<PAGE>
As filed with the Securities and Exchange Commission on June 30, 1995
Registration Nos. 33-80966
811-8598
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. 1 [x]
---
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 2 [x]
---
----------------------------
The Commerce Funds
(Exact Name of Registrant as Specified in Charter)
4900 Sears Tower
Chicago, IL 60606
(Address of Principal Executive Offices)
Registrant's Telephone Number:
800-621-2550
W. Bruce McConnel III, Esquire
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 5, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite number of shares of its beneficial
interest, which includes shares of the Commerce Short-Term Bond Fund, Bond Fund,
Balanced Fund, Growth Fund, Aggressive Growth Fund, International Equity Fund,
National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund.
<PAGE>
THE COMMERCE FUNDS
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
Aggressive Growth Fund
International Equity Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Part A Item Number Prospectus Caption
- ---------------------------- ------------------
<S> <C>
1. Cover Page...................................... Cover Page
2. Synopsis........................................ Summary of Expenses
3. Condensed Financial Information................. Financial Highlights
4. General Description of Registrant............... Cover Page; Investment
Objectives and Policies; The
Business of The Commerce Funds
5. Management of the Fund.......................... The Business of The Commerce
Funds; How to Buy Shares; How
to Sell Shares
5A. Management's Discussion of Fund Performance..... Not Applicable
6. Capital Stock and Other Securities.............. How to Buy Shares; How to Sell
Shares; Dividend and Distribution
Policies; Tax Information; How
Are Shares Priced?
7. Purchase of Securities Being Offered............ How to Buy Shares; How to Sell
Shares
8. Redemption or Repurchase........................ How to Sell Shares
9. Pending Legal Proceedings....................... Not Applicable
</TABLE>
<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 Fund's 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 front 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 $100 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>
------------------------
COMMERCE FUNDS(TM)
------------------------
The Short-Term Government Fund
The Bond Fund
The Balanced Fund
The Growth Fund
The Aggressive Growth Fund
The International Equity Fund
November 9, 1994, as revised November 15, 1994
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company registered
under the Investment Company Act of 1940 (the "1940 Act"). The Commerce Funds
currently consists of eight investment portfolios, each of which has a separate
pool of assets with separate investment objectives and policies. However, only
the Short-Term Government, Bond, Balanced, Growth, Aggressive Growth and
International Equity Funds (individually, a "Fund" and collectively, the
"Funds") are offered by this Prospectus. Each Fund is classified as a
diversified investment portfolio under the 1940 Act.
The Short-Term Government Fund seeks current income consistent with preservation
of principal. The Fund pursues this objective through investment in short-term
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Bond Fund seeks total return through current income and secondarily, capital
appreciation. The Fund pursues this objective through investment in a
diversified portfolio of investment grade corporate debt obligations and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Balanced Fund seeks total return through a balance of capital appreciation
and current income consistent with preservation of capital. The Fund pursues
this objective through investment in a diversified portfolio of equity and fixed
income securities.
The Growth Fund seeks capital appreciation and secondarily, current income and
dividend growth potential. The Fund pursues this objective through investment in
a diversified portfolio of equity securities of companies with the potential for
above average growth in earnings and dividends.
The Aggressive Growth Fund seeks long-term capital appreciation. The Fund
pursues this objective through investment in a diversified portfolio of equity
securities of companies with medium-sized market capitalizations and the
potential for above average earnings growth.
The International Equity Fund seeks total return with an emphasis on growth of
capital. The Fund pursues this objective through investment in a diversified
portfolio of common stocks of established foreign companies.
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as investment advisor to the Funds (together, the "Advisor"). Rowe Price-Fleming
International, Inc. serves as sub-investment advisor to the International Equity
Fund (the "Sub-Advisor").
This Prospectus contains information you should know about the Funds before
you invest. Please read it carefully and keep it for your future reference. It
contains your Shareowner Guide and a description of shareowner features. A
Statement of Additional Information (dated November 9, 1994, as revised November
15, 1994) contains additional information about the Funds. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. The Statement of
Additional Information, as it may be amended from time to time, is available
without charge by writing to The Commerce Funds at P.O. Box 16931, St. Louis, MO
63105 or by calling 1-800-305-2140.
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November 9, 1994, as revised November 15, 1994
<PAGE>
TABLE OF CONTENTS
SUMMARY OF EXPENSES......................................................... 3
INVESTMENT OBJECTIVES AND POLICIES.......................................... 5
Short-Term Government Fund............................................. 5
Bond Fund.............................................................. 6
Balanced Fund.......................................................... 8
Growth Fund............................................................ 10
Aggressive Growth Fund................................................. 11
International Equity Fund.............................................. 12
ADDITIONAL RISK CONSIDERATIONS.............................................. 14
INVESTMENT RESTRICTIONS..................................................... 15
OTHER INVESTMENT PRACTICES.................................................. 16
SHAREOWNER GUIDE............................................................ 27
HOW TO BUY SHARES...................................................... 27
What Is My Minimum Investment For Each Fund?...................... 27
How Are Shares Priced?............................................ 27
How Can I Buy Shares?............................................. 30
What Price Will I Receive When I Buy Shares?...................... 32
What Else Should I Know About Buying Shares?...................... 32
HOW TO SELL SHARES..................................................... 32
How Do I Sell My Shares?.......................................... 32
What Price Will I Receive For Shares I Want To Sell?.............. 34
How Quickly Can I Receive Proceeds From A Sale?................... 34
What If I Want To Reinvest Sales Proceeds?........................ 35
DIVIDEND AND DISTRIBUTION POLICIES..................................... 35
SHAREOWNER FEATURES AND PRIVILEGES..................................... 36
Can I Use The Funds In My Retirement Plan?........................ 36
Can I Make Regular Investments To A Fund Automatically?........... 37
What Is Dollar Cost Averaging And How Can I Implement It?......... 37
Can I Exchange My Investment From One Commerce Fund To Another?... 37
Can I Have Exchanges Made Automatically?.......................... 38
Can I Re-invest Dividends From One Commerce Fund to Another?...... 38
How Do I Obtain Other Information About My Account?............... 39
Can I Make Transactions By Telephone?............................. 38
Can I Arrange Automatic Withdrawals?.............................. 39
THE BUSINESS OF THE COMMERCE FUNDS.......................................... 40
Board Of Trustees...................................................... 40
Expenses............................................................... 40
Service Providers...................................................... 40
TAX INFORMATION............................................................. 45
HOW PERFORMANCE IS MEASURED................................................. 46
OTHER INFORMATION........................................................... 49
ACCOUNT APPLICATION FORM
2
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund.
Shareowner Transaction Expenses are charges you pay when buying or selling
shares. Annual Operating Expenses are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareowner accounts, general Fund
administration, accounting, custody and other services. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
Short-Term Aggressive International
Government Bond Balanced Growth Growth Equity
Fund Fund Fund Fund Fund Fund
----------- ------ --------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shareowner Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)(1)............ 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Maximum Sales Charge Imposed on Reinvested
Distributions..................................... None None None None None None
Deferred Sales Charge imposed on Redemptions....... None None None None None None
Redemption Fees.................................... None None None None None None
Exchange Fees(2)................................... None None None None None None
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waivers)(3)............. 0.30% 0.50% 0.75% 0.75% 0.75% 0.90%
12b-1 Fees......................................... None None None None None None
Other Expenses (after reimbursements)(4)........... 0.38% 0.38% 0.38% 0.38% 0.65% 0.82%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses(5)................... 0.68% 0.88% 1.13% 1.13% 1.40% 1.72%
===== ===== ===== ===== ===== =====
Example: Assume a Fund's annual return is 5% and
its expenses are the same as those stated above.
For every $1,000 you invest, here's how much
you would pay in total expenses if you closed
your account after the number of years
indicated, assuming redemption at the end of
each time period:
One Year........................................ $ 42 $ 44 $ 46 $ 46 $ 49 $ 52
Three Years..................................... $ 56 $ 62 $ 70 $ 70 $ 79 $ 89
</TABLE>
____________________________
(1) Certain investors may not be charged a sales charge. See "Shareowner Guide
-- When There is No Sales Charge."
(2) No charge is imposed on exchanges through the Automatic Exchange Feature
or for up to five exchanges made within a twelve month period. Additional
exchanges may incur a $5.00 fee.
(3) For the current fiscal year the Advisor intends to voluntarily waive a
portion of the investment advisory fees otherwise payable by the Short-Term
Government, Balanced and International Equity Funds. Without such fee
waivers, "Management Fees" would be .50%, 1.00%, and 1.50%, respectively,
of the average daily net assets of such Funds.
(4) In addition to the advisory fee waivers referred to in note 3, for the
current fiscal year the Advisor intends to voluntarily reimburse expenses
(including shareowner servicing fees) to the extent necessary for the
Short-Term Government, Bond, Balanced and Growth Funds to maintain annual
expense ratios (excluding management fees) of not more than .38%, excluding
interest, taxes and extraordinary expenses, respectively. The Commerce
Funds has adopted a Shareowner Service Plan pursuant to which it may enter
into agreements with institutions under which they will render shareowner
administrative support services for their customers who beneficially own
shares in return for a fee of up to 0.25% per annum of the value of such
shares.
(5) Without such fee waivers and expense reimbursements in effect for the
Short-Term Government, Bond, Balanced, Growth and International Equity
Funds, "Total Fund Operating Expenses" would be 1.40%, 0.92%, 1.48%, 1.17%
and 2.32%, respectively, of the average daily net assets of such Funds.
3
<PAGE>
The above expense information is provided to help you understand the
expenses you would pay either directly (i.e., transaction expenses) or
indirectly (i.e., annual operating expenses) as a shareowner in the Funds. The
information is based on the expenses the Funds expect to incur during the
current fiscal year. In addition, Shareowner Servicing Organizations may charge
their clients account fees for providing account services in connection with
their clients' investments in shares of The Commerce Funds. You should note that
any fees that are charged by The Commerce Funds' Advisor, its affiliates or any
other institutions directly to their customer accounts for services related to
an investment in the Funds are in addition to and not reflected in the fees and
expenses described above. If you purchase or redeem shares directly from The
Commerce Funds Shareowner Services or an account representative at a Commerce
Bank branch, you may avoid these fees by following the procedures described in
"How To Buy Shares" on page 31 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- --------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESS THAN THOSE INDICATED. THE FUNDS ARE NEW
AND THE ABOVE FIGURES ARE BASED ON ADJUSTMENTS AND EXPENSES EXPECTED TO BE
INCURRED DURING THE FUNDS' CURRENT FISCAL YEAR. INFORMATION ABOUT THE ACTUAL
PERFORMANCE OF THE FUNDS WILL BE CONTAINED IN FUTURE ANNUAL REPORTS TO
SHAREOWNERS, WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING THE COMMERCE
FUNDS AT THE ADDRESS OR TELEPHONE NUMBER INDICATED ON THE COVER PAGE OF THIS
PROSPECTUS WHEN THEY BECOME AVAILABLE.
- --------------------------------------------------------------------------------
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are described
below. There is no assurance that they will achieve their investment objectives.
No Fund, by itself, constitutes a complete investment program. Additional
information regarding the securities, investment policies and restrictions of
each Fund are described in the Statement of Additional Information.
The investment objectives of a Fund may not be changed without the
affirmative vote of the holders of at least a majority of outstanding shares of
such Fund (as defined under "Other information"). Except as noted below under
"Investment Limitations," a Fund's investment policies may be changed without a
vote of shareowners.
Short-Term Government Fund
Investment Objective
The investment objective of the Short-Term Government Fund is to seek
current income consistent with preservation of principal. The Fund pursues this
objective through investment in short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
Investment Strategy
In pursuing its investment objective, the Fund will invest at least 65% of
its total assets in U.S. Treasury bills, notes and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Obligations"), with remaining maturities of five years or less, and
repurchase agreements with respect to such obligations. The Fund's dollar-
weighted average maturity will not exceed three years.
The Short-Term Government Fund may purchase U.S. Government Obligations and
mortgage-backed securities with stated maturities in excess of five years in an
amount not to exceed 25% of its total assets. The average life of mortgage-
backed securities varies with the maturities of the underlying mortgage
instruments. The average life is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as the result
of mortgage prepayments. The rate of such prepayments, and accordingly the life
of the certificates, will be a function of current market rates and current
conditions in the relevant housing markets. Estimated average life will be
determined by the Advisor, and such securities may be purchased by the Fund if
the estimated average life is determined to be five years or less. See "Other
Investment Practices--Mortgage-Related Securities."
In addition, U.S. Government Obligations with nominal maturities in excess
of five years that have variable or floating interest rates or put features may
be deemed to have remaining maturities of five years or less and therefore to be
permissible investments for the Fund.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
Risks Associated with an Investment in the Fund
U.S. Government Obligations have historically involved little risk of loss
of principal if held to maturity. The Fund, however, will not necessarily hold
its securities to maturity. Generally, the market value of
5
<PAGE>
securities not held to maturity can be expected to vary inversely to changes in
prevailing interest rates. See "Additional Risk Considerations--Risks Associated
With Fixed Income Investments." In addition, neither the U.S. Government, nor
any agency or instrumentality thereof, has guaranteed, sponsored or approved the
Fund or its shares.
Mortgage-backed securities may be subject to risks including price
volatility, liquidity and interest rate risk. The prices of such securities may
be inversely affected by changes in interest rates and prepayment of the
underlying mortgage collateral may result in a decreased rate of return. See
"Other Investment Practices--Mortgage-Related Securities."
Bond Fund
Investment Objective
The investment objective of the Bond Fund is to seek total return through
current income and secondarily, capital appreciation. The Fund pursues this
objective through investment in a diversified portfolio of investment grade
corporate debt obligations and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Investment Strategy
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 A- or better, 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 will be rated investment grade at the time of purchase. For purposes of
this investment policy, investment grade obligations are those rated at the time
of purchase AAA, AA, A or BBB by Standard & Poor's Ratings Group ("S&P"), Aaa,
Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's") or which are
similarly rated by another nationally recognized statistical rating organization
("NRSRO") (including Fitch Investors Service, Inc., Duff & Phelps, Thomson
BankWatch and IBCA) or are unrated but deemed by the Advisor to be comparable in
quality to instruments that are so rated. Except for temporary defensive
periods, the Fund's market weighted average credit rating will be at least AA-
/Aa3 as rated by S&P or Moody's, respectively, or the equivalent rating of
another NRSRO. Obligations rated BBB by S&P, Baa by Moody's or the equivalent
rating of another NRSRO are considered to have speculative characteristics and
are subject to greater credit and market risk than securities rated in the top
three investment grade categories. Subsequent to their purchase by the Fund, up
to 5% of its portfolio securities may represent securities downgraded below
investment grade or may be deemed by the Advisor to be no longer comparable to
investment grade securities. The Advisor will consider such an event in
determining whether the Fund should continue to hold the security. See Appendix
A to the Statement of Additional Information for a description of applicable
debt ratings.
The Fund may invest up to 65% of its total assets in certain mortgage-
backed and asset-backed securities. Mortgage-backed securities represent pools
of mortgage loans assembled for sale to investors by various governmental
agencies as well as by private issuers. See "Other Investment Practices--
Mortgage Related Securities." Asset-backed securities represent a participation
in, or are secured by or payable from, a stream of payments governed by
particular assets. Such securities may include motor vehicle installment
purchase obligations, credit card receivables and home equity loans. See "Other
Investment Practices--
6
<PAGE>
Asset-Backed Securities." The Fund may also invest in "stripped" and convertible
securities. See "Other Investment Practices--Stripped Securities" and "Other
Investment Practices--Convertible Securities."
Additionally, up to 20% of the total assets of the Fund may be invested
directly in debt obligations of foreign issuers. These obligations may include
obligations of foreign corporations as well as investments in obligations of
foreign governments and their political sub-divisions (which will be limited to
direct government obligations and government-guaranteed securities). The Fund is
also permitted to invest up to 20% of its total assets in obligations issued by
or on behalf of states, territories and possessions of the United States, the
District of Columbia and their authorities, agencies, instrumentalities and
political subdivisions, the interest on which is, in the opinion of bond
counsel, exempt from regular federal income tax ("Municipal Obligations"). The
purchase of Municipal Obligations may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government Obligations. See "Other Investment Practices--Municipal Obligations."
In acquiring particular portfolio securities, the Advisor will consider,
among other things, historical yield relationships between corporate and
government bonds, intermarket yield relationships among various industry
sectors, current economic cycles and the creditworthiness of particular issuers.
The Fund seeks to equal or exceed the return of the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"). The Aggregate Bond Index is a
broad market weighted index which encompasses three major classes of investment
grade fixed income securities with maturities greater than one year, including:
U.S. Treasury, corporate bond and mortgage-backed securities. Although the Fund
seeks to equal or exceed the return of the Aggregate Bond Index, the Fund may
invest a substantial portion of its assets in securities that are not included
in its benchmark index. The Fund is not, therefore, an "index" fund, which
typically holds only securities that are included in the index it attempts to
replicate.
Although the Fund has no restriction as to the maximum or minimum duration
of any individual security held by it, the Fund's average effective duration
will be within +/- 30% of the duration of the Aggregate Bond Index. "Duration"
is a term used by investment managers to express the average time to receipt of
expected cash flows (discounted to their present value) on a particular fixed
income instrument or a portfolio of instruments. Duration takes into account the
pattern of a security's cash flow over time, including how cash flow is affected
by prepayments and changes in interest rates. For example, the duration of a
five-year zero coupon bond which pays no interest or principal until the
maturity of the bond is five years. This is because a zero coupon bond produces
no cash flow until the maturity date. On the other hand, a coupon bond that pays
interest semiannually and matures in five years will have a duration of less
than five years, which reflects the semiannual cash flows resulting from coupon
payments. Duration also generally defines the effect of interest rate changes on
bond prices. Generally, if interest rates increase by one percent, the value of
a security having an effective duration of five years would decrease in value by
five percent. As of August 31, 1994, the Aggregate Bond index had an effective
duration of 4.7 years.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
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Risks Associated with an Investment in the Fund
Generally, the market value of fixed income securities is subject to
interest rate fluctuation and can be expected to vary inversely to changes in
the prevailing interest rates. Fixed income securities with longer maturities,
which tend to produce higher yields, are subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities.
Investments in asset-backed securities may be subject to risks in addition
to those presented by mortgage-backed securities. Asset-backed securities are
dependent upon payment of the underlying loan or receivable and are generally
unsecured. Additional risks may include the prepayment of the underlying
collateral, liquidity and valuation. See "Other Investment Practices -- Asset-
Backed Securities."
Because the Fund may invest in securities issued by foreign issuers, the
Fund may be subject to additional investment risks for those securities that are
different in some respects from those incurred by a Fund which invests solely in
securities of domestic U.S. issuers. Such risks include foreign taxation,
changes in currency rates or currency brokerage, currency exchange costs and
differences between domestic and foreign legal, auditing, brokerage and economic
standards. See "Additional Risk Considerations -- Risks Associated with Foreign
Securities and Currencies."
See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" for risks associated with investments in mortgage-backed securities.
See "Additional Risk Considerations--Risks Associated with Fixed Income
Investments."
Balanced Fund
Investment Objective
The investment objective of the Balanced Fund is to seek total return
through a balance of capital appreciation and current income consistent with
preservation of capital. The Fund pursues this objective through investment in a
diversified portfolio of equity and fixed income securities.
Investment Strategy
The Balanced Fund seeks to achieve its objective through a policy of
diversified investments in equity securities, fixed income securities and cash
equivalents. Equity securities in which the Fund normally invests are common
stocks, preferred stocks, securities or bonds which are convertible into common
or preferred stocks and warrants. The Fund may also participate in rights
offerings. The Fund seeks to acquire equity securities of companies with market
capitalizations over $200 million. (For further information regarding equity
securities in which the Fund may invest and the Fund's policies regarding the
selection of equity securities, see "Growth Fund--Investment Strategy" below.)
Fixed income securities in which the Fund may invest include 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, "stripped" securities, convertible securities and
money market instruments. All of the fixed income securities acquired by the
Balanced Fund will be rated at the time of purchase investment grade by S&P,
Moody's or the equivalent rating of another NRSRO or will be unrated but deemed
by the Advisor to be comparable in quality to instruments that are so rated.
Obligations
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rated BBB by S&P, Baa by Moody's or the equivalent rating of another NRSRO are
considered to have speculative characteristics and are subject to greater credit
and market risk than securities rated in the top three investment grade
categories. Except for temporary defensive periods, the Fund's market weighted
average credit rating will be at least AA-/Aa3 as rated by S&P, Moody's or the
equivalent rating of another NRSRO. Subsequent to their purchase by the Fund, up
to 5% of the fixed income portion of its portfolio securities may represent
securities downgraded below investment grade or may be deemed by the Advisor to
be no longer comparable to investment grade securities. The Advisor will
consider such an event in determining whether the Fund should continue to hold
the security. (For further information regarding fixed income securities in
which the Fund may invest and the Fund's policies regarding the selection of
fixed income securities, see "Bond Fund -- Investment Strategy" and "Bond Fund
- -- Risks Associated with an Investment in the Fund" above.)
The Fund may invest up to 65% of the fixed income portion of its portfolio
in certain mortgage-backed and asset-backed securities and is also permitted to
invest up to 20% of the fixed income portion of its portfolio in Municipal
Obligations. At least 25% of the Fund's total assets will be invested in fixed
income senior securities (including cash equivalents, long-term debt securities
and convertible debt securities and convertible preferred stock to the extent
their value is attributable to their fixed income characteristics).
Up to 20% of the fixed income portion of the Fund's portfolio may be
invested directly in debt obligations of foreign issuers. These obligations may
include obligations of foreign corporations as well as investments in
obligations of foreign governments and their political sub-divisions (which will
be limited to direct government obligations and government-guaranteed
securities).
Although equity securities acquired by the Balanced Fund will generally be
issued by U.S. issuers, the Fund may also invest up to 10% of the equity portion
of its portfolio in securities issued by foreign issuers either directly or
indirectly through investments in sponsored and unsponsored American Depository
Receipts ("ADRs"). ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADR
prices are denominated in United States dollars while the securities underlying
an ADR are normally denominated in a foreign currency.
The actual percentage of assets invested in equity and fixed income
securities will vary from time to time, depending on the judgment of the
Advisor. The Advisor will attempt to take advantage of changing economic
conditions by increasing or decreasing the ratio of equity securities to fixed
income securities or cash equivalents in the Fund.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
Risks Associated with an Investment in the Fund
Because the Fund may invest in securities issued by foreign issuers, the
Fund may be subject to additional investment risks that are different in some
respects from those incurred by a Fund which invests solely in securities of
U.S. domestic issuers. Such risks include foreign taxation, changes in currency
rates or
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currency brokerage, currency exchange costs and differences between domestic and
foreign legal, auditing, brokerage and economic standards. See "Additional Risk
Considerations--Risks Associated with Foreign Securities and Currencies."
See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" for risks associated with investments in mortgage-backed securities.
See "Bond Fund--Risks Associated with an Investment in the Fund" for risks
associated with investments in asset-backed and fixed income securities.
See "Additional Risk Considerations--Risks Associated with Fixed Income
Investments" for information concerning other pertinent risks.
Growth Fund
Investment Objective
The investment objective of the Growth Fund is to seek capital appreciation
and, secondarily, current income and dividend growth potential. The Fund pursues
this objective through investment in a diversified portfolio of equity
securities of companies with the potential for above average growth in earnings
and dividends.
