVERNMENT FUND (a)
Purchases (excluding U.S. Government securities).................. $ --
Sales (excluding U.S. Government securities)...................... --
Purchases of U.S. Government securities........................... 32,846,818
Sales of U.S. Government securities............................... 17,920,689
BOND FUND (a)
Purchases (excluding U.S. Government securities).................. $ 54,753,528
Sales (excluding U.S. Government securities)...................... 11,939,810
Purchases of U.S. Government securities........................... 45,198,635
Sales of U.S. Government securities............................... 8,732,172
BALANCED FUND (a)
Purchases (excluding U.S. Government securities).................. $ 35,045,108
Sales (excluding U.S. Government securities)...................... 8,783,303
Purchases of U.S. Government securities........................... 9,130,337
Sales of U.S. Government securities............................... 3,539,495
GROWTH FUND (a)
Purchases (excluding U.S. Government securities).................. $104,344,931
Sales (excluding U.S. Government securities)...................... 10,950,856
Purchases of U.S. Government securities........................... --
Sales of U.S. Government securities............................... --
AGGRESSIVE GROWTH FUND (a)
Purchases (excluding U.S. Government securities).................. $ 21,523,250
Sales (excluding U.S. Government securities)...................... 4,563,334
Purchases of U.S. Government securities........................... --
Sales of U.S. Government securities............................... --
INTERNATIONAL EQUITY FUND
Purchases (excluding U.S. Government securities).................. $ 9,925,830
Sales (excluding U.S. Government securities)...................... 1,191,161
Purchases of U.S. Government securities........................... --
Sales of U.S. Government securities............................... --
NATIONAL TAX-FREE BOND FUND
Purchases (excluding U.S. Government securities).................. $ 5,846,280
Sales (excluding U.S. Government securities)...................... 380,000
Purchases of U.S. Government securities........................... --
Sales of U.S. Government securities............................... --
</TABLE>
36
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT TRANSACTIONS - (CONTINUED)
<TABLE>
<S> <C>
MISSOURI TAX-FREE BOND FUND
Purchases (excluding U.S. Government securities).................... $4,252,720
Sales (excluding U.S. Government securities)........................ 526,895
Purchases of U.S. Government securities............................. --
Sales of U.S. Government securities................................. --
</TABLE>
- -------
(a) Initial shares of the Funds were issued in exchange for assets transferred
from existing collective funds managed by the Advisor.
5. CONCENTRATION OF CREDIT RISK
The Commerce Missouri Tax-Free Bond Fund invests substantially all of its
assets in debt obligations of issuers located in the state of Missouri. The
issuers' abilities to meet their obligations may be affected by Missouri
economic or political developments.
37
<PAGE>
THE COMMERCE FUNDS
-----------------------------
TRUSTEES
J. Eric Helsing, Chairman
Randall D. Barron
David L. Bodde
John J. Holland
P.V. Miller
OFFICERS
P.V. Miller
President
Paul Klug
Vice President
Nancy L. Mucker
Vice President
Pauline Taylor
Vice President
Randall D. Barron
Treasurer
W. Bruce McConnel, III
Secretary
Scott M. Gilman
Assistant Secretary
Michael J. Richman
Assistant Secretary
Howard B. Surloff
Assistant Secretary
This Semi-Annual Report is authorized for distribution to prospective
investors only when preceded or accompanied by a Commerce Funds Prospectus
which contains facts concerning The Commerce Funds' objectives and policies,
management, expenses and other information. Shares of the Funds are not
deposits or obligations of, or guaranteed, endorsed or otherwise supported by,
Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City), their
parent or affiliates, and the shares are not Federally insured or guaranteed
by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency. An investment in the Funds
involves investment risks, including possible loss of principal.
<PAGE>
THE COMMERCE FUNDS
922 Walnut Street
Kansas City, Missouri 64106
INVESTMENT ADVISORS
Commerce Bank N.A.
922 Walnut Street
Kansas City, Missouri 64106
Commerce Bank N.A.
8000 Forsyth Boulevard
St. Louis, Missouri 63105
Rowe-Price Fleming International, Inc.