Investment Strategy
In pursuing its investment objective the Fund will, under normal market
conditions, invest at least 65% of its total assets in equity securities,
including common stocks, preferred stocks and securities convertible into common
stocks. The Advisor will seek to acquire stocks of companies that, in the
aggregate, will experience growth in sales, dividends or earnings per share
greater than the average of the companies comprising the Standard & Poor's
Composite Stock Price Index (the "S&P 500 Index"), an unmanaged index which
emphasizes large capitalization companies. The Fund uses the S&P 500 Index as a
benchmark for comparison because it represents roughly two-thirds of the market
value of all publicly traded common stocks in the United States and is a widely
accepted measure of common stock investment returns. Although the Fund seeks to
exceed the return of the S&P 500 Index, the Fund may invest its assets in
securities that are not included in this index. The Fund is not, therefore, an
index fund which typically holds only securities that are included in the index
it attempts to replicate. The Fund will generally acquire equity securities of
companies with market capitalizations over $500 million. The Advisor anticipates
that from time to time certain industry sectors will not be represented in the
Fund while other sectors will represent a significant portion of invested
assets.
In selecting stocks for the Growth Fund, the Advisor employs a "bottom-up"
security analysis. "Bottom-up" security analysis refers to an analytical
approach to securities selection which first focuses on the company and company-
related matters as contrasted to a "top-down" analysis which first focuses on
the industry or the economy. The Advisor believes that a "bottom-up" approach is
more likely to identify attractive companies which might otherwise be neglected
or overlooked.
While emphasis will be placed on investments in equity securities,
primarily common stocks, the Growth Fund may also invest in other types of
equity securities, including warrants and securities which are convertible into
common or preferred stocks and may participate in rights offerings. The Fund may
also
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invest, either directly or through investments in sponsored and unsponsored
ADRs, up to 10% of its total assets in the securities of foreign issuers.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
Risks Associated with an Investment in the Fund
Because the Fund may invest in securities issued by foreign issuers, it may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests solely in securities of U.S.
domestic issuers. Such risks include foreign taxation, changes in currency rates
or currency brokerage, currency exchange costs and differences between domestic
and foreign legal, auditing, brokerage and economic standards. See "Additional
Risk Considerations--Risks Associated with Foreign Securities and Currencies."
Aggressive Growth Fund
Investment Objective
The investment objective of the Aggressive Growth Fund is to seek long-term
capital appreciation. The Fund pursues this objective through investment in a
diversified portfolio of equity securities of companies with medium-sized market
capitalizations and the potential for above average earnings growth.
Investment Strategy
In pursuing its investment objective the Fund will, under normal market
conditions, invest at least 65% of its total assets in equity securities,
including common stocks, warrants and securities convertible into common or
preferred stock. The Fund may also participate in rights offerings. The Fund
will generally acquire equity securities of companies with market
capitalizations between $200 million and $3 billion. The Advisor believes that
the companies in which the Fund may invest offer greater opportunity for growth
of capital than larger, more mature companies.
The Advisor selects common stocks of companies which, in its opinion, have
attractive fundamental financial characteristics. Such characteristics include,
as compared to the Standard & Poor's 400 Mid-Cap Index ("S&P Mid-Cap Index"),
market liquidity as measured by average daily trading volume, profitability as
measured by above average return on equity, and operating consistency, as
measured by above average earnings growth. The Advisor intends to purchase
securities of companies which, in its opinion, are the most attractive in light
of their expected earnings growth and relative valuation. The S&P Mid-Cap Index
is a capitalization-weighted index that measures the performance of the mid-
range sector of the U.S. stock market. Its median market capitalization is
approximately $700 million. Generally, the market capitalization of companies
measured by the S&P Mid-Cap Index will be between $150 million and $6.5 billion.
Although the Fund uses the S&P Mid-Cap Index as a benchmark for weighting
investments, it is not an "index" fund, which holds only securities included on
the index.
In selecting stocks for the Aggressive Growth Fund, the Advisor employs a
"bottom-up" security analysis, as described under "Growth Fund -- Investment
Strategy."
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The Fund may also invest up to 10% of its total assets in the securities of
foreign issuers either directly or through investments in sponsored and
unsponsored ADRs.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
Risks Associated with an Investment in the Fund
The securities of smaller companies may be subject to more abrupt or
erratic market movements than larger, more established companies, both because
such securities are typically traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
The Fund's net asset value per share may be subject to rapid and substantial
changes. Additionally, such securities may not be traded every day or in the
volume typical of trading on a national securities exchange. As a result, the
disposition by the Fund of portfolio securities, to meet redemptions or
otherwise, may require the Fund to sell these securities at a discount from
market prices, to sell during periods when such disposition is not desirable, or
to make many small sales over a lengthy period of time.
See "Additional Risk Considerations--Risks Associated with Foreign
Securities and Currencies" for information concerning other pertinent risks.
International Equity Fund
Investment Objective
The investment objective of the International Equity Fund is to seek total
return with an emphasis on growth of capital. The fund pursues this objective
through investment in a diversified portfolio of common stocks of established
foreign companies.
Investment Strategy
In pursuing its investment objective, the Fund will, under normal market
conditions, invest at least 65% of its total assets in common stocks of
established companies that are domiciled, traded on a foreign exchange or
conduct their principal activities outside the United States. The Fund may also
invest in other types of equity securities, including securities convertible
into common stocks or preferred stocks, warrants and bonds, notes and other debt
securities of U.S. and foreign corporations and governmental issuers. Under
normal market conditions, the Fund will invest in equity securities of companies
in at least three different foreign countries. Countries in which the Fund may
invest include, but are not limited to: Argentina, Australia, Austria,
Bangladesh, Belgium, Botswana, Brazil, Canada, Chile, China, Czech Republic,
Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Israel, Italy,
Japan, Jordan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway,
Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand and the
United Kingdom. The Fund may invest in developed as well as developing
countries. The domicile or the location of the principal activities of a company
will be the country under whose laws the company is organized, in which the
principal trading market for the equity securities issued by the company is
located, or in which the company has over half of its assets or derives over
half of its revenues or profits.
The International Equity Fund may invest without limitation in securities
of foreign issuers in the form of sponsored and unsponsored ADRs and European
Depository Receipts ("EDRs"). EDRs are receipts issued
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by European financial institutions evidencing the ownership of underlying
securities issued by a foreign issuer. EDR prices are generally denominated in
foreign currencies as are the securities underlying an EDR.
The International Equity Fund may also invest up to 10% of its total assets
in hybrid investments. These instruments, which are derivatives, combine the
characteristics of securities, futures and options. 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 or differences between prices of securities, currencies, intangibles,
goods, articles or commodities or by another objective index, economic factor or
other measure such as interest rates, currency exchange rates or other indices.
For example, the principal amount, redemption or conversion terms of a security
could be related to the market price of some commodity, currency or securities
index. Such securities may bear interest or pay dividends at below market (or
even relatively nominal) rates. Under certain conditions, the redemption value
of such an investment could be zero. Hybrids can have volatile prices and
limited liquidity and, accordingly, their use by the Fund may not enhance
investment return.
See "Other Investment Practices" for a description of other types of
securities in which the Fund may invest.
Risks Associated with an Investment in the Fund
Although investment in any mutual fund has certain inherent risks, an
investment in the International Equity Fund may have even greater risks than
investments in most other types of mutual funds. The International Equity Fund
may not be appropriate for an investor if the investor cannot bear financially
the loss of at least a significant portion of the investment. Investors should
understand that in addition to the International Equity Fund's volatile net
asset value per share, the expense ratios of the Fund can be expected to be
higher than those of Funds investing primarily in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
The International Equity Fund may invest its assets in countries with
emerging economies or securities markets. These countries are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have failed in the past to recognize
private property rights and at times have nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value of
a Fund's investments in those countries and the availability of additional
investments in those countries. The small size and inexperience of the
securities markets in certain countries and the limited volume of trading in
securities in those countries may make the Fund's investments in such countries
illiquid and more volatile than investments in Japan or most Western European
countries. The Fund may also be required to establish special custodial or other
arrangements before making certain investments in those countries. There may be
little financial or accounting information available with respect to issuers
located in certain of such countries, and it may be difficult as a result to
assess the value or prospects of an investment in such issuers.
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ADDITIONAL RISK CONSIDERATIONS
Risks Associated with Fixed Income Investments
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
also recognize that, in periods of declining interest rates, the yields of
investment funds composed primarily of fixed income securities will tend to be
higher than prevailing market rates and, in periods of rising interest rates,
yields will tend to be somewhat lower. Zerocoupon bonds are subject to greater
market fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. Debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also affect the
value of these investments. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Funds' net asset values.
Risks Associated with Foreign Securities and Currencies
The International Equity Fund intends to invest primarily in the securities
of foreign issuers. In addition, as described above, the Bond, Balanced, Growth
and Aggressive Growth Funds also may invest a portion of their assets in the
securities of foreign issuers.
Investment in foreign securities involves special risks including market
risk, foreign currency risk, interest rate risk and the risks of investing in
securities of foreign issuers and of companies whose securities are principally
traded outside the United States. Market risk involves the possibility that
stock prices will decline over short or extended periods. Stock markets tend to
be cyclical, with alternate periods of generally rising and generally declining
prices. In addition, the performance of investments in securities denominated in
a foreign currency will depend on the strength of the foreign currency against
the U.S. dollar and the interest rate environment in the country issuing the
currency. Absent other events which could otherwise affect the value of a
foreign security (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally can
be expected to increase the value of a foreign currency-denominated security in
terms of U.S. dollars. An increase in foreign interest rates or a decline in the
value of the foreign currency relative to the U.S. dollar generally can be
expected to depress the value of a foreign currency-denominated security.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments also
involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes, the possible seizure
or nationalization of foreign holdings, the possible establishment of exchange
controls, or the adoption of other governmental restrictions might adversely
affect an investment in foreign securities. Additionally, foreign banks and
foreign branches of domestic banks are subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
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The Bond and Balanced Funds may invest in foreign debt or in the securities
of foreign governments. The risks of such investments include the risk that
foreign governments may default on their obligations, may not respect the
integrity of such debt, may attempt to renegotiate the debt at a lower rate and
may not honor investments by United States entities or citizens.
The Balanced, Growth, Aggressive Growth and International Equity Funds may
invest in ADRs, some of which may not be sponsored by the issuing institution.
A non-sponsored depository may not be required to disclose material information
that a sponsored depository would be required to provide under its contractual
relationship with the issuer. Accordingly, there may not be a correlation
between such information and the market value of such securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also may be affected unpredictably by the intervention or the failure to
intervene by U.S. or foreign governments or central banks, or by currency
controls or political developments in the U.S. or abroad. To the extent that a
Fund's total assets, adjusted to reflect the Fund's net position after giving
effect to currency transactions, are denominated in the currencies of foreign
countries, the Fund will be more susceptible to the risk of adverse economic and
political developments within those countries. In addition, the respective net
currency positions of the International Equity Fund may expose it to risks
independent of its securities positions. Although the net long and short foreign
currency exposure of the International Equity Fund will not exceed its total
asset value, to the extent that the Fund is fully invested in foreign securities
while also maintaining currency positions, it may be exposed to greater risk
than it would have if it did not maintain the currency positions. The Funds
investing in foreign securities are also subject to the possible imposition of
exchange control regulations or freezes on convertibility of currency.
Dividends, capital gains and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may reduce the net return to the shareowners.
INVESTMENT RESTRICTIONS
The Funds are subject to certain investment restrictions which, as
described in more detail in the Statement of Additional Information, are
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of a Fund (as defined under "Other
Information"). 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 of 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 fully 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.
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OTHER INVESTMENT PRACTICES
Zero Coupon Bonds
Each Fund may acquire zero coupon bonds. Such obligations will not result
in the payment of interest until maturity and typically have greater price
volatility than coupon obligations. A Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareowners and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations. These actions may occur under disadvantageous
circumstances and may reduce a Fund's assets thereby increasing its expense
ratio and decreasing its rate of return. Zero coupon bonds are subject to
greater market fluctuations from changing interest rates than debt obligations
of comparable maturities which make current distributions of interest.
U.S. Government Obligations
Each Fund may invest in U.S. Government Obligations. Examples of the types
of obligations which may be held by the Funds include, in addition to U.S.
Treasury bonds, notes and bills, the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks and Maritime
Administration. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as those of the Government National Mortgage Association,
are supported by the right of the issuer to borrow from the Treasury, others,
such as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
When-issued Purchases and Forward Commitments
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit a Fund to lock in a price or yield on a security it owns or
intends to purchase, regardless of future changes in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the yield
obtained in a transaction (and therefore the value of the security) may be less
favorable than the yield (and therefore the value of the security) available in
the market when the securities delivery takes place. A Fund is required to hold
and maintain in a segregated account until the settlement date cash, U.S.
Government securities or liquid, high grade debt obligations in an amount
sufficient to meet the purchase price. No Fund intends to engage in when-issued
purchases and forward commitments for speculative purposes.
Interest Rate Swaps, Mortgage Swaps, Caps and Floors
In order to hedge against fluctuations in interest rates, the Short-Term
Government, Bond and Balanced Funds may enter into interest rate swaps, mortgage
swaps and other types of swap agreements such as caps
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and floors. Interest rate swaps involve the exchange by a 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. In a typical cap or floor agreement, 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 payment 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,
caps and floors are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its swap,
cap and floor positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that 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. The Fund will maintain cash, U.S. Government securities and liquid,
high grade debt securities equal to the net amount, if any, of the excess of the
Fund's obligations over its entitlements with respect to swap transactions in a
segregated account with its custodian. Interest rate and mortgage swaps do not
involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and mortgage swaps
is limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate or mortgage swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. To the extent that
the net amount of an interest rate or mortgage swap is held in a segregated
account consisting of cash, U.S. Government securities and liquid, high grade
debt securities, the Funds and the Advisor believe that such swaps will not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to the Funds' borrowing restriction.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of the Fund would be less favorable than it would have
been if these investment techniques were not used. The staff of the Securities
and Exchange Commission ("SEC") currently takes the position that swaps, caps
and floors are illiquid for purposes of a Fund's limitation on illiquid
securities.
Mortgage-Related Securities
The Short-Term Government, Bond and Balanced Funds may invest in mortgage-
related securities. Purchasable mortgage-related securities are represented by
pools of mortgage loans assembled for sale to investors by various governmental
agencies such as the Government National Mortgage Association and government-
related organizations such as the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"), as well as by private
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies. Although certain mortgage-
related securities are guaranteed by a third party or are otherwise similarly
secured, the market value of the security, which may fluctuate, is not so
secured. If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security
whether resulting from increases in interest rates or prepayment of the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in
17
<PAGE>
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true because
mortgages underlying securities are prone to prepayment in periods of declining
interest rates. For this and other reasons, a mortgage-related security's
maturity may be shortened by unscheduled prepayments on underlying mortgages
and, therefore, it is not possible to accurately predict the security's return
to a Fund. Mortgage-related securities provide regular payments consisting of
interest and principal. No assurance can be given as to the return a Fund will
receive when these amounts are reinvested.
Mortgage-related securities acquired by the Funds may include
collateralized mortgage obligations ("CMOs"), a type of derivative, issued by
FNMA, FHLMC or other U.S. Government agencies or instrumentalities, as well as
by private issuers. CMOs provide an investor with a specified interest in the
cash flow of a pool of underlying mortgages or other mortgage-related
securities. Issuers of CMOs frequently elect to be taxed as pass-through
entities known as real estate mortgage investment conduits ("REMICs"). CMOs are
issued in multiple classes, each with a specified fixed or floating interest
rate and a final distribution date. The relative payment rights of the various
CMO classes may be structured in many ways. Generally, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other
classes having an earlier stated maturity date are paid in full. Sometimes,
however, CMO classes are "parallel pay," i.e. payments of principal are made to
two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to the Fund based on the Fund's
analysis of the market value of the security.
Asset-Backed Securities
The Bond and Balanced Funds may purchase asset-backed securities issued by
either governmental or non-governmental entities which represent a participation
in, or are secured by and payable from, a stream of payments generated by
particular assets, most often a pool of assets similar to one another.
Primarily, these securities do not have the benefit of the same security
interest in the underlying collateral. Payment on asset-backed securities of
private issues is typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guaranty, or subordination. Assets
generating such payments will consist of such instruments as motor vehicle
installment purchase obligations, credit card receivables and home equity loans.
The Funds may also invest in other types of asset-backed securities that may be
available in the future.
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 will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected payments will increase, while slower than expected prepayments will
decrease, yield to maturity. In calculating the average weighted maturity of a
Fund, the maturity of asset-backed securities will be based on estimates of
average life.
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<PAGE>
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates. Furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of a shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. 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.
Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). Ultimately, asset-backed securities are dependent upon
payment of the consumer loans or receivables by individuals, and the certificate
holder frequently has no recourse against the entity that originated the loans
or receivables. Credit card receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which have given debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. In addition, default may
require repossession of the personal property of the debtor which may be
difficult or impossible in some cases. Most issuers of automobile receivables
permit the servicers to return possession of the underlying obligations. If the
servicers were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the number of vehicles
involved in a typical issuance and technical requirements under state law, the
trustee for the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there is
a possibility that recoveries of repossessed collateral may not, in some cases,
be able to support payments on these securities.
Asset-backed securities are relatively new instruments and may be subject
to greater risk of default during periods of economic downturn than other
instruments. Also, the secondary market for certain asset-backed securities may
not be as liquid as the market for other types of securities, which could result
in a Fund's experiencing difficulty in valuing or liquidating such securities.
In certain circumstances, asset-backed securities may be considered illiquid
securities subject to the percentage limitations described below under "Illiquid
Securities."
Mortgage Dollar Rolls
The Short-Term Government, Bond and Balanced Funds may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity) but not identical securities on a
specified future date. A Fund gives up the right to receive principal and
interest paid on the securities sold. However, a Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. Unless such
benefits exceed the income, capital appreciation, and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Fund. A Fund will hold and maintain in a segregated
account until the settlement date cash or liquid, high grade debt securities in
an amount equal to the forward purchase price. The benefits derived from the use
of mortgage dollar rolls may depend upon
19
<PAGE>
the Advisor's ability to correctly predict mortgage prepayments and interest
rates. There is no assurance that mortgage dollar rolls can be successfully
employed.
For financial reporting and tax purposes, each Fund proposes to treat
mortgage dollar rolls as two separate transactions; one transaction involving
the purchase of a security and a separate transaction involving a sale. No Fund
currently intends to enter into mortgage dollar rolls that are accounted for as
a financing.
Stripped Securities
The Bond and Balanced Funds may invest in instruments known as "stripped"
securities. These instruments include U.S. Treasury bonds and notes and federal
agency obligations on which the unmatured interest coupons have been separated
from the underlying obligation. Such obligations are usually issued at a
discount to their "face value," and because of the manner in which principal and
interest are returned may exhibit greater price volatility than more
conventional debt securities. The Funds may invest in "interest only" stripped
securities that have been issued by a federal instrumentality known as the
Resolution Funding Corporation and other stripped securities issued or
guaranteed by the U.S. Government, where the principal and interest components
are traded independently under the Separate Trading of Registered Interest and
Principal Securities program ("STRIPS"). Under STRIPS, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently. The Funds may also invest in instruments that
have been stripped by their holder, typically a custodian bank or investment
brokerage firm, and then resold in a custodian receipt program under names such
as TIGRs and CATS.
Although stripped securities do not pay interest to their holders before
they mature, federal income tax rules require a Fund each year to recognize a
part of the discount attributable to a security as interest income. This income
must be distributed along with the other income the Funds earn. To the extent
shareowners request that they receive their dividends in cash rather than
reinvesting them, the money necessary to pay those dividends must come from the
assets of the Fund or from other sources such as proceeds from sales of Fund
shares and/or sales of portfolio securities. The cash so used would not be
available to purchase additional income-producing securities, and a Fund's
current income could ultimately be reduced as a result.
In addition, the Funds may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions.
SMBS, in particular, may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors. If the underlying obligations experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped. SMBS issued
by the U.S. Government (or a U.S. Government agency or instrumentality) may be
considered liquid under guidelines established by the Board of Trustees if they
can be disposed of promptly in the ordinary course of business at a value
reasonably close to that used in the calculation of a Fund's per share net asset
value.
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<PAGE>
Repurchase Agreements
Each Fund may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain with a Fund's
custodian collateral equal to at least 100% of the repurchase price including
accrued interest as monitored daily by the Advisor. If the seller under the
repurchase agreement defaults, a Fund may incur a loss if the value of the
collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a Fund
sells portfolio securities to a financial institution (such as a bank or broker-
dealer) and agrees to buy them back later at an agreed upon time and price. When
a Fund enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other high grade debt securities that
have a value equal to or greater than the repurchase price. The account is then
continuously monitored by the Advisor to make sure that an appropriate value is
maintained. Reverse repurchase agreements involve the risk that the value of
portfolio securities a Fund relinquishes may decline below the price the Fund
must pay on the repurchase date. A Fund will only enter into reverse repurchase
agreements to avoid the need to sell its securities to meet redemption requests
during unfavorable market conditions. As reverse repurchase agreements are
deemed to be borrowings by the SEC, each Fund is required to maintain continuous
asset coverage of 300%. Should the value of a Fund's assets decline below 300%
of borrowings, a Fund may be required to sell portfolio securities within three
days to reduce the Fund's debt and restore 300% asset coverage.
Variable and Floating Rate Instruments
Instruments purchased by a Fund may include variable and floating rate
demand instruments issued by corporations, industrial development authorities
and governmental entities. Although variable and floating rate demand
instruments are frequently not rated by credit rating agencies, unrated
instruments purchased by a Fund will be determined to be of comparable quality
to rated instruments that may be purchased by the Fund. While there may be no
active secondary market with respect to a particular variable or floating rate
instrument purchased by the Fund, a Fund may, from time to time as specified in
the instrument, demand payment in full of the principal of the instrument or may
resell the instrument to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of a variable
or floating rate demand instrument if the issuer defaulted on its payment
obligations or during periods that the Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss.
Variable and floating rate instruments with no active secondary market and with
notice/termination dates in excess of seven days will be included in the
calculation of a Fund's illiquid assets.
Securities Issued by Other Investment Companies
Each Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. Each Fund currently intends to
limit its investments so that, as determined immediately after a purchase is
made: (a) not more than 5% of the value of its total assets will be invested in
the securities
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<PAGE>
of any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by a Fund; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by a Fund and other investment companies advised by the Advisor, or
any affiliate of Commerce Bancshares, Inc. As a shareowner of another investment
company, a Fund would bear, along with other shareowners, its pro rata portion
of the expenses of such other investment company, including advisory fees. These
expenses would be in addition to the advisory and other expenses that a Fund
bears directly in connection with its own operations and may represent a
duplication of fees to shareowners of a Fund.
Illiquid Securities
Each Fund may invest up to 15% of the value of its net assets in illiquid
securities, including securities having legal or contractual restrictions on
resale or no readily available market (including repurchase agreements, variable
and floating rate instruments and time deposits with notice/termination dates in
excess of seven days, SMBS issued by private issuers, interest rate and currency
swaps and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933 (the "1933 Act")).
If otherwise consistent with its investment objective and policies, each
Fund may purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and securities that are not registered under the 1933 Act but can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. These securities will not be considered illiquid so long as the Advisor
determines, under guidelines approved by the Board of Trustees, that an adequate
trading market exists. This practice could increase the level of illiquidity
during any period that qualified institutional buyers become uninterested in
purchasing these securities. The ability to sell to qualified institutional
buyers under Rule 144A is a relatively recent development and it is not possible
to predict how this market will develop.
Securities Lending
To increase return on portfolio securities, each Fund may lend its
securities to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Such loans will not be made if, as a result, the aggregate of all outstanding
loans exceeds 33 1/3% of the value of a Fund's total assets. There may be risks
of delay in receiving additional collateral or in recovering the securities
loaned or even a loss of rights in the collateral should the borrower of the
securities fail financially. However, loans are made only to borrowers deemed by
the Advisor to be of good standing and when, in its judgment, the income to be
earned from the loan justifies the attendant risks.
Options and Futures Contracts
Each Fund may purchase put and call options and may write covered call and
secured put options which will be listed on a national securities exchange and
issued by the Options Clearing Corporation. Such options may relate to
particular securities,' and various stock indexes or currencies. The Bond,
Balanced, Growth, Aggressive Growth and International Equity Funds may also
invest in futures contracts and options on futures, index futures contracts or
interest rate futures contracts, as applicable for hedging purposes or to seek
to increase total return. The International Equity Fund may also invest in
currency futures contracts. A Fund may not purchase or sell futures contracts or
options on futures contracts to increase total return unless immediately after
any such transaction the aggregate amount of premiums paid for put options and
the
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<PAGE>
amount of margin deposits on its existing futures positions do not exceed 5% of
the total assets of the Fund. Purchasing options is a specialized investment
technique that may entail the risk of a complete loss of the amounts paid as
premiums to the writer of the option.
Writing a covered call option means that a Fund owns or has the right to
acquire the underlying security subject to call at the stated exercise price at
all times during the option period. Writing a secured put option means that a
Fund maintains in a segregated account with its custodian cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. In order to close out these types
of option positions, a Fund will be required to enter into a "closing purchase
transaction" -- the purchase of a call or put option (depending upon the
position being closed out) on the same security with the same exercise price and
expiration date as the option that it previously wrote. The aggregate value of
securities subject to options written by the Bond, Balanced and international
Equity Funds will not exceed 5% of the respective Fund's total assets, or 25% of
the total respective assets of the Growth and Aggressive Growth Funds.
By writing a covered call option, a Fund forgoes the opportunity to profit
from an increase in the market price of the underlying security above its
exercise price except insofar as the premium represents such a profit, and it is
not able to sell the underlying security until the option expires or is
exercised or a Fund effects a closing purchase transaction by purchasing an
option of the same series. If a Fund writes a secured put option, it assumes the
risk of loss should the market value of the underlying security decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of the Funds, and they are
expected to be used infrequently. If the Advisor is incorrect in its forecast
for the underlying security or other factors when writing the foregoing options,
a Fund would be in a worse position than it would have been had the foregoing
investment techniques not been used.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
To enter into a futures contract, a Fund must make a deposit of initial
margin with its custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin, will
be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of the
futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional fund management skills and techniques; and (iv) losses due to
unanticipated market movements. Successful use of options and futures by a Fund
is subject to the Advisor's ability to correctly predict movements in the
direction of stock prices, interest rates and other economic factors. For
example, if a Fund uses futures contracts as a hedge against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, a Fund will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. The risk of loss
in trading futures contracts in some strategies can be substantial and is
potentially unlimited, due both to the low
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<PAGE>
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 or gain to the Fund. Thus,
a purchase or sale of a futures contract may result in losses or gains in excess
of the amount invested in the contract.
For additional information and a description of the risks relating to
option and futures contract trading practices, see the Statement of Additional
Information.
Forward Currency Exchange Contracts
The International Equity Fund may enter into forward currency exchange
contracts in an effort to hedge all or any portion of its portfolio positions.
Specifically, foreign currency contracts may be used for this purpose to reduce
the level of volatility caused by changes in foreign currency exchange rates or
when such transactions are economically appropriate for the reduction of risks
in the ongoing management of the Fund. The Fund may also enter into foreign
currency exchange contracts to seek to increase total return when the Advisor
anticipates that a foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities and are not held by the Fund. In addition, the International
Equity Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the Advisor believes that there is a pattern of
correlation between the two currencies. A forward currency exchange contract is
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of contract. Although the contracts may be
used to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might be
realized should the value of such currency increase. In connection with its
forward currency exchange contracts, the Fund will create a segregated account
of liquid assets, such as cash, U.S. Government securities or other liquid high
grade obligations, or will otherwise cover its position in accordance with
applicable requirements of the SEC.
Convertible Securities
The Bond, Balanced, Growth, Aggressive Growth and International Equity
Funds may invest in convertible securities, including bonds, notes and preferred
stock, that may be converted into common stock either at a stated price or
within a specified period of time. With investment in convertible securities, a
Fund may be looking for the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible, while earning higher current income than is
available from alternative investments.
Municipal Obligations
The Bond and Balanced Funds may invest in Municipal Obligations from time
to time when the yield spread between taxable corporate and municipal
obligations is deemed by the Advisor to be advantageous. The two principal
classifications of Municipal Obligations which may be held by the Funds are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the issuer of the facility
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<PAGE>
being financed. Private activity bonds (e.g., bonds issued by industrial
development authorities) that are issued by or on behalf of public authorities
to finance various privately-operated facilities are included within the term
"Municipal Obligations" if the interest paid thereon is exempt from regular
federal income tax. Private activity bonds are in most cases revenue securities
and are not payable from the unrestricted revenues of the issuer. The credit
quality of such bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
A Fund may also hold "moral obligation" securities, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment
but not a legal obligation of the state or municipality which created the
issuer.
Further, a Fund may purchase Municipal Obligations known as "certificates
of participation" which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and other
rights under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by applicable municipal charter provisions or
the nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not appropriate
funds for future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may or may not provide that the certificate
trustee can accelerate lease obligations upon default. If the trustee could not
accelerate lease obligations upon default, the trustee would only be able to
enforce lease payments as they became due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. Certificates of participation are
generally subject to redemption by the issuing municipal entity under specified
circumstances. If a specified event occurs, a certificate is callable at par
either at any interest payment date or, in some cases, at any time. As a result,
certificates of participation are not as liquid or marketable as other types of
Municipal Obligations.
Temporary Investments
Each Fund may assume a temporary defensive position at times when the
Advisor believes such a position is warranted by uncertain or unusual market
conditions. Such a position would allow a Fund to deviate from its fundamental
and non-fundamental policies. Each Fund may invest for temporary defensive
purposes up to 100% of its total assets in cash or cash equivalent short-term
obligations including "money market instruments," a term which includes, among
other things, bank obligations, commercial paper and notes, and U.S. Government
Obligations, foreign government securities (if permitted) and repurchase
agreements.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign banks
or foreign branches of U.S. banks. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase.
The International Equity Fund may also hold foreign or domestic money
market instruments and debt securities rated at the time of purchase in one of
the three highest investment grade categories by Moody's or S&P or the
equivalent rating of another NRSRO. The Fund does not intend to purchase unrated
debt
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obligations. In the event that the rating of any security held by the Fund falls
below the required rating, the Sub-Advisor will dispose of the security unless
it appears this would be disadvantageous to the Fund.
Portfolio Turnover
Each Fund may sell a portfolio investment soon after its acquisition if the
Advisor believes that such a disposition is consistent with attaining a Fund's
investment objective. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity.
The Advisor cannot accurately predict the Funds' portfolio turnover rates
which may vary from year to year, but expects that the annual turnover rates
will generally not exceed 100%. A high rate of portfolio turnover (100% or more)
involves correspondingly greater brokerage commission expenses and other
transaction costs, which must be borne directly by a Fund and ultimately by its
shareowners. See "Portfolio Transactions" in the Statement of Additional
Information. Portfolio turnover may result in the realization of short-term
capital gains which are taxable to shareowners as ordinary income.
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SHAREOWNER GUIDE
The following section will provide you with
answers to some of the most often-asked questions
about buying and selling a Fund's shares and
about a Fund's dividends and distributions
HOW TO BUY SHARES
What Is My Minimum Investment For Each Fund?
Generally, the minimum investment requirement is $2,000 for initial
purchases and $500 for subsequent purchases, although it may differ in certain
circumstances as shown below.
Investment Minimums for Specific Types of Accounts
<TABLE>
<CAPTION>
Initial Subsequent
Investment Investment
---------- ----------
<S> <C> <C>
Regular Account....................................... $2,000 $500
Automatic Investment Feature.......................... $1,000 $100
Individual Retirement Accounts (including
SEP-IRAs), Keogh Plans, corporate retirement
plans, public employer deferred plans,
profit sharing plans and 401(k) plans............... $1,000 $500
</TABLE>
How Are Shares Priced?
Shares of the Funds are purchased at their public offering price, which is
a Fund's net asset value per share plus a front-end sales charge. A Fund's net
asset value ("NAV") is calculated as follows:
NAV= (Value of Fund Assets) - (Fund Liabilities)
------------------------------------------------
Number of Outstanding Shares
The net asset value is determined as of the close of regular trading hours
on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
Time) on days the Exchange is open (a "Business Day").
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by or under
the supervision of the Board of Trustees. Certain short-term securities may be
valued at amortized cost, which approximates fair value.
Trading in foreign securities is generally completed prior to the end of
regular trading on the Exchange and may occur on Saturdays and U.S. holidays and
at other times when the Exchange is closed. As a result, there may be delays in
reflecting changes in the market values of foreign securities in the calculation
of the net asset value of the International Equity Fund. There may be variations
in the net asset value per share of the Fund on days when net asset value is not
calculated and on which shareowners of the Fund cannot redeem their shares due
to changes in values of securities traded in foreign markets. For more
information about valuing securities, see the Statement of Additional
Information.
27
<PAGE>
Sales Charge. The maximum front-end sales charge is 3.50% and may be less
based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
Maximum
Dealer's
As a % of As a % of Reallowance
offering net asset as a % of
price value offering price
Amount of Purchase per share per share per share*
------------------ --------- --------- --------------
<S> <C> <C> <C>
Less than $100,000........................ 3.50 3.63 3.15
$100,000 but less than $250,000........... 2.50 2.56 2.25
$250,000 but less than $500,000........... 1.50 1.52 1.35
$500,000 but less than $1,000,000......... 1.00 1.01 0.90
$1,000,000 or more........................ 0.00 0.00 0.00
</TABLE>
____________________
*Dealer's reallowance may be changed periodically.
Goldman, Sachs & Co. (the "Distributor") will, out of its administration
fee or other resources, pay additional incentives to dealers who initiate and
are responsible for purchases of shares of The Commerce Funds. In addition, at
its expense, the Distributor will provide additional compensation and
promotional incentives to dealers in connection with the sales of shares of the
Funds. Compensation may include promotional and other merchandise, sales and
training programs and other special events sponsored by dealers. Compensation
may also include payment for reasonable expenses incurred in connection with
trips taken by invited registered representatives for meetings or seminars of a
business nature.
When There Is No Sales Charge. There is no sales charge on shares purchased
by the following types of investors or transactions:
. automatic reinvestments (and cross-reinvestments) of dividends and
capital gain distributions by existing shareowners;
. the Exchange Privilege described below on page 37;
. the Redemption Reinvestment Privilege described below on page 35;
. plans qualified under Section 401 of the Internal Revenue Code of 1986
(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);
. trust, management agency, custodial and other accounts maintained by an
Investment Management Group (Trust Department) within a bank affiliated
with Commerce Bancshares, Inc. (including shares purchased with
distributions from such accounts);
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Code; and
. employees, directors, trustees, officers and retirees (as well as
their spouses and minor children) of Commerce Bancshares, Inc.,
Goldman, Sachs & Co. or their subsidiaries or affiliates;
. employees, directors, trustees, officers and retirees (as well as
their spouses and minor children) of banks that have signed a
definitive agreement to become affiliated with Commerce Bancshares,
Inc.;
. current and retired members of the Board of Trustees of The Commerce
Funds;
. any state, county or city, or any instrumentality, department,
authority or agency thereof, prohibited by applicable laws from paying
a sales charge for the purchase of Fund shares.
28
<PAGE>
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
shares of the Funds at net asset value, without payment of a sales charge. To
qualify for this special net asset value purchase when applicable, the investor
must pay for such purchase with the proceeds from the redemption of shares of a
non-affiliated mutual fund or unit investment trust on which a sales charge was
paid. A qualifying purchase of shares in a Fund must occur within five Business
Days of the prior redemption and must be evidenced by a confirmation of the
redemption transaction. At the time of purchase, The Commerce Funds Must be
notified that the purchase qualifies for a purchase without a sales charge.
Proceeds from the redemption of shares on which no sales charges or commissions
were paid would not qualify for the special net asset value purchase program.
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In order
to take advantage of these exemptions, you must certify eligibility on your
account application.
Rights of Accumulation. When you buy shares in The Commerce Funds, your
current total investment determines the sales charge that you pay. Since larger
investments receive a discounted sales charge, the sales charge you pay may
subsequently be reduced as you build your investment.
Over time, as your current total investment in shares accumulates to
$100,000 or beyond, the sales charge on subsequent investments is decreased.
Your current total investment is the combination of your immediate investment
along with the shares that you own in any investment portfolio of The Commerce
Funds on which you paid a sales charge (including shares of the Financial Square
Treasury, Prime and Tax-Free Money Market Funds that carry no sales charge but
were obtained through an exchange and can be traced back to shares that were
acquired with a sales charge). Shares purchased without a sales charge may not
be aggregated with shares purchased subject to a sales charge.
To buy shares at a reduced sales charge under Rights of Accumulation, you
must indicate at the time of purchase that a quantity discount is applicable. A
reduction in sales charge is subject to a check of appropriate records, after
which you will receive the lowest applicable sales charge.
Example: Suppose you own Commerce Fund shares with a total current
value of $90,000 that can be traced back to the purchase of shares with a
sales charge. If you subsequently invest $10,000 in any Fund within The
Commerce Funds family, you will pay a reduced sales charge of 2.50% of the
public offering price on the additional purchase.
Letter of Intent. You may also buy shares at a reduced sales charge under a
written Letter of intent, a non-binding commitment to invest a total of at least
$100,000 in one or more Funds of The Commerce Funds within a period of 13 months
and under the terms and conditions of the Letter of Intent. Shares you buy under
a Letter of Intent will be eligible for the same sales charge discount that
would have been available had all of your share purchases been made at once. To
use this feature, complete the Letter of Intent section on your account
application. A Letter of Intent must be filed with The Commerce Funds within 90
days of the first investment under the Letter of Intent provision.
While submitting a Letter of intent does not bind you to buy, or The
Commerce Funds to sell, the full amount at the sales charge indicated in the
Letter of intent, you must complete the intended purchase to obtain the reduced
sales charge. When you sign a Letter of Intent, The Commerce Funds holds in
escrow a
29
<PAGE>
sufficient number of shares which can be sold to make up any difference in the
sales charge on the amount actually invested. After you fulfill the terms of the
Letter of Intent, the shares in escrow will be released.
If your aggregate investment exceeds that indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
charge applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase. You
must inform The Commerce Funds that the Letter of Intent is in effect each time
you buy shares.
You may include the value of all shares on which a sales charge had
previously been paid as a credit toward fulfillment of the Letter of Intent, but
no price adjustment will be made on shares previously purchased.
You may combine purchases that are made by members of your immediate
family, or the total investments of a trustee or custodian of any qualified
pension or profit-sharing plan or IRA established for your benefit or the
benefit of any member of your immediate family, for the purpose of obtaining
reduced sales charges by means of a written Letter of Intent or Right of
Accumulation. You must indicate on the account application the accounts that are
to be combined for this purpose.
HOW CAN I BUY SHARES?
You may purchase shares of a Fund through:
. The Commerce Funds Shareowner Services; or
. An investment representative at a Commerce Bank branch.
Simply choose whichever you prefer.
The following chart describes ways to invest in The Commerce Funds:
30
<PAGE>
HOW TO BUY SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------------- ------------------------
By Mail Send a completed account Send a check with your
application with a check account number printed
(payable to The Commerce on it, along with the
Funds) directly to: stub from the previous
confirmation directed
The Commerce Funds to the address given at
P.O. Box 16931 left.
St. Louis, MO 63105
In Person Whether opening or adding to an account, you are
welcome to stop into a Commerce Bank branch office
location. A registered representative can assist
you.
By Wire After an account Contact your bank to
application is request that funds be
completed and an wired to your existing
account is opened, Fund account. Follow
instruct your bank to instructions at left.
wire funds to: Be sure to include your
name and your account
Commerce Bank, N.A. number.
(Kansas City)
Kansas City, MO
ABA #1010-00019
Account #2800255
Be sure to have your
bank indicate your
name, address, tax
identification number,
the name of the Fund
and your new account
number.
Ask your bank for specific information about
making federal wires, including associated charges.
By Telephone Via Subsequent purchases of
Electronic Funds Transfer Fund shares may be made
by electronic funds
transfer from your
bank, checking or money
market account.
You can authorize this
feature and provide
necessary bank
information on your
account application.
Then, when you wish to
make a subsequent
purchase, you can do so
by calling The Commerce
Funds Shareowner
Services at
1-800-305-2140.
31
<PAGE>
Other investment features, including exchanges and automatic investments,
are also available. Additional information pertaining to investments in the
Funds is included in the following pages or can be obtained by contacting The
Commerce Funds Shareowner Services.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at a Fund's public offering price calculated
at the next close of regular trading on the Exchange (currently 4:00 p.m.
Eastern Time) after your purchase order is received in proper form by The
Commerce Funds' transfer agent, State Street Bank and Trust Company (the
"Transfer Agent"), at its Kansas City office.
WHAT ELSE SHOULD I KNOW ABOUT BUYING SHARES?
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments by check must be in U.S. dollars and be drawn
only on U.S. banks. The Commerce Funds reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). The Commerce Funds may
reject or restrict purchases or exchanges of shares by a particular purchaser or
group, for example, when a pattern of frequent purchases and sales or exchanges
of shares of a Fund is evident, or if the purchase and sale or exchange orders
are, or a subsequent abrupt redemption might be, of a size that would disrupt
the management of a Fund.
The Commerce Funds will not issue share certificates. The Transfer Agent
will maintain a complete record of your account and will issue you a statement
at least quarterly. You will also be sent confirmations showing purchases and
redemptions.
HOW TO SELL SHARES
How Do I Sell My Shares?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
shares. The Commerce Funds does not charge you to sell shares. However, the
value of the shares you sell may be more or less than your cost, depending on a
Fund's current net asset value. The following chart describes ways to sell your
shares of The Commerce Funds:
32
<PAGE>
HOW TO SELL SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
By Mail Send a written request signed by each owner, including
each joint owner, to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
Proper written authority is required to execute redemption
requests on behalf of corporations, partnerships, trusts,
and/or fiduciary accounts. Redemption requests require
signature guarantees as described on page 34 with the
exception of redemptions sent to a shareowner name/address of
record in effect for no less than 30 days.
In Person You are welcome to deliver your written request signed by
each owner, including each joint owner, to a Commerce Bank
branch office location. A registered investment
representative can assist you.
By Telephone You may redeem shares (to a shareowner) by telephone and
request to receive proceeds by check (to a shareowner
name/address of record in effect for no less than 30 days),
federal wire (for amounts exceeding $1,000) or electronic
funds transfer. In order to request a federal wire or
electronic funds transfer, appropriate information regarding
your bank, checking or money market account must be
previously established on your account. This information may
be provided on the account application or in a signature
guaranteed letter of instruction (see description of
signature guarantees on page 34).
Redemption requests may be placed by calling The Commerce
Funds Shareowner Services at 1-800-305-2140. Additional
information pertaining to Fund share redemptions is included
in the following pages or can be obtained by contacting The
Commerce Funds Shareowner Services.
Other redemption features, including exchanges and automatic
withdrawals, are also available. Please refer to the
Shareowner Features and Privileges section in this prospectus
for additional information about telephone redemption
features.
Written requests to sell shares must be signed by each shareowner, including
each joint owner.
33
<PAGE>
Certain types of redemption requests will need to include a signature
guarantee. You may obtain a signature guarantee from:
(1) a bank which is a member of the FDIC;
(2) a securities broker or dealer;
(3) a credit union having the authority to issue signature guarantees;
(4) a savings and loan association;
(5) a building and loan association;
(6) a cooperative bank;
(7) a federal savings bank or association;
(8) a national securities exchange; or
(9) a registered securities association or a clearing agency.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed." Guarantees
from notaries public will not be accepted.
Share redemptions can be suspended and the payment of redemption proceeds
delayed when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted as
determined by the SEC, during any emergency as determined by the SEC which makes
it impracticable for a Fund to sell its securities or value its assets or during
any other period permitted by order of the SEC for the protection of investors.
Other redemption features, including exchanges and automatic withdrawals,
are also available. Please refer to Shareowner Features and Privileges for more
information.
WHAT PRICE WILL I RECEIVE FOR SHARES I WANT TO SELL?
The price you will receive when you sell your shares is the net asset value
per share (as described on page 36) determined after receipt of an order in
proper form by the Transfer Agent.
The Commerce Funds reserves the right to redeem accounts involuntarily if,
after sixty days' written notice to the shareowner, the account's net asset
value remains below a $500 minimum balance. Involuntary redemptions will not be
implemented if the value of your account falls below the minimum balance as a
result of market conditions.
HOW QUICKLY CAN I RECEIVE PROCEEDS FROM A SALE?
Ordinarily, redemption proceeds will be disbursed the next Business Day
following receipt of an order in proper form by the Transfer Agent. Payment must
be made within seven calendar days following redemption.
You can have your proceeds sent by federal wire to your bank checking or
money market account. Proceeds will normally be wired the Business Day after
your request to redeem shares is received in good order by the Transfer Agent.
Wiring of sales proceeds may be delayed one additional day if the Federal
Reserve Bank is not open on the day your wire is to be made. Your request to
wire proceeds is subject to the bank's wire charges.
34
<PAGE>
Fund shares must be paid in full in order for you to redeem them and
receive proceeds. If the shares you wish to sell were a recent purchase by check
or telephone, The Commerce Funds can delay the subsequent payment of sales
proceeds up to 15 days after the check or telephone payment is received. This
does not apply if Fund shares were purchased by federal wire.
WHAT IF I WANT TO REINVEST SALES PROCEEDS?
You may reinvest all or any portion of your redemption proceeds in shares
of any Fund within 60 days of your redemption without a sales charge. Shares
will be purchased at a price equal to the net asset value per share next
determined after the Transfer Agent receives a reinvestment order and payment in
proper form.
If you wish to use the Redemption Reinvestment Privilege, you must submit a
written reinvestment request to the Transfer Agent stating that you are eligible
to use the feature.
Generally, using the Redemption Reinvestment Privilege will not affect any
gain or loss realized on redemptions for federal income tax purposes. However,
if a redemption results in a loss, the reinvestment may result in the loss being
disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
As a Fund shareowner, you are entitled to any dividends and distributions
arising from net investment income and net realized capital gains.
The Short-Term Government and Bond Funds declare dividends daily and
distribute dividends on or about the last Business Day of the current month. The
Balanced and Growth Funds declare and distribute dividends quarterly. The
Aggressive Growth and International Equity Funds declare and distribute
dividends annually. Each Fund declares and distributes net realized capital
gains annually.
For purchases by check, shares of the Short-Term Government and Bond Funds
begin earning dividends and distributions on the next day after payment for the
shares is received by the Transfer Agent. In the case of the Balanced, Growth,
Aggressive Growth and International Equity Funds, if you are a shareowner of
record on the record date, you are eligible to receive such dividend or
distribution.
You Can Choose A Distribution Option for Dividends and Capital Gains:
(1) reinvest all dividend and capital gain distributions in additional
Fund shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Fund shares without a sales charge;
(3) receive all dividend and capital gain distributions in cash; or
(4) have all dividend and capital gain distributions deposited
directly into a designated checking account.
35
<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in the same Fund without a sales charge. For
your protection, if you elect to have distributions mailed to you which cannot
be delivered, they will be reinvested in the same Fund without a sales charge.
You may invest dividend or capital gain distributions from one Fund in
another Fund of The Commerce Funds. There is no sales charge on purchases made
through the Cross Reinvestment Privilege; however, both Fund accounts must be
established at the minimum initial investment requirement and have identical
account registration. Cross Reinvestment Privileges do not apply to the
Financial Square Treasury, Prime and Tax-Free Money Market Funds.