25 Copthall Avenue
London, England EC2R 7DR
DISTRIBUTOR
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
ADMINISTRATOR
Goldman Sachs Asset Management
One New York Plaza
New York, New York 10004
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
National Financial Data Services, Inc.
1004 Baltimore Street
Kansas City, Missouri 64105
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
1000 Walnut Street
Kansas City, Missouri 64106
LEGAL COUNSEL
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, Pennsylvania 19107
COM-SEM94
[ART]
The Short-Term Government Fund
The Bond Fund
The Balanced Fund
The Growth Fund
The Aggressive Growth Fund
The International Equity Fund
The National Tax-Free Bond Fund
The Missouri Tax-Free Bond Fund
Semi-Annual Report
April 30, 1995
<PAGE>
The Commerce Funds
Notes to Statements of Assets and Liabilities
September 2, 1994
Note 1. Organization
The Commerce Funds (the "Trust") was organized on February 7, 1994 as a
Delaware business trust and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of eight portfolios (the "Funds"): Short-Term Government Fund, Bond
Fund, Balanced Fund, Growth Fund, Aggressive Growth Fund, International Equity
Fund, National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund. The Missouri
Tax-Free Bond Fund is a non-diversified Fund; all other Funds are diversified.
The only transactions of the Funds have been the initial sale on September 2,
1994 of 694 shares of each Fund to The Goldman Sachs Group, L.P.
Note 2. Organizational Costs
The Trust has incurred organizational expenses in connection with the
start-up and initial registration of the Funds. These costs will be amortized
over 60 months on a straight-line basis beginning with the commencement of each
of the Fund's operations. If any or all of the shares held by The Goldman Sachs
Group, L.P. representing initial capital of the Funds are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion of the unamortized organizational cost balance.
Note 3. Federal Taxes
The Trust intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of the investment company taxable and tax-exempt income to the
shareholders of each of the Funds. Accordingly, no federal tax provisions are
required.
Note 4. Agreements
The Funds have entered into an Advisory Agreement with Commerce Bank, N.A.
(St. Louis) and Commerce Bank N.A. (Kansas City) (the "Advisor"). Pursuant to
the terms of the Advisory
<PAGE>
Agreement, the Advisor will manage the investments and make investment decisions
for each of the Funds with the exception of the International Equity Fund. For
these services, the Advisor is entitled to a monthly fee at the following annual
rate of the corresponding Fund's average daily net assets:
<TABLE>
<S> <C>
Short-Term Government Fund .50%
Bond Fund .50%
Balanced Fund 1.00%
Growth Fund .75%
Aggressive Growth Fund .75%
International Equity Fund 1.50%
National Tax-Free Bond Fund .50%
Missouri Tax-Free Bond Fund .50%
</TABLE>
As authorized by the Advisory Agreement, the Advisor has entered into a Sub-
Advisory Agreement with Rowe Price-Fleming International, Inc. (the "Sub-
Advisor") whereby the Sub-Advisor manages the investment assets of the
International Equity Fund. As compensation for services rendered under the Sub-
Advisory Agreement, the Sub-Advisor is entitled to a fee from the Advisor at the
following annual rate:
<TABLE>
<CAPTION>
Average Daily Net Assets Annual Rate
------------------------ -----------
<S> <C>
First $20 million .75%
Next $30 million .60%
Over $50 million .50%
</TABLE>
Goldman Sachs Asset Management (GSAM) serves as the Trust's administrator
pursuant to an Administration Agreement. Under the Administration Agreement,
GSAM administers the Trust's business affairs. As compensation for services
rendered under the Administration Agreement, GSAM is entitled to a fee, computed
daily and payable monthly, at the annual rate of .15% of the average daily net
assets of the corresponding Fund.
Goldman, Sachs & Co. serves as Distributor of shares of the Funds pursuant to a
Distribution Agreement and may receive a portion of the sales load imposed on
the sale of shares of the Funds.
In addition to the advisory and administrative fees, the Funds are responsible
for paying certain other operating expenses, including outside trustee fees and
expenses, custodial fees, registration fees, shareholder servicing fees,
printing of shareholder reports, transfer agent fees and expenses, legal,
accounting and auditing services, organizational costs and other miscellaneous
expenses.