Your election to reinvest the distributions paid by a Fund in additional
shares of the Fund or any other Fund of The Commerce Funds will not affect the
tax treatment of such dividends and distributions, which will be treated as
received by the shareowner and then used to purchase shares of the Fund or
another Fund of The Commerce Funds.
To change your distribution option, contact The Commerce Funds Shareowner
Services at 1-800-305-2140 or write to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
The change will become effective after it is received and processed by the
Transfer Agent.
SHAREOWNER FEATURES AND PRIVILEGES
The Commerce Funds provides a variety of ways to make managing
your investments more convenient.
Some or all of the following features as well as others described in this
Prospectus may have different conditions imposed on them in addition to those
described in this Prospectus. Consult your investment representative or call our
toll-free service and information number, 1-800-305-2140 for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Commerce Funds makes available: (1) individual retirement accounts
("IRAs"), including IRAs set up under a Simplified Employee pension plan ("SEP-
IRAs"); (2) Keogh plans; (3) corporate retirement plans; (4) public employer
deferred compensation plans; and (5) profit sharing plans (including 401(k)
plans) and money-purchase plans.
Your investments grow tax deferred until withdrawal at retirement, and in
many cases the initial investment is tax deductible.
Information concerning these plans is available through The Commerce Funds
Shareowner Services or your investment representative.
36
<PAGE>
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
Investment in a Fund of $100 or more can be made from your checking account
automatically on the date you specify in any month you choose. The Automatic
Investment Feature is one way to use Dollar Cost Averaging to invest. Only
checking accounts at U.S. financial institutions which permit automatic
withdrawals through the Automated Clearing House are eligible. Check with your
bank or financial institution to determine eligibility.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
Dollar Cost Averaging involves investing a fixed dollar amount at regular
intervals. Because more shares are purchased during periods with lower share
prices and fewer shares are purchased when the price is higher, your average
cost per share may be reduced.
In order to be effective, Dollar Cost Averaging should be followed on a
regular basis. You should be aware, however, that shares bought using Dollar
Cost Averaging are made without regard to their price on the day of investment
or to market trends. In addition, while you may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if you ultimately redeem your shares at a
price that is lower than their purchase price. Dollar cost averaging does not
assure a profit or protect against a loss in a declining market. You can invest
through Dollar Cost Averaging on your own or through Automatic Investing.
To establish an Automatic Investment account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary information
on the account application or send a subsequent written request with an
appropriate signature guarantee.
You may change the amount of purchase or cancel this feature at any time by
calling The Commerce Funds Shareowner Services at 1-800-305-2140 or writing to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
Notification will be effective three Business Days following receipt. The
Commerce Funds may modify or terminate this feature at any time or charge a
service fee, although no such fee is currently contemplated.
CAN I EXCHANGE MY INVESTMENT FROM ONE COMMERCE FUND TO ANOTHER?
As a shareowner, you have the privilege of exchanging your shares for
shares of another Fund of The Commerce Funds. Exchanges may also be made to or
from the Financial Square Treasury, Prime and Tax-Free Money Market Funds. There
is no additional sales charge when exchanging shares.
You can exchange shares of one Fund for shares in another Fund within The
Commerce Funds family that may be legally sold in your state of residence by
writing or calling The Commerce Funds as described under "How To Sell Shares" on
page 42. The Exchange Privilege is automatic for all shareowners unless declined
on an account application. All telephone exchanges must be registered in the
same name(s) and with the same address as are registered in the Fund from which
the exchange is made. See the section
37
<PAGE>
below regarding telephone transactions for a description of The Commerce Funds'
policy regarding responsibility for telephone instructions. Shares Purchased by
check may not be exchanged until the check has cleared.
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 37. Before using this
feature, you should consider carefully the investment objective, policies, risks
and expenses of the acquired Fund, as described in such Fund's prospectus. You
can request a current Prospectus from your investment representative or by
calling The Commerce Funds Shareowner Services at 1-800-305-2140.
In addition to free automatic exchanges pursuant to the Automatic Exchange
feature discussed below, five free exchanges are permitted in each twelve-month
period. Additional exchanges may incur a $5 exchange fee.
The Commerce Funds reserves the right to reject any exchange request and
the Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification or termination of the Exchange
Privilege will be given to shareowners except where notice is not required under
the regulations of the SEC.
An exchange may result in a taxable gain or loss. Any sales charge paid on
the original purchase cannot be taken into account in determining such gain or
loss if the exchange occurs within ninety (90) days after the original purchase
of shares and no sales charge is imposed on such exchange.
CAN I HAVE EXCHANGES MADE AUTOMATICALLY?
You may request on your account application that a specified dollar amount
of shares at net asset value be automatically exchanged for shares of any other
Fund of The Commerce Funds. No sales charge is imposed on exchanges. These
automatic exchanges may be made on any one day of each month and are subject to
the following conditions: The minimum dollar amount for automatic exchanges must
be at least $250 per month. In addition, the value of the account in the
acquired Fund must equal or exceed the acquired Fund's minimum initial
investment requirement. The names, addresses and taxpayer identification number
for the shareowner accounts of the exchanged and acquired Funds must be
identical. You should consider the investment objective, policies, risks and
expenses of the acquired Fund, as described in such Fund's prospectus, before
establishing an automatic exchange into that Fund.
CAN I REINVEST DIVIDENDS FROM ONE COMMERCE FUND IN ANOTHER?
You may elect to have your dividends, capital gain distributions, or both
received from a non-retirement Fund account automatically invested in additional
shares of any other investment portfolio of The Commerce Funds in which you
currently maintain an open non-retirement account. To participate in this
program check the appropriate box and supply the necessary information on the
account application or in a subsequent written request.
Dividend reinvestments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
38
<PAGE>
The distribution must exceed $50 in order to use this feature. You should
consider carefully the investment objective, policies and applicable fees of the
acquired Fund before using this feature.
HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact The Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information. Share prices of
each Fund will be listed in the mutual funds pricing section of most daily
newspapers under The Commerce Funds.
CAN I MAKE TRANSACTIONS BY TELEPHONE?
You may authorize electronic transfers of money to make additional
investments in or redeem shares from an established account. The service may be
used like an "electronic check" to move money to or from your checking or money
market account and your Fund account by calling The Commerce Funds Shareowner
Services at 1-800-305-2140.
Telephone purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Proceeds from sales of shares will be deposited into your Commerce checking or
money market account generally two business days after the redemption request is
received. You may also request receipt of your redemption proceeds by check,
which will only be sent to the registered owner of your account and only to the
address of record. If you should experience difficulty in redeeming shares by
telephone (i.e., because of unusual market activity), you are urged to consider
redeeming your shares by mail or in person.
You should note that the Transfer Agent may act upon a telephone purchase
or redemption request from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Neither The
Commerce Funds nor any of its service contractors will be liable for any loss or
expense in acting upon telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine, The
Commerce Funds will use such procedures as are considered reasonable, including
recording those instructions and requesting information as to account
registration (such as the name in which the account is registered, the account
number, recent transactions in the account, or the account holder's tax
identification number, address or bank). To the extent that The Commerce Funds
fails to use reasonable procedures as a basis for its belief, it and/or its
service contractors may be liable for instructions that prove to be fraudulent
or unauthorized.
The Commerce Funds may modify this feature at any time or charge a service
fee upon notice to shareowners. No such fee is currently contemplated.
CAN I ARRANGE AUTOMATIC WITHDRAWALS?
If you are a shareowner with an account valued at $5,000 or more, you may
withdraw amounts in multiples of $100 or more from your account on a monthly,
quarterly, semi-annual or annual basis through the Automatic Withdrawal feature.
39
<PAGE>
At your option, monthly withdrawals may be made on either the first or
fifteenth day of the month and quarterly, semiannual and annual withdrawals will
be made on either the first or fifteenth day of the month(s) selected. To
participate in this plan, check the appropriate box and supply the necessary
information on the account application or in a subsequent written request.
Purchases of additional shares concurrently with withdrawals are ordinarily not
advantageous because of the sales charge imposed on the Funds. This feature may
be suspended should the value of your account fall below $500.
THE BUSINESS OF THE COMMERCE FUNDS
BOARD OF TRUSTEES
The business affairs of The Commerce Funds are managed under the general
supervision of the Board of Trustees. Information about the Trustees and
officers of The Commerce Funds is included in the Statement of Additional
Information.
EXPENSES
Except as set forth in the Statement of Additional information, each Fund
is responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to the Advisor, Administrator,
Custodian (defined below) and Transfer Agent, brokerage fees and commissions,
expenses associated with the Shareowner Services Plan, fees for the registration
or qualification of Fund shares under federal and state securities laws,
expenses of the organization of The Commerce Funds, taxes, interest, costs of
liability insurance, fidelity bonds, indemnification or contribution, any costs,
expenses or losses arising out of any liability of, or claim for damages or
other relief asserted against, The Commerce Funds for violation of any law,
legal, tax and auditing fees and expenses, expenses of preparing and printing
prospectuses, statements of additional information, proxy materials, reports and
notices and the printing and distributing of the same to the Funds' shareowners
and regulatory authorities, compensation and expenses of its Trustees, fees of
industry organizations such as the investment Company Institute and
extraordinary expenses incurred by The Commerce Funds.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of the advisory fees and/or reimburse expenses for the Short-
Term Government, Bond, Balanced, Growth and International Equity Funds during
the current fiscal year. The result of such fee waivers and expense
reimbursements will be to increase the performance of such Funds during the
periods for which they are made.
SERVICE PROVIDERS
-----------------
INVESTMENT ADVISOR
Commerce Bank, N.A. (St. Louis) and
Commerce Bank, N.A. (Kansas City)
(the "Advisor")
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as Advisor for the Funds, selecting investments and making purchases and sale
orders for securities in each Fund's portfolio.
40
<PAGE>
SUB-ADVISOR
Rowe Price-Fleming International, Inc.
("Price-Fleming" or the "Sub-Advisor")
Rowe Price-Fleming International, Inc. serves as Sub-Advisor to the
International Equity Fund. Price-Fleming's U.S. office is located at 100 East
Pratt Street, Baltimore, Maryland.
ADMINISTRATOR
Goldman Sachs Asset Management
("GSAM" or the "Administrator")
GSAM serves as Administrator of each of the Funds. GSAM is located at One
New York Plaza, New York, New York.
DISTRIBUTOR
Goldman, Sachs & Co.
("Goldman" or the "Distributor")
Fund shares are sold on a continuous basis by Goldman, Sachs & Co. Goldman,
Sachs & Co. is located at 85 Broad Street, New York, New York.
TRANSFER AGENT
State Street Bank and Trust Company
(the "Transfer Agent")
State Street Bank and Trust Company ("State Street Bank") has delegated its
responsibilities to its indirect subsidiary, National Financial Data Services,
Inc. ("NFDS"), which maintains the account records of all shareowners in the
Funds and administers the distribution of income earned as a result of investing
in the Funds. State Street Bank and Trust Company is located at 225 Franklin
Street, Boston, Massachusetts. NFDS is located at 1004 Baltimore Street, Kansas
City, Missouri.
CUSTODIAN
State Street Bank and Trust Company
(the "Custodian")
State Street Bank and Trust Company also serves as the Custodian of each of
the Funds.
More about the Advisor
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to each Fund. Each is a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank, N.A.
(St. Louis) is located at 8000 Forsyth Boulevard, St. Louis, Missouri, and
Commerce Bank, N.A. (Kansas City) is located at 922 Walnut Street, Kansas City,
Missouri. Although neither Commerce Bank, N.A. (St. Louis) nor Commerce Bank,
N.A. (Kansas City) has previously served as
41
<PAGE>
investment advisor to a registered investment company, each (or its predecessor
organizations) has provided investment management services to private and public
pension funds, endowments and foundations since 1946 and to individuals since
1906. As of July 31, 1994, Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A.
(Kansas City) and their affiliates had $4.2 billion in assets under management.
In the Advisory Agreement with The Commerce Funds, the Advisor has agreed
to manage each Fund's investments and to be responsible for, place orders for,
and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee at the annual rate
of 0.50% of the average daily net assets of the Short-Term Government and Bond
Funds, 1.00% of the average daily net assets of the Balanced Fund, 0.75% of the
average daily net assets of the Growth Fund and Aggressive Growth Funds, and
1.50% of the average daily net assets of the International Equity Fund. The
Advisor may agree to voluntarily waive its fees in whole or in part with respect
to any particular Fund. As stated in the "Summary of Expenses," for the current
fiscal year the Advisor intends to voluntarily waive a portion of the investment
advisory fees otherwise payable by the Short-Term Government, Balanced and
International Equity Funds so that the advisory fees payable by such Funds will
be 0.30%, 0.75% and 0.90% of the average daily net assets of each respective
Fund. Although the advisory fee rates payable by the Balanced, Growth,
Aggressive Growth and International Equity Funds are higher than the rates
payable by most mutual funds, the Board of Trustees believes they are comparable
in light of the services received to the rates payable by other balanced, equity
and international equity funds.
Scott M. Colbert, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Short-Term Government and Bond
Funds. Mr. Colbert joined the Investment Management Group of Commerce Bank, N.A.
(St. Louis) in 1993. He served as a portfolio manager for Armco Investment
Management, Inc. from 1987-1993, managing fixed-income investments for employee
benefit, insurance and endowment funds.
Joseph C. Williams III, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Growth Fund's investments. Mr.
Williams joined Commerce Bank, N.A. (Kansas City) in 1975 and became a member of
its Investment Management Group in 1977.
Joseph C. Williams III and Scott M. Colbert are the persons primarily
responsible for the day-to-day management of the equity and fixed-income
portions, respectively, of the Balanced Fund's investments.
Paul D. Cox, CFA, CIC and Vice President, is the person primarily
responsible for the day-to-day management of the Aggressive Growth Fund. Mr. Cox
joined the Investment Management Group of Commerce Bank, N.A. (St. Louis) in
1989. Mr. Cox came to Commerce Bank from Robert Murray Partners, Inc. where he
was a securities analyst and portfolio manager.
The Advisory Agreement authorizes the Advisor to engage a sub-advisor to
assist it in the performance of its services. Pursuant to such authorization,
the Advisor has appointed Rowe Price-Fleming International, Inc. as Sub-Advisor
to the International Equity Fund.
More About Rowe Price-Fleming International, Inc.
Price-Fleming, as sub-advisor, manages the investment assets of the
International Equity Fund. Price-Fleming was incorporated in Maryland in 1979 as
a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price") and
Robert Fleming Holdings Limited (Flemings). Flemings is a diversified investment
42
<PAGE>
organization which participates in a global network of regional investment
offices in New York, London, Zurich, Geneva, Tokyo, Hong Kong, Manila, Kuala
Lumpur, South Korea, and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor of the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1993, T. Rowe
Price and its affiliates managed more than $50 billion of assets and Flemings
managed the U.S. equivalent of approximately $57 billion of assets.
The common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary
of T. Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming
Group Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings
and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the board of directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
The International Equity Fund has an investment advisory group that has
day-to-day responsibility for managing the International Equity Fund and
developing and executing the Fund's investment program. The Fund's advisory
group is composed of the following members: Martin G. Wade, Christopher D.
Alderson, Peter B. Askew, Richard J. Bruce, Mark J. T. Edwards, John R. Ford,
Robert C. Howe, James B. M. Seddon, Benedict R. F. Thomas and David J. L.
Warren.
Martin Wade joined Price-Fleming in 1979 and has 25 years of experience
with Fleming Group (Fleming Group includes Flemings and/or Jardine Fleming) in
research, client service and investment management. Peter Askew joined Price-
Fleming in 1988 and has 19 years of experience managing multicurrency fixed
income portfolios.
Christopher Alderson joined Price-Fleming in 1988 and has eight years of
experience with the Fleming Group in research and portfolio management. Richard
Bruce joined Price-Fleming in 1991 and has six years of experience in investment
management with the Fleming Group in Tokyo. Mark Edwards joined Price-Fleming in
1986 and has thirteen years of experience in financial analysis. John Ford
joined Price-Fleming in 1982 and has fourteen years of experience with Fleming
Group in research and portfolio management. Robert Howe joined Price-Fleming in
1986 and has thirteen years of experience in economic research, company research
and portfolio management. James Seddon joined Price-Fleming in 1987 and has
seven years of experience in investment management. Benedict Thomas joined
Price-Fleming in 1988 and has five years of portfolio management experience.
David Warren joined Price-Fleming in 1984 and has fourteen years of experience
in equity research, fixed income research and portfolio management.
The Board of Trustees of The Commerce Funds has authorized Price-Fleming to
utilize affiliates of Flemings and Jardine Fleming in the capacity of broker in
connection with the execution of the Fund's portfolio transactions if Price-
Fleming believes that doing so would result in an economic advantage (in the
form of lower execution costs or otherwise) being obtained by the Fund.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Advisor will pay the Sub-Advisor a monthly management fee at an
annual rate of 0.75% of the first $20 million of average daily net assets; 0.60%
of the next $30 million of average daily net assets; and 0.50% of average daily
net assets above $50 million.
43
<PAGE>
More About The Administrator
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is
a separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes The
Commerce Funds with office facilities and is responsible for ordinary clerical,
recordkeeping and bookkeeping services required to be maintained by The Commerce
Funds (excluding those maintained by The Commerce Funds' Custodian, Transfer
Agent, Advisor and any Sub-Advisor), preparation and filing of documents
required to comply with federal and state securities laws, supervising the
activities of the Custodian and Transfer Agent, providing assistance in
connection with meetings of the Board of Trustees and shareowners and other
administrative services necessary to conduct the business of The Commerce Funds.
For these services and facilities, GSAM is entitled to receive a monthly fee
from each Fund at an annual rate of 0.15% of its average daily net assets.
Service Organizations
Pursuant to a shareowner servicing plan ("Shareowner Servicing Plan")
adopted by its Board of Trustees, The Commerce Funds may enter into agreements
("Shareowner Servicing 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 their customers who beneficially own shares.
Such services, which are described more fully in the Statement of Additional
information, may include processing purchase and redemption requests from
customers, placing net purchase and redemption orders with the Distributor,
processing, among other things, distribution payments from The Commerce Funds,
providing necessary personnel and facilities to establish and maintain customer
accounts and records and providing information periodically to customers showing
their positions in Fund shares.
For these services, the Service Organizations will be entitled to receive
fees from a Fund at an annual rate of up to 0.25% of the average daily net asset
value of Fund shares held by such Service Organizations for the benefit of their
customers. The Service Organizations are required to provide their customers
with a schedule of any credits, fees or other conditions that may be applicable
to the investment of customer assets in Fund shares.
Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into Shareowner
Servicing Agreements.
44
<PAGE>
TAX INFORMATION
As with any investment you should consider the tax implications of an
investment in a Fund. You should consult your tax advisor with specific
reference to your own tax situation.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send written
notices to shareowners annually regarding the tax status of distributions made
by the Fund. You should save your regular account statements because they
contain information you will need to calculate your capital gains or losses upon
your sale or exchange of shares in a Fund.
Federal Taxes. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself is not required to pay federal income taxes.
To satisfy various requirements in the Code, each Fund expects to
distribute virtually all its net income each year. Dividends derived from Fund
income other than net capital gains (the excess, if any, of net long-term
capital gains over net short-term capital losses) will be taxable to you as
ordinary income, whether the dividends are paid in cash or reinvested in Fund
shares.
Dividends derived from Fund net capital gains ("capital gain dividends")
will be taxable to you as a long-term capital gain regardless of how long you
hold Fund shares, whether such gains were recognized by the Fund before you
acquired shares of the Fund, and whether the dividends are paid in cash or
reinvested in Fund shares.
If you are considering buying shares of a Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for tax purposes to have been paid by
the Fund and received by you in that year, so long as the dividends are actually
paid on or before January 31 of the following year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the price at which the
shares are sold or exchanged and the price or prices at which the shares were
originally purchased for cash or under the dividend reinvestment plan. If you
hold shares for six months or less and during that time receive a capital gain
dividend on those shares, any loss realized on the sale or exchange of those
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend.
Dividends and certain interest income earned by the International Equity
Fund from foreign securities may be subject to foreign withholding taxes or
other income taxes. The International Equity Fund may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it as paid by its
shareowners. Should the Fund make that election, a pro rata portion of such
foreign taxes paid by the Fund will constitute income to you (in addition to
taxable dividends actually received by you), and you may be entitled to claim an
offsetting tax credit or itemized deduction for that amount of foreign taxes.
45
<PAGE>
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided an
incorrect Social Security Number or Taxpayer Identification Number or no number
at all, (ii) who is subject to withholding by the Internal Revenue Service for
failure to properly include on his return payments of interest or dividends, or
(iii) who has failed to certify to the Fund, when required to do so, that he is
not subject to backup withholding or that he is an "exempt recipient."
Other State and Local Taxes. You should consult your tax advisor regarding
state and local tax consequences which may differ from the federal tax
consequences described above.
HOW PERFORMANCE IS MEASURED
A Fund's performance may be quoted in terms of average annual total return,
aggregate total return and yield as discussed below. Performance information is
historical and is not intended to indicate future results.
From time to time, total return, aggregate total return and yield data for
the Funds may be quoted in advertisements. The performance of each Fund may be
compared to those of other mutual funds with similar investment objectives and
to stock, bond and other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a Fund may be
compared to data prepared by Lipper Analytical Services, Inc., Mutual Fund
Forecaster, Wiesenberger Investment Companies Services, Morningstar or CDA
Investment Technologies, Inc., as well as to indices such as the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Lehman Brothers
Bond Indexes, the Wilshire 5000 Equity Indexes or the Consumer Price Index.
Performance data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, Morningstar, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature, may also be used
in comparing the performance of a Fund.
Performance is based on historical earnings and is not intended to indicate
future performance. The investment return and principal value of an investment
in a Fund will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed yield
for a stated period of time. Changes in the net asset value should be considered
in ascertaining the total return to shareowners for a given period. Total return
data should also be considered in light of the risks associated with a Fund's
composition, quality, operating expenses and market conditions. Any fees charged
by The Commerce Funds directly to its customers in connection with investments
in the Funds will not be included in the Funds' calculations of performance
data. The methods used to compute the Fund's yield and total return are
described in more detail in the Statement of Additional information.
The Funds calculate their total return on an "average annual total return"
basis for various periods from the date a Fund commences investment operations
and for other periods as permitted under SEC rules. Average annual total return
reflects the average annual percentage change in value of an investment over the
measuring period. Total return may also be calculated on an aggregate total
return basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return reflect changes in the price of a Fund's shares and
assume that dividend and capital gain distributions are reinvested. When
considering average total return figures for periods longer
46
<PAGE>
than one year, you should note that the annual total return for any one year may
be more or less than the average for the entire period. A Fund may also
advertise its total return on an aggregate, year-by-year or other basis for
various specified periods through charts, graphs, schedules or quotations.
The yield of the Short-Term Government and Bond Funds are Computed based on
the Fund's net income during a specified 30-day (or one month) period. More
specifically, a Fund's yield is computed by dividing its per share net income
during the relevant period by the per share maximum public offering price on the
last day of the period and annualizing the result on a semiannual basis.
Periodically, each Fund's total return (calculated on an average annual
total return and/or an aggregate total return basis for various periods) and
yield may be quoted in advertisements or in communications to you. Both methods
of calculating total return reflect the sales charge imposed by the Funds and
assume that dividend and capital gain distributions made by the Funds during the
period are reinvested in Fund shares. The Funds may also advertise quotations of
total return and yield that do not reflect the sales charge imposed on the
purchase of Fund shares. Quotations which do not reflect sales charges will, of
course, be higher than quotations which do reflect sales charges.
The Bond and Growth Funds will be the successors to pooled collective
investment funds ("Pooled Funds"), managed by Commerce Bank, N.A. (Kansas City).
Substantially all of the assets of the Pooled Funds in question will be
transferred to the respective Fund as soon as is practicable following the
Funds' commencement of operations. Set forth below are certain performance data
for the predecessor Pooled Funds and other similarly managed pooled funds
managed by Commerce Bank, N.A. (Kansas City). This performance information is
deemed relevant since these funds are managed using substantially the same
investment objectives, policies, restrictions and portfolio managers as those to
be followed by the corresponding Fund and take into consideration the expense
ratios expected to be incurred by the respective Funds. However, this
performance data is not necessarily indicative of the future performance of the
Fund.
47
<PAGE>
BOND FUND(1)
POOLED INVESTMENT FUNDS AVERAGE ANNUAL TOTAL RETURNS
FOR VARIOUS PERIODS ENDED 9/30/94
<TABLE>
<CAPTION>
PREDECESSORS TO PREDECESSORS TO
THE BOND FUND(2) THE BOND FUND(3)
(ASSUMING (ASSUMING
SALES CHARGES) NO SALES CHARGES)
---------------- -----------------
<S> <C> <C>
One Year..................................... -7.78% -4.43%
Five Years................................... 5.91% 6.67%
Ten Years.................................... 7.89% 8.28%
</TABLE>
- --------
(1) The pooled funds included in this calculation include the predecessor
collective investment fund, The Employee Benefit Bond Fund, which is a
collective fund maintained by Commerce Bank, N.A. (Kansas City) for
institutional fiduciary accounts and the Commerce Personal Bond Fund which
is a common trust fund managed by Commerce Bank, N.A. (Kansas City) for
personal trust fiduciary accounts.
(2) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into
account annual operating expenses of 0.88% of average daily net assets,
which are the projected expenses (after fee waivers and reimbursements) for
the Bond Fund, and assuming a sales charge of 3.50%.
(3) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into
account annual operating expenses of 0.88% of average daily net assets,
which are the projected expenses (after fee waivers and reimbursements) for
the Bond Fund, but assuming full waiver of the sales charge.
GROWTH FUND(1)
POOLED INVESTMENT FUNDS AVERAGE ANNUAL TOTAL RETURNS
FOR VARIOUS PERIODS ENDED 9/30/94
<TABLE>
<CAPTION>
PREDECESSORS TO PREDECESSORS TO
THE GROWTH THE GROWTH
FUND(2) (ASSUMING FUND(3) (ASSUMING
SALES CHARGES) NO SALES CHARGES)
----------------- -----------------
<S> <C> <C>
One Year.................................... -4.90% -1.44%
Five Years.................................. 8.36% 9.14%
Ten Years................................... 12.04% 12.44%
</TABLE>
- --------
(1) The pooled funds included in this calculation include the predecessor
collective investment fund, The Employee Benefit Stock Fund, which is a
collective fund maintained by Commerce Bank, N.A. (Kansas City) for
institutional fiduciary accounts and the Commerce Personal Stock Fund which
is a common trust fund managed by Commerce Bank, N.A. (Kansas City) for
personal trust fiduciary accounts.
(2) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into
account annual operating expenses of 1.13% of average daily net assets,
which are the projected expenses (after fee waivers and reimbursements) for
the Growth Fund, and assuming a sales charge of 3.50%.
(3) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into
account annual operating expenses of 1.13% of average daily net assets,
which are the projected expenses (after fee waivers and reimbursements) for
the Growth Fund, but assuming full waiver of the sales charge.
48
<PAGE>
OTHER INFORMATION
THE COMMERCE FUNDS IS A DELAWARE BUSINESS TRUST THAT WAS ORGANIZED ON
FEBRUARY 7, 1994.
ABOUT THE COMMERCE FUNDS
THE COMMERCE FUNDS' TRUST INSTRUMENT AUTHORIZES THE BOARD OF TRUSTEES TO
ISSUE AN UNLIMITED NUMBER OF FULL AND FRACTIONAL SHARES OF BENEFICIAL INTEREST,
WITHOUT PAR VALUE, OF ONE OR MORE SERIES OF SHARES (OR CLASSES THEREOF)
REPRESENTING INTERESTS IN EIGHT DIFFERENT FUNDS AND SUCH OTHER FUNDS AS THE
TRUSTEES MAY FROM TIME TO TIME CREATE AND ESTABLISH.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowners shall be paid solely out of the funds
and property of such series of The Commerce Funds.
VOTING RIGHTS
SHAREOWNERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, except when required by the
1940 Act or when the Board of Trustees has determined a matter effects the
interests of more than one series, all shares shall be voted separately by
individual series. The Board of 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.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a shareowners
meeting. Such meetings will be held when requested by the shareowners of 10% or
more of The Commerce Funds' outstanding shares of beneficial interest. The
Commerce Funds will assist in shareowner communications in such matters to the
extent required by law and The Commerce Funds' undertaking with the Securities
and Exchange Commission. Voting rights are not cumulative, and accordingly the
owners of more than 50% of the aggregate shares of The Commerce Funds may elect
all of the Trustees irrespective of the vote of the other shareowners.
As of the date immediately preceding the public offering of shares, Goldman,
Sachs & Co., the Distributor, owned all of the outstanding shares of each Fund.
It is contemplated that the public offering of the shares of the Funds will
reduce the Distributor's holdings to less than 5% of the total shares
outstanding.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of The Commerce Funds or of a particular Fund means the
affirmative vote of the holders of the lesser of (a) more than 50% of the
outstanding shares of The Commerce Funds or such Fund, or (b) 67% or more of
the shares of The Commerce Funds or such Fund present at a meeting if more than
50% of the outstanding shares of The Commerce Fund or such Fund are represented
at a meeting in person or by proxy.
49
<PAGE>
Shareowner Reports
Shareowners of record will be provided each year with a semi-annual report
showing each Fund's investments and other information as of April 30 and, after
the close of The Commerce Funds' fiscal year on October 31, with an annual
report containing audited financial statements.
Inquiries
We welcome any inquiries you may have regarding The Commerce Funds. Please
consult your investment representative or call our toll-free service and
information number at 1-800-305-2140.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMMERCE FUNDS OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMMERCE FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
50
<PAGE>
Not to be used for Individual Retirement Accounts- Account #_______________
For an IRA application,
call Shareowner Services at 1-800-305-2140 Order #_________________
---------------
commerce funds (TM)
---------------
Account Application Form
- --------------------------------------------------------------------------------
This Account Application The Commerce Funds
Form Should be Forwarded c/o Shareowner Services
Promptly to: P.O. Box 16931
St. Louis, MO 63105
For additional information call 1-800-305-2140
Date:_________________
================================================================================
1. ACCOUNT REGISTRATION Please Print
INDIVIDUAL
---------------------------------------------------
First Name Initial Last Name
----------------- --------------------------------
(Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants
with Right of Survivorship" unless otherwise
specified.
---------------------------------------------------
First Name Initial Last Name
----------------- --------------------------------
(Birthdate) SS# or Tax ID#
---------------------------------------------------
First Name Initial Last Name
----------------- --------------------------------
(Birthdate) SS# or Tax ID#
GIFT TO MINORS
---------------------------------------------------
Custodian's Name (Only one can be named)
-------------------------------- -----------------
Minor's Name (Only one) SS#
Under the _______________________________ (State
of Residence) Uniform Gift to Minors Act
Additional documentation CORPORATION, TRUST, OR OTHER ENTITY
may be required
---------------------------------------------------
Name of Corporation, Trust or other Non-Person
Entity
---------------------------------
Tax ID#
---------------------------------------------------
Attention
---------------------------------------------------
Date of Trust Instrument:
---------------------------------------------------
Name of Beneficiary (If to be included in the
registration)
---------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
================================================================================
2. Mailing Address ( )
------------------------------- ------------------
Street Daytime Phone
---------------------------------------------------
City State Zip Code
<PAGE>
================================================================================
3. To Purchase Shares Check appropriate boxes:
$2000 Minimum (except [ ]Short Term Government $_________
pursuant to the Amount
Automatic Investment [ ]Aggressive Growth $_________
Plan - Minimum is Amount
$1000) [ ]Bond $_________
Amount
[ ]International Equity $_________
Amount
[ ]Balanced (Employee
Benefit Plans only) $_________
Amount
[ ]National Tax-Free
Bond $_________
Amount
[ ]Growth $_________
Amount
[ ]Missouri Tax-Free
Bond $_________
Amount
[ ]A check (payable to "The Commerce Funds") for
$_________________ is enclosed.
[ ]I/we certify that I/we am/are an entity exempt
from the sales charge according to the "How To
Buy Shares" section in the Prospectus and I/we
am/are, therefore, entitled to purchase Fund
shares at net asset value. By checking this box,
the undersigned agrees that I/we will notify
Commerce Funds Shareowner Services at or prior
to purchase if I/we am/are no longer in one of
the categories of eligible investors.
Reason for exemption___________________________
_______________________________________________.
================================================================================
4. Dividend and See "Dividend and Distribution Policies" in the
Distribution Options Prospectus
Choose how you wish to receive dividends. If no
boxes are checked, Option A will be assigned.
A.[ ] Reinvest all dividends and capital gains.
B.[ ] Receive dividends in cash and reinvest
capital gains (Complete cash dividend section
below.)
C.[ ] Receive all dividends and capital gains in
cash (Complete cash dividend section below.)
D.[ ] All dividends and capital gains reinvested in
another Commerce Fund account. (See
Prospectus regarding limitations on this
privilege.)
Fund Name_____________________________
Account Number________________________
Please send cash dividends to:
[ ]Account registration address.
[ ]Deposit to bank (attach voided check/deposit
slip)
[ ]Check to special payee as follows:
(SIGNATURE GUARANTEE required. See Section 13 of
this Form.)
Name of Payee_____________________________________
Account No. (if applicable)_______________________
Street Address____________________________________
City______________________________________________
State___________________ Zip_____________________
================================================================================
5. Right of Accumulation See "How To Buy Shares" in the Prospectus
Cumulative quantity discounts are applicable if
a shareowner's current value of existing shares
of a Fund alone or in combination with shares of
any other Fund described in the Prospectus on
which a sales charge was paid, total the
requisite amount for receiving a discount
($100,000 minimum) as described in the
accompanying Prospectus. Below are listed all
the accounts (account name, Fund and number)
which should be aggregated for a right of
accumulation.
Name___________________________
Fund___________________________
Acct. No.______________________
Name___________________________
Fund___________________________
Acct. No.______________________
Name___________________________
Fund___________________________
Acct. No.______________________
================================================================================
6. Letter of Intent See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or
in combination with shares of any other Fund, on
which a sales charge was paid, described in the
Prospectus which qualify for a quantity discount as
described in the accompanying Prospectus, in an
amount that will equal or exceed:
[ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000
I/we agree to the Letter of Intent and Escrow
Agreement described in the accompanying Prospectus
under "How to Buy Shares--Letter of Intent" and
incorporated by reference herein.
<PAGE>
================================================================================
7. Automatic Investment See "What is Dollar Cost Averaging and How Can I
Plan (Attach voided Implement It?" in the Prospectus
check or deposit slip)
Beginning on the day of these months:
J F M A M J J A S O N D (circle all months that
apply), I/We authorize State Street Bank (the
custodian for a Fund) to debit the amount requested
below from my/our bank account for investment in a
Fund. I/We understand that my/our participation in
the Automatic Investment Plan is subject to the
terms and conditions of such plan as amended from
time to time.
________________________________________________
Amount of each monthly investment (minimum $100)
________________________________________________
Name of Fund
________________________________________________
Amount of each monthly investment (minimum $100)
________________________________________________
Name of Fund
________________________________________________
Authorized Signature (as shown on bank records)
________________________________________________
Authorized Signature (if joint bank account both
sign)
================================================================================
8. Telephone Purchase/ See "How To Buy Shares" or "How To Sell Shares"
Redemption (Attach in the Prospectus
voided check or
deposit slip) [ ]The Commerce Funds and its agent is hereby
authorized to honor telephone, telegraphic, or
other instructions, without signature guarantee,
from any person for the redemption of shares for
the above account, without an obligation on
behalf of The Commerce Funds or its agent, to
verify that such person is the shareowner of
record or authorized to give purchase/redemption
instructions, provided proceeds are sent by
federal wire (minimum $1,000) or electronic
funds transfer to/from the bank account
indicated on your voided check or deposit slip
or mailed to the account registration address.
Neither a Fund nor its agent shall be liable for
telephone purchases or redemptions or for
payments made to any unauthorized account for
instructions reasonably believed to be genuine.
The Commerce Funds will employ reasonable
procedures to confirm that such instructions
given are genuine.
================================================================================
9. Telephone Exchange See "Can I Exchange My Investment From One
Commerce Fund To Another?" in the Prospectus
Exchange Privilege (you will have this privilege
unless declined)
[ ]I/We DO NOT wish to authorize telephone
exchanges.
================================================================================
10. Automatic Exchanges See "Can I Have Exchanges Made Automatically?"
in the Prospectus
The originating Fund's balance must be at least
$2,000 after the exchange and the receiving Fund's
minimum investment must be met. Exchanges will take
place each month after such exchanges commence
until terminated.
I/We hereby authorize automatic exchanges of
$_____________ (exact dollars - $250 minimum) into
my/our identically registered account:
Exchange from ____________________________________
(Name of Fund)
to ____________________________________
(Name of Fund)
Account No. (if known)____________________________
Please make exchanges on the day beginning
the month of _____________________.
================================================================================
11. Duplicate Mailings [ ]Check the box if you would like duplicate
confirmations/statements sent to another
address:
________________________________________________
Name
________________________________________________
Street Address City
________________________________________________
State Zip
<PAGE>
================================================================================
12. Automatic Minimum account balance must be $5,000. Withdrawal
Withdrawal Plan minimum is $100.
Check One: [ ] Monthly [ ] Quarterly
[ ] Semi-Annual [ ] Annual
Please make payments via (check one) [ ]check
[ ]ACH (Bank must be ACH affiliated. Attach voided
check). Payments made via check are withdrawn from
your account on or about the 1st or 15th of a month
for monthly withdrawals or the 15th of the month
for quarterly/semi-annual/annual withdrawals. (I
understand that I may change the date of
redemption, via ACH, or the amount at any time in
writing to the Fund at the address stated above.)
If withdrawal payments are to be made via ACH
(attach voided check/deposit slip)
Please withdraw $________________ from my account
on the ___________ of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered
owner. SIGNATURE GUARANTEE required. (See Section
13 of this Form.)
________________________________________________
Name of check recipient Address
________________________________________________
City State Zip
================================================================================
13. Taxpayer ID 1) The number shown on this Account Application
Certification Form is my/our correct Taxpayer Identification
and Signature number, and 2) I/we am/are not subject to backup
Authorization withholding because (a) I/we am/are exempt from
backup withholding, or (b) I/we have not been
notified by the Internal Revenue Service (IRS) that
I/we am/are subject to backup withholding as a
result of a failure to report all interest or
dividends, or (c) the IRS has notified me/us that
I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject
to federal backup withholding because of under
reporting interest or dividends on your federal tax
return or if you have not been notified by the IRS
that you are no longer subject to backup
withholding.
I/we further certify that I/we am/are neither a
citizen nor a resident of the United States for the
purpose of the Internal Revenue Code. I/we am/are a
resident of ___________________________________.
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT
IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS
MADE TO YOU.
By checking only the appropriate box and signing
below, I/we certify under penalties of perjury
that:
[ ]I/we do not have a taxpayer identification
number, but I/we have applied for or intend
to apply for one. I/we understand that the
required 31% withholding may apply before
I/we provide such number and certifications,
which should be provided within 60 days.
or [ ]I/we am/are an exempt recipient.
or [ ]I/we am/are neither a citizen nor a resident
of the United States for the purpose of the
Internal Revenue Code. I/we am/are a resident
of _______________________________.
Permanent Foreign Address:
___________________________________________
___________________________________________
___________________________________________
================================================================================
By the execution of this Account Application Form,
the undersigned represents and warrants that it has
the full right, power and authority to make the
investment applied for pursuant to this Form and is
acting for itself or in some fiduciary capacity in
making such investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED
THE SAME.
Sign Here:
___________________________________________________
Signature
___________________________________________________
Name (print) and Title
___________________________________________________
Signature
___________________________________________________
Name (print) and Title
SIGNATURE GUARANTEE REQUIRED ONLY IF A SPECIAL
PAYEE/ADDRESS IS DESIGNATED UNDER ITEM #'S 4 AND
12. SEE "HOW TO SELL SHARES" IN THE PROSPECTUS.
___________________________________________________
Signature Guarantee (if required)
<PAGE>
================================================================================
14. For Dealer Only Investment dealer's signature is required for
Automatic Withdrawal Plan or Letter of Intent. If
an Automatic Withdrawal Plan is being opened, we
believe that the amount to be withdrawn is
reasonable in light of the investor's circumstances
and we recommend establishment of the account.
___________________________________________________
Branch Office Location
___________________________________________________
Branch Number/Branch Phone
___________________________________________________
Reg. Rep. Number Reg. Rep.'s Name
___________________________________________________
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read the disclosure
statement and has been told and understands that:
. shares of the Funds are not bank 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 company or its affiliates, or any other
bank
. are not federally insured or guaranteed by the U.S. Government, Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other
government agency
. investment in the Funds involves investment risks, including possible loss of
the principal amount invested
. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve as
the investment advisor to the Funds and receive compensation for such services
as disclosed in the current prospectus
. sales charges may apply.
Dated:____________________________ __________________________________
Signature
__________________________________
Signature
<PAGE>
[ARTWORK APPEARS HERE]
<PAGE>
[ARTWORK APPEARS HERE]
<PAGE>
THE COMMERCE FUNDS
National Tax-Free Bond Fund
Missouri Tax-Free Bond Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Part A Item Number Prospectus Caption
- ---------------------------- ------------------
<S> <C>
1. Cover Page...................................... Cover Page
2. Synopsis........................................ Summary of Expenses
3. Condensed Financial Information................. Financial Highlights
4. General Description of Registrant............... Cover Page; Investment
Objectives and Policies; The
Business of The Commerce
Funds; Other Information
5. Management of the Fund.......................... The Business of The Commerce
Funds; How to Buy Shares; How
to Sell Shares
5A. Management's Discussion of Fund Performance..... Not Applicable
6. Capital Stock and Other Securities.............. How to Buy Shares; How to Sell
Shares; Dividend and Distribution
Policies; Tax Information; How
Are Shares Priced?
7. Purchase of Securities Being Offered............ How to Buy Shares; How to Sell
Shares
8. Redemption or Repurchase........................ How to Sell Shares
9. Pending Legal Proceedings....................... Not Applicable
</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 Fund's 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 front 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>
--------------------------------------
COMMERCE FUNDS(TM)
--------------------------------------
The National Tax-Free Bond Fund
The Missouri Tax-Free Bond Fund
November 15, 1994
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"). The
Commerce Funds currently consists of eight investment portfolios, each of which
has a separate pool of assets with separate investment objectives and policies.
However, only the National Tax-Free Bond and Missouri Tax-Free Bond Funds
(individually, a "Fund" and collectively, the "Funds") are offered by this
Prospectus. Under the 1940 Act, the National Tax-Free Bond Fund is classified as
a diversified investment portfolio and the Missouri Tax-Free Bond Fund is
classified as a non-diversified investment portfolio.
The National Tax-Free Bond Fund seeks current income exempt from federal income
tax consistent with the preservation of capital. The Fund pursues this objective
through investment in a diversified portfolio of investment grade Municipal
Obligations.
The Missouri Tax-Free Bond Fund seeks current income exempt from federal, and to
the extent possible, from Missouri income taxes, as is consistent with
preservation of capital. The Fund pursues this objective through investment
primarily in Missouri Obligations.
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City),
serve as investment advisor to the Funds (together, the "Advisor").
This Prospectus contains information you should know about the Funds before
you invest. Please read it carefully and keep it for your future reference. It
contains your Shareowner Guide and a description of shareowner features. A
Statement of Additional Information (dated November 9, 1994, as revised November
15, 1994) contains additional information about the Funds. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. The Statement of
Additional Information, as it may be amended from time to time, is available
without charge by writing to The Commerce Funds at P.O. Box 16931, St. Louis, MO
63105 or by calling 1-800-305-2140.
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November 15, 1994
<PAGE>
TABLE OF CONTENTS
SUMMARY OF EXPENSES........................................................ 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 6
National Tax-Free Bond Fund........................................... 6
Missouri Tax-Free Bond Fund........................................... 7
ADDITIONAL RISK CONSIDERATIONS............................................. 8
INVESTMENT RESTRICTIONS.................................................... 9
OTHER INVESTMENT PRACTICES................................................. 10
SHAREOWNER GUIDE........................................................... 21
HOW TO BUY SHARES..................................................... 21
What Is My Minimum Investment For Each Fund?..................... 21
How Are Shares Priced?........................................... 21
How Can I Buy Shares............................................. 25
What Price Will I Receive When I Buy Shares?..................... 27
What Else Should I Know About Buying Shares?..................... 27
HOW TO SELL SHARES.................................................... 27
How Do I Sell My Shares?......................................... 27
What Price Will I Receive For Shares I Want To Sell?............. 29
How Quickly Can I Receive Proceeds From A Sale?.................. 29
What If I Want To Reinvest Sales Proceeds?....................... 30
DIVIDEND AND DISTRIBUTION POLICIES.................................... 30
SHAREOWNER FEATURES AND PRIVILEGES.................................... 32
Can I Make Regular Investments To A Fund Automatically?.......... 32
What Is Dollar Cost Averaging And How Can I Implement It?........ 32
Can I Exchange My Investment From One Commerce Fund To Another... 33
Can I Have Exchanges Made Automatically?......................... 34
Can I Re-Invest Dividends From One Commerce Fund In Another?..... 34
How Do I Obtain Other Information About My Account?.............. 35
Can I Make Transactions By Telephone?............................ 36
Can I Arrange Automatic Withdrawals?............................. 36
THE BUSINESS OF THE COMMERCE FUNDS......................................... 37
Board Of Trustees..................................................... 37
Expenses.............................................................. 37
Service Providers..................................................... 38
TAX INFORMATION............................................................ 41
HOW PERFORMANCE IS MEASURED................................................ 43
OTHER INFORMATION.......................................................... 46
ACCOUNT APPLICATION FORM
2
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund.
Shareowner Transaction Expenses are charges you pay when buying or selling
shares. Annual Operating Expenses are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareowner accounts, general Fund
administration, accounting, custody and other services. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
National Missouri
Tax-Free Tax-Free
--------- ---------
<S> <C> <C>
Shareowner Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)(1).............. 3.50% 3.50%
Maximum Sales Charge Imposed on
Reinvested Distributions............................ None None
Deferred Sales Charge Imposed on Redemptions......... None None
Redemption Fees...................................... None None
Exchange Fees(2)..................................... None None
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fees (after fee waivers)(3)............... 0.50% 0.30%
12b-1 Fees........................................... None None
Other Expenses (after reimbursements)(4)............. 0.35% 0.35%
----- -----
Total Fund Operating Expenses(5)..................... 0.85% 0.65%
===== =====
Example: Assume a Fund's annual return is 5% and its
expenses are the same as those stated above. For
every $1,000 you invest, here's how much you
would pay in total expenses if you closed your
account after the number of years indicated,
assuming redemption at the end of each time period.
One Year............................................. $ 43 $ 41
Three Years.......................................... $ 61 $ 55
</TABLE>
- -------------------
(1) Certain investors may not be charged a sales charge. See "Shareowner Guide
--When There Is No Sales Charge."