For the current fiscal year, the advisor intends to voluntarily waive and
reimburse fees to limit total fund expenses to the
-2-
<PAGE>
following annual rates of each Fund's corresponding average daily net assets:
<TABLE>
<S> <C>
Short-Term Government Fund .68%
Bond Fund .88%
Balanced Fund 1.13%
Growth Fund 1.13%
National Tax-Free Bond Fund .85%
Missouri Tax-Free Bond Fund .65%
</TABLE>
For the current fiscal year, the advisor intends to limit the advisory fee to
.90% of the International Equity Fund.
-3-
<PAGE>
THE COMMERCE FUNDS
Statements of Assets and Liabilities
September 2, 1994
<TABLE>
<CAPTION>
Short-Term Aggressive International National Missouri
Government Balanced Growth Growth Equity Tax-Free Tax-Free
Bond Fund Bond Fund Fund Fund Fund Fund Bond Fund Bond Fund
---------- --------- -------- ------- ---------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash $12,500 $12,500 $12,500 $12,500 $12,500 $12,500 $12,500 $12,500
Deferred organization expenses 44,044 44,044 44,044 44,044 44,044 44,044 44,044 44,044
------- ------- ------- ------- ------- ------- ------- -------
Total Assets 56,544 56,544 56,544 56,544 56,544 56,544 56,544 56,544
------- ------- ------- ------- ------- ------- ------- -------
LIABILITIES:
Accrued organization expenses 44,044 44,044 44,044 44,044 44,044 44,044 44,044 44,044
------- ------- ------- ------- ------- ------- ------- -------
Total Liabilities 44,044 44,044 44,044 44,044 44,044 44,044 44,044 44,044
------- ------- ------- ------- ------- ------- ------- -------
NET ASSETS:
Paid-in capital 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500
------- ------- ------- ------- ------- ------- ------- -------
Net Assets $12,500 $12,500 $12,500 $12,500 $12,500 $12,500 $12,500 $12,500
======= ======= ======= ======= ======= ======= ======= =======
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00
======= ======= ======= ======= ======= ======= ======= =======
MAXIMUM PUBLIC OFFERING PRICE
PER SHARE $ 18.65 $ 18.65 $ 18.65 $ 18.65 $ 18.65 $ 18.65 $ 18.65 $ 18.65
======= ======= ======= ======= ======= ======= ======= =======
SHARES OUTSTANDING 694 694 694 694 694 694 694 694
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
APPENDIX A
----------
DESCRIPTION OF SECURITIES RATINGS
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be
A-1
<PAGE>
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"Duff 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment .
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
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"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - Debt is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - Debt is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default and is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes such payments will be made during
such grace period. "D" rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa"
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represents a poor standing; "Ca" represents obligations which are speculative in
a high degree; and "C" represents the lowest rated class of bonds). "Caa," "Ca"
and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the company ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
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To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
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IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
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"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Corporation for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are
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designated Variable Moody's Investment Grade ("VMIG"). Such ratings recognize
the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's Investors Service, Inc. for short-
term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
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APPENDIX B
As stated in their Prospectus, the Bond, Balanced, Growth, Aggressive
Growth, International Equity, National Tax-Free Bond and Missouri Tax-Free Bond
Funds may enter into futures contracts and options for hedging purposes. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount
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of the specific type of financial instrument and the same delivery date. If the
price of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Funds
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes,
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities, three-month U.S. Treasury Bills and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks
-------
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
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III. Futures Contracts on Foreign Currencies
---------------------------------------
The International Equity Fund may enter into futures contracts on
foreign currency. This futures contract is a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of foreign currency, for an amount fixed in U.S. dollars.