(2) No charge is imposed on exchanges through the Automatic Exchange feature or
for up to five exchanges made within a twelve month period. Additional
exchanges may incur a $5.00 fee.
(3) For the current fiscal year the Advisor intends to voluntarily waive a
portion of the investment advisory fees otherwise payable by the Missouri
Tax-Free Bond Fund. Without such fee waivers, "Management Fees" would be
0.50% of the average daily net assets of the Fund.
(4) In addition to the advisory fee waivers referred to in note 3, for the
current fiscal year the Advisor intends to voluntarily reimburse expenses
(including shareowner servicing fees) to the extent necessary for the Funds
to maintain annual expense ratios (excluding management fees) of not more
than 0.35%, excluding interest, taxes and extraordinary expenses,
respectively. The Commerce Funds has adopted a Shareowner Service Plan
pursuant to which it may enter into agreements with institutions under
which they will render shareowner administrative support services for their
customers who beneficially own shares in return for a fee of up to 0.25%
per annum of the value of such shares.
(5) Without such fee waivers and expense reimbursements in effect for the
National Tax-Free Bond and Missouri Tax-Free Bond Funds, "Total Fund
Operating Expenses" would be 1.19% and 1.27%, respectively, of the average
daily net assets of such Funds.
3
<PAGE>
The above expense information is provided to help you understand the
expenses you would pay either directly (i.e., transaction expenses) or
indirectly (i.e., annual operating expenses) as a shareowner in the Funds. The
information is based on the expenses the Funds expect to incur during the
current fiscal year. In addition, Shareowner Servicing Organizations may charge
their clients account fees for providing account services in connection with
their clients' investments in shares of The Commerce Funds. You should note that
any fees that are charged by The Commerce Funds' Advisor, its affiliates or any
other institutions directly to their customer accounts for services related to
an investment in the Funds are in addition to and not reflected in the fees and
expenses described above. If you purchase or redeem shares directly from The
Commerce Funds Shareowner Services or an account representative at a Commerce
Bank branch, you may avoid these fees by following the procedures described in
"How To Buy Shares" on page 21 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- --------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESS THAN THOSE INDICATED. THE FUNDS ARE NEW
AND THE ABOVE FIGURES ARE BASED ON EXPENSES EXPECTED TO BE INCURRED DURING THE
FUNDS' CURRENT FISCAL YEAR. INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE
FUNDS WILL BE CONTAINED IN FUTURE ANNUAL REPORTS TO SHAREOWNERS, WHICH MAY BE
OBTAINED WITHOUT CHARGE BY CONTACTING THE COMMERCE FUNDS AT THE ADDRESS OR
TELEPHONE NUMBER INDICATED ON THE COVER OF THIS PROSPECTUS WHEN THEY BECOME
AVAILABLE.
- --------------------------------------------------------------------------------
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are described
below. There is no assurance that they will achieve their investment objectives.
Neither Fund, by itself, constitutes a complete investment program. Additional
information regarding the securities, investment policies and restrictions of
each Fund are described in the Statement of Additional Information.
The investment objectives of a Fund may not be changed without the
affirmative vote of the holders of at least a majority of the outstanding shares
of such Fund (as defined under "Other Information"). Except as noted below under
"Investment Limitation," a Fund's investment policies may be changed without a
vote of shareowners.
National Tax-Free Bond Fund
Investment Objective
The investment objective of the National Tax-Free Bond Fund is to seek
current income exempt from federal income tax consistent with the preservation
of capital. The Fund pursues this objective through investment in a diversified
portfolio of investment grade Municipal Obligations (as defined below).
Investment Strategy
Substantially all of the Fund's assets will be invested in obligations
issued by or on behalf of the states, territories and possessions of the United
States, the District of Columbia and their respective authorities, agencies,
instrumentalities and political subdivisions, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income taxes ("Municipal
Obligations"). Dividends paid by the Fund which are derived from interest
attributable to the Municipal Obligations will be exempt from regular federal
income taxes. As a matter of fundamental policy (except during temporary
defensive periods), at least 80% of the Fund's total assets will be invested in
Municipal Obligations, the interest on which is exempt from regular federal
income and federal alternative minimum tax. Although the Fund has no
restrictions as to the minimum or maximum maturity of any individual security
held by it, the average weighted effective portfolio maturity of the Fund will
be less than 15 years.
Missouri Tax-Free Bond Fund
Investment Objective
The investment objective of the Missouri Tax-Free Bond Fund is to seek
current income exempt from federal and, to the extent possible, from Missouri
income taxes, as is consistent with the preservation of capital. The Fund
pursues this objective through investment primarily in investment grade Missouri
Obligations (as defined below).
Investment Strategy
In pursuing its investment objective, the Fund normally will invest at
least 65% of its total assets in Municipal Obligations issued by the State of
Missouri and its political subdivisions as well as certain other governmental
issuers including Puerto Rico, Guam and the Virgin Islands, the interest on
which is, in the opinion of bond counsel, exempt from federal and Missouri
income tax ("Missouri Obligations"). Dividends
5
<PAGE>
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Missouri income tax. As a matter
of fundamental policy (except during temporary defensive periods), at least 80%
of the Fund's total assets will be invested in Municipal Obligations, the
interest on which is exempt from regular federal income and federal alternative
minimum tax. The Fund seeks to maximize the proportion of its dividends that are
exempt from both federal and Missouri income tax and presently expects to invest
substantially all of its assets in Missouri Obligations. The Fund's average
weighted maturity will vary in light of current market and economic conditions,
the comparative yields on instruments with different maturities, and other
factors.
Risks Associated With An Investment in the Fund
The Missouri Tax-Free Bond Fund's ability to achieve its investment
objective is dependent upon the ability of issuers of Municipal Obligations to
meet their continuing obligations for the payment of principal and interest.
There will be additional risks associated with investment in the Fund to the
extent it invests its assets predominantly in Missouri Obligations. The major
sectors of Missouri's economy include agriculture, manufacturing, trade,
government and services. More specifically, farming and defense-related
businesses have played an important role in the state's economy and have yielded
a large portion of the state's revenues. Increased urbanization, recent flooding
and the continued decline in defense appropriations by the U.S. Congress have
had and will continue to have an impact on the state.
The Missouri Constitution 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. You should also
be aware that certain provisions of and amendments to the Missouri Constitution
and other laws could result in certain adverse consequences affecting Missouri
Obligations. Some of the significant financial considerations relating to the
Fund's investments in Missouri obligations are summarized in the Statement of
Additional Information.
As indicated previously, the Missouri Tax-Free Bond Fund is classified as
non-diversified under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio. Consequently,
the change in value of any one security may affect the overall value of a non-
diversified portfolio more than it would a diversified portfolio. In addition, a
non-diversified portfolio may be more susceptible to economic, political and
regulatory developments than a diversified investment portfolio with similar
objectives.
ADDITIONAL RISK CONSIDERATIONS
Risks Associated With Fixed Income Securities
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
also recognize that, in periods of declining interest rates, the yields of
investment portfolios composed primarily of fixed income securities will tend to
be higher than prevailing market rates and, in periods of rising interest rates,
yields will tend to be somewhat lower. Zero
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coupon bonds are subject to greater market fluctuations from changing interest
rates than debt obligations of comparable maturities which make current
distributions of interest. Debt securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also affect the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
affect cash income from such securities but will be reflected in the Funds' net
asset value.
When a Fund's assets are concentrated in obligations payable from revenues
of similar projects or issued by issuers located in the same state, or in
industrial development bonds, it will be subject to the particular risks
(including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to certain
projects may be secured by mortgages or deeds of trust. In the event of a
default, enforcement of a mortgage or deed of trust will be subject to statutory
enforcement procedures and limitations on obtaining deficiency judgments.
Moreover, collection of the proceeds from that foreclosure may be delayed and
the amount of the proceeds received may not be enough to pay the principal or
accrued interest on the defaulted Municipal Obligations.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following investment restrictions which, as
described in more detail in the Statement of Additional Information, are
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of a Fund (as defined under "Other
Information"). 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, securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
fully collateralized by securities issued or guaranteed by the U.S. Government,
its agencies or 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 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.
OTHER INVESTMENT PRACTICES
Municipal Obligations
The two principal classifications of Municipal Obligations which may be
held by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's
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pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds (e.g., bonds issued
by industrial development authorities) that are issued by or on behalf of public
authorities to finance various privately-operated facilities are included within
the term "Municipal Obligations" if the interest paid thereon is exempt from
regular federal income tax and not treated as a specific tax preference item
under the federal alternative minimum tax. Private activity bonds are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. The credit quality of such bonds is usually directly related to the
credit standing of the corporate user of the facility involved. Municipal
Obligations purchased by the Funds may also include variable and floating rate
instruments.
Municipal Obligations may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Certain of the Municipal Obligations held by the Funds 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 an 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. A
Fund may, from time to time, invest more than 25% of its assets in Municipal
Obligations covered by insurance policies.
The Funds may also purchase Municipal Obligations known as "certificates of
participation" which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and other
rights under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by applicable Municipal charter provisions or
the nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not appropriate
funds for future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may or may not provide that the certificate
trustee can accelerate lease obligations upon default. If the trustee could not
accelerate lease obligations upon default, the trustee would only be able to
enforce lease payments as they became due. In the event of a default or failure
of appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. Certificates of participation are
generally subject to redemption by the issuing municipal entity under specified
circumstances. If a specified event occurs, a certificate is callable at par
either at any interest payment date or, in some cases, at any time. As a result,
certificates of participation are not as liquid or marketable as other types of
Municipal Obligations.
The Advisor, under the Supervision of the Board of Trustees, will evaluate
the liquidity of a municipal lease obligation based on all relevant factors. The
Funds may purchase unrated municipal lease obligations. The Advisor, under the
Supervision of the Board of Trustees, will determine the credit quality of such
leases on an ongoing basis, including an assessment of the likelihood that the
underlying lease will be canceled.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance.
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Neither The Commerce Funds nor the Advisor will review the proceedings relating
to the issuance of Municipal Obligations or the bases for such opinions.
Variable and Floating Rate Instruments
Municipal Obligations and other instruments purchased by a Fund may include
variable and floating rate demand instruments issued by corporations, industrial
development authorities and governmental entities. Although variable and
floating rate demand instruments are frequently not rated by credit rating
agencies, unrated instruments purchased by a Fund will be determined to be of
comparable quality to rated instruments that may be purchased by a Fund. While
there may be no active secondary market with respect to a particular variable or
floating rate instrument purchased by a Fund, a Fund may, from time to time as
specified in the instrument, demand payment in full of the principal of the
instrument or may resell the instrument to a third party. The absence of such an
active secondary market, however, could make it difficult for a Fund to dispose
of a variable or floating rate demand instrument if the issuer defaulted on its
payment obligations during periods that a Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss.
Variable and floating rate instruments with no active secondary market and with
notice/termination dates in excess of seven days will be included in the
calculation of a Fund's illiquid assets.
Ratings of Securities
Municipal Obligations acquired by the Funds will be rated investment grade
at the time of purchase. For purposes of this investment policy, investment
grade obligations are those rated at the time of purchase AAA, AA, A or BBB by
Standard & Poor's Rating Group ("S&P"), Aaa, Aa, A or Baa by Moody's Investors
Service, Inc. ("Moody's") or which are similarly rated by another nationally
recognized statistical rating organization ("NRSRO") (including Fitch Investors
Service, Inc., Duff & Phelps, Thomson BankWatch and IBCA) or are unrated but
deemed by the Advisor to be comparable in quality to instruments that are so
rated. Obligations rated BBB by S&P and Baa by Moody's, or the equivalent rating
by an NRSRO, are considered to have speculative characteristics and are subject
to greater credit and market risk than securities rated in the top three
investment grade categories. The Funds do not intend to purchase obligations
rated below investment grade. Subsequent to its purchase by a Fund, a portfolio
security may be downgraded below investment grade or may be deemed by the
Advisor to be no longer comparable to investment grade securities. The Advisor
will consider such an event in determining whether the Fund should continue to
hold the security. Each Fund may also acquire tax-exempt commercial paper rated
A-1 or higher by S&P or Prime-1 or higher by Moody's or, when deemed advisable
by the Advisor, issues rated A-2 by S&P or Prime-2 by Moody's which the Advisor
considers to be "high quality," municipal notes rated SP-2 or higher by S&P or
MIG-2 or higher by Moody's and variable rate demand obligations rated VMIG-2 or
higher by Moody's or the equivalent rating of another NRSRO. Each Fund may
invest up to 10% of its assets in unrated obligations provided that such
obligations are determined by the Advisor to be comparable in quality to
instruments that are eligible for purchase by the Funds. See Appendix A to the
Statement of Additional Information for a description of applicable S&P and
Moody's debt obligation ratings.
Taxable Investments
Each Fund may invest up to 20% of its net assets in Municipal Obligations
the interest on which is exempt from regular federal income tax but is an item
of tax preference for purposes of the federal alternative minimum tax. Each Fund
may also invest up to 20% of its net assets for temporary defensive
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purposes in short-term taxable money market instruments as described below, in
securities issued by other investment companies which invest in taxable or tax-
exempt money market instruments and in U.S. Government Obligations (as defined
below under "U.S. Government Obligations"). Each Fund may also enter into
repurchase and reverse repurchase agreements and may lend portfolio securities.
In addition, each Fund may hold uninvested cash reserves pending investment
during temporary defensive periods, or when, in the opinion of the Advisor,
suitable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested by the Funds.
Uninvested cash normally will not represent a significant portion of a Fund's
assets.
Zero Coupon Bonds
The Funds may acquire zero coupon bonds. Such obligations will not result
in the payment of interest until maturity, and typically have greater price
volatility than coupon obligations, provided that the Fund will purchase such
zero coupon bonds only if the likely relative greater price volatility of such
zero coupon bonds is not inconsistent with such Fund's investment objective. The
Fund will accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareowners and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Fund's distribution obligations. These actions may
occur under disadvantageous circumstances and may reduce the Fund's assets
thereby increasing its expense ratio and decreasing its rate of return. Zero
Coupon bonds are subject to greater market fluctuations from changing interest
rates than debt obligations of comparable maturities which make current
distributions of interest.
Interest Rate Swaps, Mortgage Swaps, Caps and Floors
In order to hedge against fluctuations in interest rates, the Funds may
enter into interest rate swaps, mortgage swaps and other types of swap
agreements such as caps and floors. Interest rates swaps involve the exchange by
a 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. In a typical cap or floor
agreement, 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 payment 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, caps and floors are individually negotiated, the Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap and floor positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that 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. The Fund will maintain cash, U.S. Government securities and liquid
high grade debt securities equal to the net amount, if any, of the excess of the
Fund's obligations over its entitlements with respect to swap transactions in a
segregated account with its custodian. Interest rate and mortgage swaps do not
involve the delivery of securities, or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and mortgage swaps
is limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate or mortgage swap
defaults, the
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Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive. To the extent that the net amount of
an interest rate or mortgage swap is held in a segregated account consisting of
cash, U.S. Government securities and liquid, high grade debt securities, the
Funds and the Advisor believe that such swaps will not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the Funds' borrowing restriction.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have been
if these investment techniques were not used. The staff of the Securities and
Exchange Commission ("SEC") currently takes the position that swaps, caps and
floors are illiquid for purposes of a Fund's limitation on illiquid securities.
U.S. Government Obligations
The Funds may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations").
Examples of the types of obligations which may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of the Government
National Mortgage Association, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law.
Money Market Instruments
The Funds may invest from time to time in "money market instruments," a
term that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign banks
or foreign branches of U.S. banks. Although the Funds will invest in obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor deems
the instrument to present minimal credit risks, such investments nevertheless
entail risks that are different from these of investments in domestic
obligations of U.S. banks due to differences in political, regulatory and
economic systems and conditions. All investments in bank obligations are limited
to the obligations of financial institutions having more than $1 billion in
total assets at the time of purchase.
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Investments by a Fund in taxable commercial paper will consist of issues
that are rated A-1 or better by S&P, Prime-1 by Moody's or the equivalent rating
of another NRSRO. Commercial paper may include variable and floating rate
instruments.
Stand-by Commitments
The Funds may acquire stand-by commitments under which a dealer agrees to
purchase certain Municipal Obligations at the Fund's option at a price equal to
amortized cost plus interest. These commitments will be used only to assist in
maintaining the liquidity of a Fund and not for trading purposes.
When-Issued Purchases and Forward Commitments
The Funds may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit a Fund to lock in a price or yield on a security it intends to
purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk, however, that the yield or
price obtained in a transaction may be less favorable than the yield (and
therefore the value of the security) available in the market when the securities
delivery takes place. A Fund's forward commitments and when-issued purchases may
be up to 100% of the value of its total assets during its period of inception,
which period will not exceed ninety days, and following such period are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. Because a Fund is required to set aside cash or liquid high grade
debt obligations to satisfy its purchase commitments, the Fund's liquidity and
ability to manage its portfolio might be affected during periods in which its
commitments exceed 25% of the value of its assets. Neither Fund intends to
engage in when-issued purchases and forward commitments for speculative
purposes.
Repurchase Agreements
The Funds may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain with a Fund's
custodian collateral equal to at least 100% of the repurchase price including
accrued interest as monitored daily by the Advisor. If the seller under the
repurchase agreement defaults, a fund may incur a loss if the value of the
collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
The Funds may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a Fund
sells portfolio securities to financial institutions (such as banks and broker-
dealers) and agrees to buy them back later at an agreed upon time and price.
when a Fund enters into a reverse repurchase agreement, it places in a separate
custodial account either liquid assets or other high grade debt securities that
have a value equal to or greater than the repurchase price. The account is then
continuously monitored by the Advisor to make sure that an appropriate value is
maintained. Reverse repurchase agreements involve the risk that the value of
portfolio securities a Fund relinquishes may decline below the price the Fund
must pay when the transaction closes. A Fund will only
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enter into reverse repurchase agreements to avoid the need to sell portfolio
securities to meet redemption requests during unfavorable market conditions. As
reverse repurchase agreements are deemed to be borrowings by the SEC, each Fund
is required to maintain continuous asset coverage of 300%. Should the value of a
Fund's assets decline to below 300% of borrowings, a Fund may be required to
sell portfolio securities within three days to reduce the Fund's debt and
restore 300% asset coverage.
Securities Issued by Other Investment Companies
The Funds may invest in securities issued by other investment companies
which invest in high quality, short-term taxable or tax-exempt instruments and
which determine their net asset value per share on the amortized cost or penny-
rounding method. Such securities may be acquired by the Funds within the limits
prescribed by the 1940 Act. Income derived by the Funds from the acquisition of
shares of another investment company which invests in taxable instruments will
be, when paid by the Funds as dividends to shareowners, subject to federal
income taxes. Each Fund currently intends to limit its investments so that, as
determined immediately after a purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund; and (d) not more than 10% of the outstanding
voting stock of any one investment company will be owned in the aggregate by a
Fund and other investment companies advised by the Advisor, or any affiliate of
Commerce Bancshares, Inc. As a shareowner of another investment company, a Fund
would bear, along with other shareowners, its pro rata portion of the expenses
of such other investment company, including advisory fees. These expenses would
be in addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations and may represent a duplication of fees to
shareowners of a Fund.
Illiquid Securities
Each Fund may invest up to 15% of the value of its net assets in illiquid
securities, including securities having legal or contractual restrictions on
resale or no readily available market (including repurchase agreements, variable
and floating rate instruments and time deposits with notice/termination dates in
excess of seven days, interest rate and currency swaps and certain securities
which are subject to trading restrictions because they are not registered under
the Securities Act of 1933 (the "1933 Act")).
If otherwise consistent with its investment objective and policies, each
Fund may purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and securities that are not registered under the 1933 Act but can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. These securities will not be considered illiquid so long as the Advisor
determines, under guidelines approved by the Board of Trustees, that an adequate
trading market exists. This practice could increase the level of illiquidity
during any period that qualified institutional buyers become uninterested in
purchasing these securities. The ability to sell to qualified institutional
buyers under Rule 144A is a relatively recent development and it is not possible
to predict how this market will develop.
Securities Lending
To increase return on portfolio securities, each Fund may lend its
portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Such loans will not
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be made if, as a result, the aggregate of all outstanding loans exceeds 33 1/3%
of the value of the Fund's total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by the Advisor to
be of good standing and when, in its judgment, the income to be earned from the
loan justifies the attendant risks.
Options and Futures Contracts
The Funds may purchase put and call options and may write covered call and
secured put options which will be listed on a national securities exchange and
issued by the Options Clearing Corporation. Such options may relate to
particular securities or to various securities indices. The Funds may also
invest in futures contracts and options on futures, index futures contracts or
interest rate futures contracts, as applicable, for hedging purposes or to seek
to increase total return. A Fund may not purchase or sell futures contracts or
options on futures contracts to increase total return unless immediately after
any such transaction the aggregate amount of premiums paid for put options and
the amount of margin deposits on its existing futures positions do not exceed 5%
of the total assets of the Funds. Purchasing options is a specialized investment
technique that may entail the risk of a complete loss of the amounts paid as
premiums to the writer of the option.
Writing a covered call option means that a Fund owns or has the right to
acquire the underlying security subject to call at the stated exercise price at
all times during the option period. Writing a secured put option means that a
Fund maintains in a segregated account with its custodian cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. In order to close out these types
of option positions, a Fund will be required to enter into a "closing purchase
transaction"--the purchase of a call or put option (depending upon the position
being closed out) on the same security with the same exercise price and
expiration date as the option that it previously wrote. The aggregate value of
securities subject to options written by the Funds will not exceed 5% of their
total assets.
By writing a covered call option, a Fund forgoes the opportunity to profit
from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents such a profit, and it is
not able to sell the underlying security until the option expires or is
exercised or a Fund effects a closing purchase transaction by purchasing an
option of the same series. If a Fund writes a secured put option, it assumes the
risk of loss should the market value of the underlying security decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of the Funds, and they are
expected to be used infrequently. If the Advisor is incorrect in its forecast
for the underlying security or other factors when writing the foregoing options,
a Fund would be in a worse position than it would have been had the foregoing
investment techniques not been used.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
To enter into a futures contract, a Fund must make a deposit of initial
margin with its custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin, will
be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable.
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The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of the
futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by a
Fund is subject to the Advisor's ability to correctly predict movements in the
direction of stock prices, interest rates and other economic factors. For
example, if a Fund uses futures contracts as a hedge against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, a Fund will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. The risk of loss
in trading futures contracts in some strategies can be potentially unlimited,
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 or
gain to the investor. Thus, a purchase or sale of a futures contract may result
in losses or gains in excess of the amount invested in the contract.
For additional information and a description of the risks relating to
option and futures contracts trading practices, see the Statement of Additional
Information.
Portfolio Turnover
Each Fund may sell a portfolio investment soon after its acquisition if the
Advisor believes that such a disposition is consistent with attaining a Fund's
investment objective. Fund investments may be sold for a variety of reasons,
such as a more favorable investment opportunity.
The Advisor cannot accurately predict the Funds' turnover rates which may
vary from year to year, but expects that the annual turnover rates will
generally not exceed 100%. A high rate of portfolio turnover (100% or more)
involves correspondingly greater brokerage commission expenses and other
transaction costs, which must be borne directly by a Fund and ultimately by its
shareowners. See "Portfolio Transactions" in the Statement of Additional
Information. Portfolio turnover may result in the realization of short-term
capital gains which are taxable to shareowners as ordinary income.
15
<PAGE>
SHAREOWNER GUIDE
The following section will provide you with answers to some
of the most often-asked questions about buying
and selling a Fund's shares and about a
Fund's dividends and distributions
HOW TO BUY SHARES
What Is My Minimum Investment For Each Fund?