Foreign currency futures may be used by a Fund to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, a Fund may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would
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be in a better position than if it had not hedged at all. If the price of the
instruments being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the futures. If the price of the futures
moves more than the price of the hedged instruments, the Fund involved will
experience either a loss or gain on the futures which will not be completely
offset by movements in the price of the instruments which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of instruments being hedged if the volatility over a particular time
period of the prices of such instruments has been greater than the volatility
over such time period of the futures, or if otherwise deemed to be appropriate
by The Commerce Funds. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
instruments being hedged is less than the volatility over such time period of
the futures contract being used, or if otherwise deemed to be appropriate by The
Commerce Funds. It is also possible that, where a Fund has sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of instruments held in the Fund may decline. If this occurred, the
Fund would lose money on the futures and also experience a decline in value in
its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
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Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
The trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to The Commerce
Funds' ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
----------------------------
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right
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to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. A Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received
will be included as initial margin deposits. In anticipation of a decline in
interest rates, a Fund may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Fund intends to purchase.
Similarly, if the value of the securities held by a Fund is expected to decline
as a result of an increase in interest rates, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
Accounting and Tax Treatment
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Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Funds. These rules may have a particular
impact on the amount of income or gain that the Funds must distribute to their
respective shareowners to comply with the Distribution Requirement, on the
income or gain qualifying under the Income Requirement and on their ability to
comply with the Short-Short Test described above.
Generally, futures contracts held by a Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40-60
rule"). The amount of any capital gain or loss actually realized by the Fund in
a subsequent sale or other
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disposition of those futures contracts will be adjusted to reflect any capital
gain or loss taken into account by the Fund in a prior year as a result of the
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the Fund,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they have
not been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, the Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Fund would be allowed (in
lieu of the foregoing) to elect to either (1) offset gains or losses from
portions which are part of a mixed straddle by separately identifying each mixed
straddle to which such treatment applies, or (2) establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40-60 rule will apply
to the net gain or loss attributable to the futures contracts, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive federal tax
treatment similar to that described above.
Certain foreign currency contracts entered into by a Fund may be
subject to the "marking-to-market" process, but gain or loss will be treated as
100% ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Foreign currency contracts entered into by the
Fund may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the
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U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument. However,
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the "marking-to-market" rules, unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that the Fund may make or may enter
into will be subject to the special currency rules described above. Gain or
loss attributable to the foreign currency component of transactions engaged in
by the Fund which are not subject to special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
The Treasury Department may by regulation exclude from income that
meets the Income Requirement, foreign currency gains that are not directly
related to a Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. For purposes of the
Income Requirement, any income derived by a Fund from a partnership or trust is
treated as derived with respect to the Fund's business of investing in stock,
securities or currencies only to the extent that such income is attributable to
items of income which would have been qualifying income if realized by the Fund
in the same manner as by the partnership or trust.
With respect to futures contracts and other financial instruments
subject to the "marking-to-market" rules, the Internal Revenue Service has ruled
in private letter rulings that for purposes of the Short-Short Test, a gain
realized from such a futures contract or financial instrument will be treated as
being derived from a security held for three months or more (regardless of the
actual period for which the contract or instrument is held) if the gain arises
as a result of a constructive sale under the "marking-to-market" rules, and will
be treated as being derived from a security held for less than three months only
if the contract or instrument is terminated (or transferred) during the taxable
year (other than by reason of
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marking-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of the Fund's futures contracts and other investments that qualify as part
of a "designated hedge," as defined in the Code, may be netted.
If the International Equity Fund invests in certain "passive foreign
investment companies" ("PFICs") it would be subject to federal income tax (and
possibly additional interest charges) on a portion of any "excess distribution"
or gain from the disposition of such investments, even if it distributes the
income to its shareowners. If the International Equity Fund elects to treat the
PFIC as a "qualified electing fund" ("QEF") and the PFIC furnishes certain
financial information in the required form, the Fund instead would be required
to include in income each year its allocable share of the ordinary earnings and
net capital gains of the QEF, whether or not received, and such amounts would be
subject to the various distribution requirements described above.
Alternatively, if enacted as proposed, proposed Treasury regulations
would allow the International Equity Fund in the future to elect instead to
recognize annually any appreciation in the PFIC shares that it owns; by marking
them to market as of the last business day of each taxable year. Again, gain
recognized under this "mark-to-market" approach would be subject to the various
distribution requirements described above, even if no cash is received currently
from the PFIC investment.
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