Generally, the minimum investment requirement is $2,000 for initial
purchases and $500 for subsequent purchases, although it may differ in certain
circumstances as shown below.
Investment Minimums for Specific Types of Accounts
<TABLE>
<CAPTION>
Initial Subsequent
Investment Investment
---------- ----------
<S> <C> <C>
Regular Account....................................... $2,000 $500
Automatic Investment Plan............................. $1,000 $100
</TABLE>
How Are Shares Priced?
Shares of the Funds are purchased at their public offering price, which is
a Fund's net asset value per share plus a front-end sales charge. A Fund's net
asset value ("NAV") is calculated as follows:
NAV = (Value of Fund Assets) - (Fund Liabilities)
-------------------------------------------------
Number of Outstanding Shares
The net asset value is determined as of the close of regular trading hours
on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
Time) on days the Exchange is open (a "Business Day").
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by or under
the supervision of the Board of Trustees. Certain short-term securities may be
valued at amortized cost, which approximates fair value.
Sales Charge. The maximum front-end sales charge is 3.50% and may be less
based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
Maximum
Dealer's
As a % of As a % of Reallowance
offering net asset as a % of
price value offering price
Amount of Purchase per share per share per share*
------------------ --------- --------- --------------
<S> <C> <C> <C>
Less than $100,000................. 3.50 3.63 3.15
$100,000 but less than $250,000.... 2.50 2.56 2.25
$250,000 but less than $500,000.... 1.50 1.52 1.35
$500,000 but less than $1,000,000.. 1.00 1.01 0.90
$1,000,000 or more................. 0.00 0.00 0.00
</TABLE>
- -----------------
*Dealer's reallowance may be changed periodically.
16
<PAGE>
Goldman, Sachs & Co. (the "Distributor") will, out of its administration
fee or other resources, pay additional incentives to dealers who initiate and
are responsible for purchases of shares of The Commerce Funds. In addition, at
its expense, the Distributor will provide additional compensation and
promotional incentives to dealers in connection with the sales of shares of the
Funds. Compensation may include promotional and other merchandise, sales and
training programs and other special events sponsored by dealers. Compensation
may also include payment for reasonable expenses incurred in connection with
trips taken by invited registered representatives for meetings or seminars of a
business nature.
When There Is No Sales Charge. There is no sales charge on shares purchased
by the following types of investors or transactions:
. automatic reinvestments (and cross-reinvestments) of dividends and
capital gain distributions by existing shareowners;
. the Exchange Privilege described below on page 25;
. the Redemption Reinvestment Privilege described below on page 23;
. trust, management agency, custodial and other accounts maintained by an
Investment Management Group (Trust Department) within a bank affiliated
with Commerce Bancshares, Inc. (including shares purchased with
distributions from such accounts);
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986 (the "Code"); and
. employees, directors, trustees, officers and retirees (as well as their
spouses and minor children) of Commerce Bancshares, Inc., Goldman,
Sachs & Co. or their subsidiaries or affiliates;
. employees, directors, trustees, officers and retirees (as well as their
spouses and minor children) of banks that have signed a definitive
agreement to become affiliated with Commerce Bancshares, Inc.;
. current and retired members of the Board of Trustees of The Commerce
Funds;
. any state, county or city, or any instrumentality, department, authority
or agency thereof, prohibited by applicable laws from paying a sales
charge for the purchase of Fund shares.
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
shares of the Funds at net asset value, without payment of a sales charge. To
qualify for this special net asset value purchase when applicable, the investor
must pay for such purchase with the proceeds from the redemption of shares of a
non-affiliated mutual fund or unit investment trust on which a sales charge was
paid. A qualifying purchase of shares in a Fund must occur within five Business
Days of the prior redemption and must be evidenced by a confirmation of the
redemption transaction. At the time of purchase, The Commerce Funds must be
notified that the purchase qualifies for a purchase without a sales charge.
Proceeds from the redemption of shares on which no sales charges or commissions
were paid would not qualify for the special net asset value purchase program.
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In order
to take advantage of these exemptions, you must certify eligibility on your
account application.
Rights of Accumulation. When you buy shares in The Commerce Funds, your
current total investment determines the sales charge that you pay. Since large
investments receive a discounted sales charge, the sales charge you pay may
subsequently be reduced as you build your investment.
17
<PAGE>
Over time, as your current total investment in shares accumulates to
$100,000 or beyond, the sales charge on subsequent investments is decreased.
Your current total investment is the combination of your immediate investment
along with the shares that you own in any Fund of The Commerce Funds on which
you paid a sales charge (including shares of the Financial Square Treasury,
Prime and Tax-Free Money Market Funds that carry no sales charge but were
obtained through an exchange and can be traced back to shares that were acquired
with a sales charge). Shares purchased without a sales charge may riot be
aggregated with shares purchased subject to a sales charge.
To buy shares at a reduced sales charge under Rights of Accumulation, you
must indicate at the time of purchase that a quantity discount is applicable.
A reduction in sales charge is subject to a check of appropriate records, after
which you will receive the lowest applicable sales charge.
Example: Suppose you own Commerce Fund shares with a total current
value of $90,000 that can be traced back to the purchase of shares with a
sales charge. If you subsequently invest $10,000 in any Fund within The
Commerce Funds family, you will pay a reduced sales charge of 2.50% of the
public offering price on the additional purchase.
Letter of Intent. You may also buy shares at a reduced sales charge under a
written Letter of Intent, a non-binding commitment to invest a total of at least
$100,000 in one or more Funds of The Commerce Funds within a period of 13 months
and under the terms and conditions of the Letter of Intent. Shares you buy under
a Letter of Intent will be eligible for the same sales charge discount that
would have been available had all of your share purchases been made at once. To
use this feature, complete the Letter of Intent section on your account
application. A Letter of Intent must be filed with The Commerce Funds within 90
days of the first investment under the Letter of Intent provision.
While submitting a Letter of Intent does not bind you to buy, or The
Commerce Funds to sell, the full amount at the sales charge indicated in the
Letter of Intent, you must complete the intended purchase to obtain the reduced
sales charge. When you sign a Letter of intent, The Commerce Funds holds in
escrow a sufficient number of shares which can be sold to make up any difference
in the sales charge on the amount actually invested. After you fulfill the terms
of the Letter of Intent, the shares in escrow will be released.
If your aggregate investment exceeds that indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
charge applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase. You
must inform The Commerce Funds that the Letter of Intent is in effect each time
you buy shares.
You may include the value of all shares on which a sales charge had
previously been paid as a credit toward fulfillment of the Letter of Intent, but
no price adjustment will be made on shares previously purchased.
You may combine purchases that are made by members of your immediate
family, or the total investments of a trustee or custodian of any qualified
pension or profit-sharing plan or IRA established for your benefit or the
benefit of any member of your immediate family, for the purpose of obtaining
reduced sales charges by means of a written Letter of Intent or Right of
Accumulation. You must indicate on the account application the accounts that are
to be combined for this purpose.
18
<PAGE>
HOW CAN I BUY SHARES?
You may purchase shares of a Fund through:
. The Commerce Funds Shareowner Services; or
. An investment representative at a Commerce Bank branch.
Simply choose whichever you prefer.
The following chart describes ways to invest in The Commerce Funds:
HOW TO BUY SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------------------- ------------------------------
<S> <C> <C>
By Mail Send a completed account Send a check with your
application with a check account number printed on
(payable to The Commerce it, along with the stub from
Funds) directly to: the previous confirmation
directed to the address
The Commerce Funds given at left.
P.O. Box 16931
St. Louis, MO 63105
In Person Whether opening or adding to an account, you are welcome to
stop into a Commerce Bank branch office location.
A registered representative can assist you.
By Wire After an account application Contact your bank to request
is completed and an account is that funds be wired to your
opened, instruct your bank to existing Fund account.
wire funds to: Follow instructions at left.
Be sure to include your name
Commerce Bank, N.A. and your account number.
(Kansas City)
Kansas City, MO
ABA #1010-00019
Account # 2800255
Be sure to have your bank
indicate your name, address,
tax identification number,
name of the Fund and your new
account number.
Ask your bank for specific information about making federal
wires, including associated charges.
By Telephone Subsequent purchases of Fund
Via Electronic shares may be made by
Funds Transfer electronic funds transfer
from your bank, checking or
money market account.
You can authorize this
feature and provide
necessary bank information
on your account application.
Then, when you wish to make
a subsequent purchase, you
can do so by calling The
Commerce Funds Shareowner
Services at 1-800-305-2140.
</TABLE>
19
<PAGE>
Other investment features, including exchanges and automatic investments,
are also available. Additional information pertaining to investments in the
Funds is included in the following pages or can be obtained by contacting The
Commerce Funds Shareowner Services.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at a Fund's public offering price calculated
at the next close of regular trading on the Exchange (currently 4:00 p.m.
Eastern Time) after your purchase order is received in proper form by The
Commerce Funds' transfer agent, State Street Bank and Trust Company (the
"Transfer Agent"), at its Kansas City office.
WHAT ELSE SHOULD I KNOW ABOUT BUYING SHARES?
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments by check must be in U.S. dollars and be drawn
only on U.S. banks. The Commerce Funds reserves the right to reject any specific
purchase order (including exchanges) or to restrict purchases or exchanges by a
particular purchaser (or group of related purchasers). The Commerce Funds may
reject or restrict purchases or exchanges of shares by a particular purchaser or
group, for example, when a pattern of frequent purchases and sales or exchanges
of shares of a Fund is evident, or if the purchase and sale or exchange orders
are, or a subsequent abrupt redemption might be, of a size that would disrupt
the management of a Fund.
The Commerce Funds will not issue share certificates. The Transfer Agent
will maintain a complete record of your account and will issue you a statement
at least quarterly. You will also be sent confirmations showing purchases and
redemptions.
HOW TO SELL SHARES
How Do I Sell My Shares?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
shares. The Commerce Funds does not charge you to sell shares. However, the
value of the shares you sell may be more or less than your cost, depending on a
Fund's current net asset value. The following chart describes ways to sell your
shares of The Commerce Funds:
20
<PAGE>
HOW TO SELL SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
By Mail Send a written request signed by each owner, including each joint
owner, to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
Proper written authority is required to execute redemption
requests on behalf of corporations, partnerships, trusts, and/or
fiduciary accounts. Redemption requests require signature
guarantees as described on page 22 with the exception of
redemptions sent to a shareowner name/address of record in effect
for no less than 30 days.
In Person You are welcome to deliver your written request signed by each
owner, including each joint owner, to a Commerce Bank branch
office location. A registered investment representative can assist
you.
By Telephone You may redeem shares (to a shareowner) by telephone and request
to receive proceeds by check (to a shareowner name/address of
record in effect for no less than 30 days), federal wire (for
amounts exceeding $1,000) or electronic funds transfer. In order
to request a federal wire or electronic funds transfer,
appropriate information regarding your bank, checking or money
market account must be previously established on your account.
This information may be provided on the account application or in
a signature guaranteed letter of instruction (see description of
signature guarantees on page 22).
Redemption requests may be placed by calling The Commerce Funds
Shareowner Services at 1-800-305-2140. Additional information
pertaining to Fund share redemptions is included in the following
pages or can be obtained by contacting The Commerce Funds
Shareowner Services.
Other redemption features, including exchanges and automatic
withdrawals, are also available. Please refer to the Shareowner
Features and Privileges section in this prospectus for additional
information about telephone redemption features.
Written requests to sell shares must be signed by each shareowner, including
each joint owner.
21
<PAGE>
Certain types of redemption requests will need to include a signature
guarantee. You may obtain a signature guarantee from:
(1) a bank which is a member of the FDIC;
(2) a securities broker or dealer;
(3) a credit union having the authority to issue signature guarantees;
(4) a savings and loan association;
(5) a building and loan association;
(6) a cooperative bank;
(7) a federal savings bank or association;
(8) a national securities exchange; or
(9) a registered securities association or a clearing agency.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed." Guarantees
from notaries public will not be accepted.
Share redemptions can be suspended and the payment of redemption proceeds
delayed when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted as
determined by the SEC, during any emergency as determined by the SEC which makes
it impracticable for a Fund to sell its securities or value its assets or during
any other period permitted by order of the SEC for the protection of investors.
Other redemption features, including exchanges and automatic withdrawals,
are also available. Please refer to Shareowner Features and Privileges for more
information.
WHAT PRICE WILL I RECEIVE FOR SHARES I WANT TO SELL?
The price you will receive when you sell your share is the net asset value
per share (as described on page 16) determined after receipt of an order in
proper form by the Transfer Agent.
The Commerce Funds reserves the right to redeem accounts involuntarily if,
after sixty days' written notice to the shareowner, the account's net asset
value remains below a $500 minimum balance. Involuntary redemptions will not be
implemented if the value of your account falls below the minimum balance as a
result of market conditions.
HOW QUICKLY CAN I RECEIVE PROCEEDS FROM A SALE?
Ordinarily, redemption proceeds will be disbursed the next Business Day
following receipt of an order in proper form by the Transfer Agent. Payment must
be made within seven calendar days following redemption.
You can have your proceeds sent by federal wire to your bank checking or
money market account. Proceeds will normally be wired the Business Day after
your request to redeem shares is received in good order by the Transfer Agent.
Wiring of sales proceeds may be delayed one additional day if the Federal
Reserve Bank is not open on the day your wire is to be made. Your request to
wire proceeds is subject to the bank's wire charges.
22
<PAGE>
Fund shares must be paid in full in order for you to redeem them and
receive proceeds. If the shares you wish to sell were a recent purchase by check
or telephone, The Commerce Funds can delay the subsequent payment of sales
proceeds up to 15 days after the check or telephone payment is received. This
does not apply if Fund shares were purchased by federal wire.
WHAT IF WANT I TO REINVEST SALES PROCEEDS?
You may reinvest all or any portion of your redemption proceeds in shares
of any Fund within 60 days of your redemption without a sales charge. Shares
will be purchased at a price equal to the net asset value per share next
determined after the Transfer Agent receives a reinvestment order and payment in
proper form.
If you wish to use the Redemption Reinvestment Privilege, you must submit a
written reinvestment request to the Transfer Agent stating that you are eligible
to use the feature.
Generally, using the Redemption Reinvestment Privilege will not affect any
gain or loss realized on redemptions for federal income tax purposes. However,
if a redemption results in a loss, the reinvestment may result in the loss being
disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
As a Fund shareowner, you are entitled to any dividends and distributions
arising from net investment income and net realized capital gains.
The Funds declare dividends daily and distribute dividends on or about the
last Business Day of the current month. Each Fund declares and distributes net
realized capital gains annually.
For purchases by check, shares of the Funds begin earning dividends and
distributions on the next day after payment for the shares is received by the
Transfer Agent.
You Can Choose A Distribution Option For Dividends And Capital Gains:
(1) reinvest all dividend and capital gain distributions in additional
Fund shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Fund shares without a sales charge;
(3) receive all dividend and capital gain distributions in cash; or
(4) have all dividend and capital gain distributions deposited
directly into a designated checking account.
If you do not select an option when you open all account, all distributions
will automatically be reinvested in the same Fund without a sales charge. For
your protection, if you elect to have distributions mailed to you which cannot
be delivered, they will be reinvested in the same Fund without a sales charge.
You may invest dividend or capital gain distributions from one Fund in
another Fund of The Commerce Funds. There is no sales charge on purchases made
through the Cross Reinvestment Privilege; however,
23
<PAGE>
both Fund accounts must be established at the minimum initial investment
requirement and have identical account registration. Cross Reinvestment
Privileges do not apply to the Financial Square Treasury, Prime and Tax-Free
Money Market Funds.
Your election to reinvest the distributions paid by a Fund in additional
shares of the Fund or any other Fund of The Commerce Funds will not affect the
tax treatment of such dividends and distributions, which will be treated as
received by the shareowner and then used to purchase shares of the Fund or
another Fund of The Commerce Funds.
To change your distribution option, contact The Commerce Funds Shareowner
Services at 1-800-305-2140 or write to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
The change will become effective after it is received and processed by the
Transfer Agent.
SHAREOWNER FEATURES AND PRIVILEGES
The Commerce Funds provides a variety of ways to make managing
your investments more convenient.
Some or all of the following features as well as others described in this
Prospectus may have different conditions imposed on them in addition to those
described in this Prospectus. Consult your investment representative or call our
toll-free service and information number, 1-800-305-2140 for more information.
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
Investment in a Fund of $100 or more can be made from your checking account
automatically on the date you specify in any month you choose. The Automatic
Investment Feature is one way to use Dollar Cost Averaging to invest. Only
checking accounts at U.S. financial institutions which permit automatic
withdrawals through the Automated Clearing House are eligible. Check with your
bank or financial institution to determine eligibility.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
Dollar Cost Averaging involves investing a fixed dollar amount at regular
intervals. Because more shares are purchased during periods with lower share
prices and fewer shares are purchased when the price is higher, your average
cost per share may be reduced.
In order to be effective, Dollar Cost Averaging should be followed on a
regular basis. You should be aware, however, that shares bought using Dollar
Cost Averaging are made without regard to their price on the day of investment
or to market trends. In addition, while you may find Dollar Cost Averaging to be
24
<PAGE>
beneficial, it will not prevent a loss if you ultimately redeem your shares at a
price that is lower than their purchase price. Dollar Cost Averaging does not
assure a profit or protect against a loss in a declining market. You can invest
through Dollar Cost Averaging on your own or through Automatic Investing.
To establish an Automatic Investment account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary information
on the account application or send a subsequent written request with an
appropriate signature guarantee.
You may change the amount of purchase or cancel this feature at any time by
calling The Commerce Funds Shareowner Services at 1-800-305-2140 or writing to:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
Notification will be effective three Business Days following receipt. The
Commerce Funds may modify or terminate this feature at any time or charge a
service fee, although no such fee is currently contemplated.
CAN I EXCHANGE MY INVESTMENT FROM ONE COMMERCE FUND TO ANOTHER?
As a shareowner, you have the privilege of exchanging your shares for
shares of another Fund of The Commerce Funds. Exchanges may also be made to or
from the Financial Square Treasury, Prime and Tax-Free Money Market Funds. There
is no additional sales charge when exchanging shares.
You can exchange shares of one Fund for shares in another Fund within The
Commerce Funds family that may be legally sold in your state of residence by
writing or calling The Commerce Funds as described under "How To Sell Shares" on
page 20. The Exchange Privilege is automatic for all shareowners unless declined
on an account application. All telephone exchanges must be registered in the
same name(s) and with the same address as are registered in the Fund from which
the exchange is made. See the section below regarding telephone transactions for
a description of The Commerce Funds' policy regarding responsibility for
telephone instructions. Shares purchased by check may not be exchanged until the
check has cleared.
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 16. Before using this
feature, you should consider carefully the investment objective, policies, risks
and expenses of the acquired Fund, as described in such Fund's prospectus. You
can request a current Prospectus from your investment representative or by
calling The Commerce Funds Shareowner Services at 1-800-305-2140.
In addition to free automatic exchanges pursuant to the Automatic Exchange
feature discussed below, five free exchanges are permitted in each twelve-month
period. Additional exchanges may incur a $5 exchange fee.
The Commerce Funds reserves the right to reject any exchange request and
the Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification or termination of the Exchange
Privilege will be given to shareowners except where notice is not required under
the regulations of the SEC.
25
<PAGE>
An exchange may result in a taxable gain or loss. Any sales charge paid on
the original purchase cannot be taken into account in determining such gain or
loss if the exchange occurs within ninety (90) days after the original purchase
of shares and no sales charge is imposed on such exchange.
CAN I HAVE EXCHANGES MADE AUTOMATICALLY?
You may request on your account application that a specified dollar amount
of shares at net asset value be automatically exchanged for shares of any other
Fund of The Commerce Funds. No sales charge is imposed on exchanges. These
automatic exchanges may be made on any one day of each month and are subject to
the following conditions: The minimum dollar amount for automatic exchanges must
be at least $250 per month. In addition, the value of the account in the
acquired Fund must equal or exceed the acquired Fund's minimum initial
investment requirement. The names, addresses and taxpayer identification number
for the shareowner accounts of the exchanged and acquired Funds must be
identical. You should consider the investment objective, policies, risks and
expenses of the acquired Fund, as described in such Fund's prospectus, before
establishing an automatic exchange into that Fund.
CAN I REINVEST DIVIDENDS FROM ONE COMMERCE FUND IN ANOTHER?
You may elect to have your dividends, capital gain distributions, or both
received from a non-retirement Fund account automatically invested in additional
shares of any other investment portfolio of The Commerce Funds in which you
currently maintain an open non-retirement account. To participate in this
program check the appropriate box and supply the necessary information on the
account application or in a subsequent written request.
Dividend reinvestments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
The distribution must exceed $50 in order to use this feature. You should
consider carefully the investment objective, policies and applicable fees of the
acquired Fund before using this feature.
HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact the Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information. Share prices of
each Fund will be listed in the mutual funds pricing section of most daily
newspapers under The Commerce Funds.
CAN I MAKE TRANSACTIONS BY TELEPHONE?
You may authorize electronic transfers of money to make additional
investments in or redeem shares from an established account. The service may be
used like an "electronic check" to move money to or from your checking or money
market account and your Fund account by calling The Commerce Funds Shareowner
Services at 1-800-305-2140.
26
<PAGE>
Telephone purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Proceeds from sales of shares will be deposited into your Commerce checking or
money market account generally two business days after the redemption request is
received. You may also request receipt of your redemption proceeds by check,
which will only be sent to the registered owner of your Fund account and only to
the address of record. If you should experience difficulty in redeeming shares
by telephone (i.e. because of unusual market activity), you are urged to
consider redeeming your shares by mail or in person.
You should note that the Transfer Agent may act upon a telephone purchase
or redemption request from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Neither The
Commerce Funds nor any of its service contractors will be liable for any loss or
expense in acting upon telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine, The
Commerce Funds will use such procedures as are considered reasonable, including
recording those instructions and requesting information as to account
registration (such as the name in which the account is registered, the account
number, recent transactions in the account, or the account holder's tax
identification number, address or bank). To the extent that The Commerce Funds
fails to use reasonable procedures as a basis for its belief, it and/or its
service contractors may be liable for instructions that prove to be fraudulent
or unauthorized.
The Commerce Funds may modify this feature at any time or charge a service
fee upon notice to shareowners. No such fee is currently contemplated.
CAN I ARRANGE AUTOMATIC WITHDRAWALS?
If you are a shareowner with an account valued at $5,000 or more, you may
withdraw amounts in multiples of $100 or more from your account on a monthly,
quarterly, semi-annual or annual basis through the Automatic Withdrawal feature.
At your option, monthly withdrawals may be made either the first or
fifteenth day of the month and quarterly, semi-annual and annual withdrawals
will be made on the fifteenth day of the month. To participate in this plan,
check the appropriate box and supply the necessary information on the account
application or in a subsequent written request. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
sales charge imposed on the Funds. This feature may be suspended should the
value of your account fall below $500.
THE BUSINESS OF THE COMMERCE FUNDS
BOARD OF TRUSTEES
The business affairs of The Commerce Funds are managed under the general
supervision of the Board of Trustees. Information about the Trustees and
officers of The Commerce Funds is included in the Statement of Additional
Information.
EXPENSES
Except as set forth in the Statement of Additional Information, each Fund
is responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to the Advisor,
27
<PAGE>
Administrator, Custodian (defined below) and Transfer Agent, brokerage fees and
commissions, expenses associated with the Shareowner Services Plan, fees for the
registration or qualification of Fund shares under federal and state securities
laws, expenses of the organization of The Commerce Funds, taxes, interest, costs
of liability insurance, fidelity bonds, indemnification or contribution, any
costs, expenses or losses arising out of any liability of, or claim for damages
or other relief asserted against, The Commerce Funds for violation of any law,
legal, tax and auditing fees and expenses, expenses of preparing and printing
prospectuses, statements of additional information, proxy materials, reports and
notices and the printing and distributing of the same to the Funds' shareowners
and regulatory authorities, compensation and expenses of its Trustees, fees of
industry Organizations such as the Investment Company Institute and
extraordinary expenses incurred by The Commerce Funds.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of advisory fees and/or reimburse expenses for the Funds during
the current fiscal year. The result of such fee waivers and expense
reimbursements will be to increase the performance of the Funds during the
periods for which they are made.
SERVICE PROVIDERS
_________________
INVESTMENT ADVISOR
Commerce Bank, N.A. (St. Louis) and
Commerce Bank, N.A. (Kansas City)
(the "Advisor")
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as Advisor for the Funds, selecting investments and making purchases and sale
orders for Securities in each Fund's portfolio.
ADMINISTRATOR
Goldman Sachs Asset Management
("GSAM" or the "Administrator")
GSAM serves as Administrator of each of the Funds. GSAM is located at One
New York Plaza, New York, New York.
DISTRIBUTOR
Goldman, Sachs & Co.
("Goldman" or the "Distributor")
Fund shares are sold on a continuous basis by Goldman, Sachs & Co. Goldman,
Sachs & Co. is located at 85 Broad Street, New York, New York.
28
<PAGE>
TRANSFER AGENT
State Street Bank and Trust Company
(the "Transfer Agent")
State Street Bank and Trust Company ("State Street Bank") has delegated its
responsibilities to its indirect subsidiary, National Financial Data Services,
Inc. ("NFDS"), which maintains the account records of all shareowners in the
Funds and administers the distribution of income earned as a result of investing
in the Funds. State Street Bank and Trust Company is located at 225 Franklin
Street, Boston, Massachusetts. NFDS is located at 1004 Baltimore Street, Kansas
City, Missouri.
CUSTODIAN
State Street Bank and Trust Company
(the "Custodian")
State Street Bank and Trust Company also serves as the Custodian of each of
the Funds.
More about the Advisor
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to each Fund. Each is a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank, N.A.
(St. Louis) is located at 8000 Forsyth Boulevard, St. Louis, Missouri, and
Commerce Bank, N.A (Kansas City) is located at 922 Walnut Street, Kansas City,
Missouri. Although neither Commerce Bank, N.A. (St. Louis) nor Commerce Bank,
N.A. (Kansas City) has previously served as investment advisor to a registered
investment company, each (or its predecessor organizations) has provided
investment management services to private and public pension funds, endowments
and foundations since 1946 and to individuals since 1906. As of July 31, 1994,
Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City) and their
affiliates had $4.2 billion in assets under management.
In the Advisory Agreement with The Commerce Funds, the Advisor has agreed
to manage each Fund's investments and to be responsible for, place orders for,
and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee at the annual rate
of 0.50% of the average daily net assets of each of the National Tax-Free Bond
and Missouri Tax-Free Bond Funds. The Advisor may agree to voluntarily waive its
fees in whole or in part with respect to any particular Fund. As stated in the
"Summary of Expenses," for the current fiscal year the Advisor intends to
voluntarily waive a portion of the investment advisory fees otherwise payable by
the Missouri Tax-Free Bond Fund so that the advisory fee payable by such Fund
will be 0.30% of the average daily net assets of such Fund.
Craig A. MacPherson, CFA and Vice President, is the person primarily
responsible for the day-to-day management of each Fund's investments. Mr.
MacPherson joined the Investment Management Group of Commerce Bank, N.A. (Kansas
City) in 1991 as a manager of fixed income investments. Mr. MacPherson came to
Commerce Bank from Bank IV, Wichita, Kansas, where he held the title of Vice
President and Trust Investment Officer. He served as portfolio manager and head
of fixed income investments in Bank IV's trust investment section since 1987 and
its predecessor trust divisions since 1972.
29
<PAGE>
More About the Administrator
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is
a separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes The
Commerce Funds with office facilities and is responsible for ordinary clerical,
recordkeeping and bookkeeping services required to be maintained by The Commerce
Funds (excluding those maintained by The Commerce Funds' Custodian, Transfer
Agent, Advisor and any Sub-Advisor), preparation and filing of documents
required to comply with federal and state securities laws, supervising the
activities of the Custodian and Transfer Agent, providing assistance in
connection with meetings of the Board of Trustees and shareowners and other
administrative services necessary to conduct the business of The Commerce Funds.
For these services and facilities, GSAM is entitled to receive a monthly fee
from each Fund at an annual rate of 0.15% of its average daily net assets.
Service Organizations
Pursuant to a shareowner servicing plan ("Servicing Plan") adopted by its
Board of Trustees, The Commerce Funds may enter into agreements ("Shareowner
Servicing 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 their customers who beneficially own shares. Such services, which
are described more fully in the Statement of Additional Information, may include
processing purchase and redemption requests from customers, placing net purchase
and redemption orders with the Distributor, processing, among other things,
distribution payments from The Commerce Funds, providing necessary personnel and
facilities to establish and maintain customer accounts and records and providing
information periodically to customers showing their positions in Fund shares.
For these services, the Service Organizations will be entitled to receive
fees from a Fund at an annual rate of up to 0.25% of the average daily net asset
value of Fund shares held by such Service Organizations for the benefit of their
customers. The Service Organizations are required to provide their customers
with a schedule of any credits, fees or other conditions that may be applicable
to the investment of customer assets in Fund shares.
Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into Shareowner
Servicing Agreements.
30
<PAGE>
TAX INFORMATION
As with any investment you should consider the tax implications of an investment
in a Fund. You should consult your tax advisor with specific reference to
your own tax situation.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send written
notices to shareowners annually regarding the tax status of distributions made
by the Funds. You should save your regular account statements because they
contain information you will need to calculate your capital gains or losses upon
your sale or exchange of shares in a Fund.
Federal Taxes. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself is not required to pay federal income taxes.
To satisfy various requirements in the Code, each Fund expects to
distribute virtually all its net income each year. Each Fund anticipates that
most of its distributions will be dividends derived from interest on Municipal
Obligations ("exempt-interest dividends"). Such exempt-interest dividends may be
treated by you as excludable from your gross income (unless, because of your
particular situation, exclusion would be disallowed). You should note that
income that is not subject to federal income taxes may nonetheless have to be
considered along with other adjusted gross income in determining whether any
Social Security payments received by you are subject to federal income taxes.
If the Funds hold certain so-called "private activity bonds," you will need
to include as an item of tax preference for purposes of the federal alternative
minimum tax that portion of the dividends paid by the Fund derived from interest
received on such bonds. In addition, corporate shareowners will need to take
into account all exempt-interest dividends paid by the Funds in determining
certain adjustments for the federal alternative minimum tax and the
environmental tax.
Dividends derived from Fund net capital gains ("capital gain dividends")
(the excess, if any, of net long-term capital gains over net short-term capital
losses) will be taxable to you as a long-term capital gain regardless of how
long you hold Fund shares, whether such gains were recognized by the Fund before
you acquired shares of the Fund, and whether the dividends are paid in cash or
reinvested in Fund shares.
Any dividend based on Fund income other than interest on Municipal
Obligations or net capital gains will be taxable to you as ordinary income,
whether the dividend is received in cash or additional shares. The Funds will
determine annually the percentages of their respective net investment income
which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable and
will apply these percentages uniformly to all dividends declared from net
investment income during that year.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for tax purposes to have been paid by
the Fund and received by you in that year, so long as the dividends are actually
paid on or before January 31 of the following year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the
31
<PAGE>
price at which the shares are sold or exchanged and the price or prices at which
the shares were originally purchased for cash or under the dividend reinvestment
plan. If you hold shares for six months or less and during that time receive an
exempt-interest dividend attributable to those shares, any loss realized on the
sale or exchange of those shares will be disallowed to the extent of the exempt-
interest dividend. If you hold shares for six months or less and during that
time receive a capital gain dividend on those shares, any loss realized on the
sale or exchange of those shares will be treated as a long-term capital loss to
the extent of the capital gain dividend.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided an
incorrect Social Security Number or Taxpayer Identification Number or no number
at all, (ii) who is subject to withholding by the Internal Revenue Service for
failure properly to include on his return payments of interest or dividends, or
(iii) who has failed to certify to the Fund, when required to do so, that he is
not subject to backup withholding or that he is an "exempt recipient."
Missouri Taxes. Resident individuals, trusts and estates resident in
Missouri, and corporations within Missouri tax jurisdiction, will not be subject
to Missouri income tax on dividends from the Missouri Tax-Free Bond Fund that
are derived from interest on obligations of the State of Missouri and its
political subdivisions (to the extent such interest is exempt from federal
income tax) or on obligations issued by the federal Government, the Government
of Puerto Rico, the Virgin Islands, or Guam. Resident individuals, trusts and
estates and corporations generally will be subject to Missouri income tax on
other dividends received from the Fund including dividends derived from interest
on obligations of other issuers and all long-term and short-term capital gains.
Other State and Local Taxes. You should consult your tax advisor regarding
state and local tax consequences which may differ from the federal tax
consequences described above.
HOW PERFORMANCE IS MEASURED
A Fund's performance may be quoted in terms of average annual total return,
aggregate total return, yield and tax-equivalent yield as discussed below.
Performance information is historical and is not intended to indicate
future results.
From time to time, total return, yield and tax-equivalent yield data for
the Funds may be quoted in advertisements. The performance of each Fund may be
compared to those of other mutual funds with similar investment objectives and
to relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of a Fund may be compared to data prepared by
Lipper Analytical Services, Inc., Mutual Fund Forecaster, Wiesenberger
Investment Companies Services, Morningstar or CDA Investment Technologies, Inc.,
as well as to indices such as the Lehman Brothers Bond Indexes or the Consumer
Price Index. Performance data as reported in national financial publications
such as Money Magazine, Forbes, Barron's, Morningstar, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of a Fund.
Performance is based on historical earnings and is not intended to indicate
future performance. The investment return and principal value of an investment
in a Fund will fluctuate so that shares, when
32
<PAGE>
redeemed, may be worth more or less than their original cost. Performance data
may not provide a basis for comparison with bank deposits and other investments
which provide a fixed yield for a stated period of time. Changes in the net
asset value should be considered in ascertaining the total return to shareowners
for a given period. Total return data should also be considered in light of the
risks associated with a Fund's composition, quality, operating expenses and
market conditions. Any fees charged by The Commerce Funds directly to its
customers in connection with investments in the Funds will not be included in
the Funds' calculations of performance data. The methods used to compute the
Fund's yield and total return are described in more detail in the Statement of
Additional Information.
The Funds calculate their total return on an "average annual total return"
basis for various periods from the date a Fund commences investment operations
and for other periods as permitted under SEC rules. Average annual total return
reflects the average annual percentage change in value of an investment over the
measuring period. Total return may also be calculated on an aggregate total
return basis for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return reflect changes in the price of a Fund's shares and
assume that dividend and capital gain distributions are reinvested. When
considering average total return figures for periods longer than one year, you
should note that the annual total return for any one year may be more or less
than the average for the entire period. A Fund may also advertise its total
return on an aggregate, year-by-year or other basis for various specified
periods through charts, graphs, schedules or quotations.
The yield of a Fund is computed based on the Fund's net income during a
specified 30-day (or one month) period. More specifically, the Fund's yield is
computed by dividing its per share net income during the relevant period by the
per share maximum public offering price on the last day of the period and
annualizing the result on a semi-annual basis.
The tax-equivalent yield for a Fund shows the amount of taxable yield
needed to produce an after-tax equivalent of a tax-free yield, and is calculated
by increasing the yield by the amount necessary to reflect the payment of
federal and/or state income taxes at a stated rate. A Fund's tax-equivalent
yield will always be higher than a Fund's yield.
Periodically, each Fund's total return (calculated on an average annual
total return and/or an aggregate total return basis for various periods), yield
and tax-equivalent yield may be quoted in advertisements or in communications to
you. Both methods of calculating total return reflect the sales charge imposed
by the Funds and assume that dividend and capital gain distributions made by the
Funds during the period are reinvested in Fund shares. The Funds may also
advertise quotations of total return, yield and tax-equivalent yield that do not
reflect the sales charge imposed on the purchase of Fund shares. Quotations
which do not reflect sales charges will, of course, be higher than quotations
which do reflect sales charges.
Set forth below are certain performance data for existing common funds
which are managed by the Advisor. This performance information is deemed
relevant since these funds are managed using substantially the same investment
objectives, policies, restrictions and portfolio managers as those to be
followed by the National Tax-Free Bond and Missouri Tax-Free Bond Funds,
respectively, and take into consideration the expense ratios expected to be
incurred by the respective Funds. However, this performance data is not
necessarily indicative of the future performance of the Funds.
33
<PAGE>
NATIONAL TAX-FREE BOND FUND(1)
AVERAGE ANNUAL TOTAL RETURNS FOR VARIOUS PERIODS ENDED 9/30/94
<TABLE>
<CAPTION>
National Tax-Free
Bond Fund(2) National Tax-Free
(assuming Bond Fund(3)
sales charges) (assuming no sales charge)
----------------- --------------------------
<C> <C>
One Year.................................. -5.62% -2.19%
Five Years................................ 4.81% 5.56%
Ten Years................................. 6.74% 7.12%
</TABLE>
- -------------
(1) The existing common investment fund, The National Tax-Free Bond Fund, is a
common fund managed by Commerce Bank, N.A. (Kansas City) for personal trust
fiduciary accounts.
(2) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
annual operating expenses of 0.85% of average daily net assets, which are
the projected expenses (after fee waivers and reimbursements) for the
National Tax-Free Bond Fund, and assuming a sales charge of 3.50%.
(3) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
annual operating expenses of 0.85% of average daily net assets, which are
the projected expenses (after fee waivers and reimbursements) for the
National Tax-Free Bond Fund, but assuming full waiver of the sales charge.
MISSOURI TAX-FREE BOND FUND(1)
AVERAGE ANNUAL TOTAL RETURNS FOR VARIOUS PERIODS ENDED 9/30/94
<TABLE>
<CAPTION>
Missouri Tax-Free Missouri Tax-Free
Bond Fund(2) (assuming Bond Fund(3)(assuming
sales charges) no sales charges)
---------------------- ---------------------
<C> <C>
One Year............................ -5.68% -2.25%
Since Inception (12/l/89)........... 4.75% 5.58%
</TABLE>
_______________
(1) The existing common investment fund, The Missouri Tax-Free Bond Fund, is a
common fund managed by Commerce Bank, N.A. (Kansas City) for personal trust
fiduciary accounts.
(2) The above information is the SEC total return for the existing fund for the
periods indicated assuming reinvestment of all net investment income after
taking into account annual operating expenses of 0.65% of average daily net
assets, which are the projected expenses (after fee waivers and
reimbursements) for the Missouri Tax-Free Bond Fund, and assuming a sales
charge of 3.50%.
(3) The above information is the SEC total return for the periods indicated
assuming reinvestment of all net investment income after taking into account
annual operating expenses of 0.65% of average daily net assets, which are
the projected expenses (after fee waivers and reimbursements) for the
Missouri Tax-Free Bond Fund, but assuming full waiver of the sales charge.
34
<PAGE>
OTHER INFORMATION
The Commerce Funds is a Delaware business trust that was organized on
February 7, 1994.
About The Commerce Funds
The Commerce Funds' Trust Instrument authorizes the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest,
without par value, of one or more series of shares representing interests in
eight different Funds and such other funds (or classes thereof) as the Trustees
may from time to time create and establish.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds and
property of such series of The Commerce Funds.
Voting Rights
Shareowners are entitled to one vote for each full share held and
fractional votes for fractional shares held. Additionally, except when required
by the 1940 Act or when the Board of Trustees has determined that a matter
affects the interests of more than one series, all shares shall be voted
separately by individual series. The Board of 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.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will be
held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a
shareowner meeting. Such meetings will be held when requested by the shareowners
of 10% or more of The Commerce Funds' outstanding shares of beneficial interest.
The Commerce Funds will assist in shareowner communications in such matters to
the extent required by law and The Commerce Funds' undertaking with the
Securities and Exchange Commission. Voting rights are not cumulative, and
accordingly, the owners of more than 50% of the aggregate shares of The Commerce
Funds may elect all of the Trustees irrespective of the vote of the other
shareowners.
As of the date immediately preceding the public offering of shares,
Goldman, Sachs & Co., the Distributor, owned all of the outstanding shares of
each Fund. It is contemplated that the public offering of the shares of the
Funds will reduce the Distributor's holdings to less than 5% of the total shares
outstanding.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of The Commerce Funds or of a particular Fund means the
affirmative vote of the holders of the lesser of (a) more than 50% of the
outstanding shares of The Commerce Funds or such Fund, or (b) 67% or more of the
shares of The Commerce Funds or such Fund present at a meeting if more than 50%
of the outstanding shares of The Commerce Fund or such Fund are represented at a
meeting in person or by proxy.
Shareowner Reports
Shareowners of record will be provided each year with a semi-annual report
showing each Fund's investments and other information as of April 30 and, after
the close of The Commerce Funds' fiscal year on October 31, with an annual
report containing audited financial statements.
35
<PAGE>
Inquiries
We welcome any inquiries you may have regarding The Commerce Funds. Please
consult your investment representative or call our toll-free service and
information number at 1-800-305-2140.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in the Statement of
Additional Information in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by The Commerce Funds or its distributor. This
Prospectus does not constitute an offering by The Commerce Funds or by the
Distributor in any jurisdiction in which such offering may not lawfully be made.
36
<PAGE>
Not to be used for Individual Retirement Accounts- Account #__________________
For an IRA application,
call Shareowner Services at 1-800-305-2140 Order #____________________
-------------------
commerce funds (TM)
-------------------
Account Application Form
- --------------------------------------------------------------------------------
This Account Application The Commerce Funds
Form Should be Forwarded c/o Shareowner Services
Promptly to: P.O. Box 16931
St. Louis, MO 63105
For additional information call 1-800-305-2140
Date:
--------------------------
- --------------------------------------------------------------------------------
1. Account Registration Please Print
Individual
---------------------------------------------------
First Name Initial Last Name (Birthdate)
------------------
SS# or Tax ID#
Joint Tenants
The account will be registered as "Joint Tenants
with Right of Survivorship" unless otherwise
specified.
---------------------------------------------------
First Name Initial Last Name (Birthdate)
------------------
SS# or Tax ID#
---------------------------------------------------
First Name Initial Last Name (Birthdate)
------------------
SS# or Tax ID#
Gift to Minors
---------------------------------------------------
Custodian's Name (Only one can be named)
--------------------------------- -------------
Minor's Name (Only one) SS#
Under the _______________________________ (State
of Residence) Uniform Gift to Minors Act
Additional documentation Corporation, Trust, or other Entity
may be required
------------------------------------------------
Name of Corporation, Trust or other Non-Person
Entity
------------------
Tax ID#
---------------------------------------------------
Attention
---------------------------------------------------
Date of Trust Instrument:
---------------------------------------------------
Name of Beneficiary (If to be included in the
registration)
---------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
- --------------------------------------------------------------------------------
2. Mailing Address ---------------------------------------------------
Street
( )
--------------------------
Daytime Phone
---------------------------------------------------
City State Zip Code
<PAGE>
- --------------------------------------------------------------------------------
3. To Purchase Shares Check appropriate boxes:
$2000 Minimum (except [ ] Short Term Government $________
pursuant to the Amount
Automatic Investment
Plan - Minimum is [ ] Aggressive Growth $________
$1000) Amount
[ ] Bond $________
Amount
[ ] International Equity $________
Amount
[ ] Balanced (Employee
Benefit Plans only) $________
Amount
[ ] National Tax-Free
Bond $________
Amount
[ ] Growth $________
Amount
[ ] Missouri Tax-Free
Bond $________
Amount
[ ] A check (payable to "The Commerce Funds") for
$_________________ is enclosed.
[ ] I/we certify that I/we am/are an entity exempt
from the sales charge according to the "How To
Buy Shares" section in the Prospectus and I/we
am/are, therefore, entitled to purchase Fund
shares at net asset value. By checking this
box, the undersigned agrees that I/we will
notify Commerce Funds Shareowner Services at or
prior to purchase if I/we am/are no longer in
one of the categories of eligible investors.
Reason for exemption
---------------------------
- --------------------------------------------------------------------------------
4. Dividend and See "Dividend and Distribution Policies" in the
Distribution Options Prospectus
Choose how you wish to receive dividends. If no
boxes are checked, Option A will be assigned.
A. [ ] Reinvest all dividends and capital gains.
B. [ ] Receive dividends in cash and reinvest
capital gains (Complete cash dividend
section below.)
C. [ ] Receive all dividends and capital gains in
cash (Complete cash dividend section below.)
D. [ ] All dividends and capital gains reinvested
in another Commerce Fund account. (See
Prospectus regarding limitations on this
privilege.)
Fund Name Account Number
---------------- -----------
Please send cash dividends to:
[ ] Account registration address.
[ ] Deposit to bank (attach voided check/deposit
slip)
[ ] Check to special payee as follow:
(Signature Guarantee required.
See Section 13 of this Form.)
Name of Payee
--------------------------------------
Account No. (if applicable)
------------------------
Street Address
-------------------------------------
---------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
5. Right of Accumulation See "How To Buy Shares" in the Prospectus
Cumulative quantity discounts are applicable if a
shareowner's current value of existing shares of a
Fund alone or in combination with shares of any
other Fund described in the Prospectus on which a
sales charge was paid, total the requisite amount
for receiving a discount ($100,000 minimum) as
described in the accompanying Prospectus. Below are
listed all the accounts (account name, Fund and
number) which should be aggregated for a right of
accumulation.
Name
-----------------------------------------------
Fund
-----------------------------------------------
Acct. No.
------------------------------------------
Name
-----------------------------------------------
Fund
-----------------------------------------------
Acct. No.
------------------------------------------
Name
-----------------------------------------------
Fund
-----------------------------------------------
Acct. No.
------------------------------------------
- --------------------------------------------------------------------------------
6. Letter of Intent See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or
in combination with shares of any other Fund, on
which a sales charge was paid, described in the
Prospectus which qualify for a quantity discount as
described in the accompanying Prospectus, in an
amount that will equal or exceed:
[ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000
I/we agree to the Letter of Intent and Escrow
Agreement described in the accompanying Prospectus
under "How to Buy Shares--Letter of Intent" and
incorporated by reference herein.
<PAGE>
- --------------------------------------------------------------------------------
7. Automatic Investment See "What is Dollar Cost Averaging and How Can I
Plan Implement It?" in the Prospectus
(Attach voided check or
deposit slip) Beginning on the day of these months:
J F M A M J J A S O N D (circle all months that
apply), I/We authorize State Street Bank (the
custodian for a Fund) to debit the amount requested
below from my/our bank account for investment in a
Fund. I/We understand that my/our participation in
the Automatic Investment Plan is subject to the
terms and conditions of such plan as amended from
time to time.
---------------------------------------------------
Amount of each monthly investment (minimum $100)
---------------------------------------------------
Name of Fund
---------------------------------------------------
Amount of each monthly investment (minimum $100)
---------------------------------------------------
Name of Fund
---------------------------------------------------
Authorized Signature (as shown on bank records)
---------------------------------------------------
Authorized Signature
(if joint bank account both sign)
- --------------------------------------------------------------------------------
8. Telephone Purchase/ See "How To Buy Shares" or "How To Sell Shares"
Redemption in the Prospectus
(Attach voided check or
deposit slip) [ ] The Commerce Funds and its agent is hereby
authorized to honor telephone, telegraphic, or
other instructions, without signature
guarantee, from any person for the redemption
of shares for the above account, without an
obligation on behalf of The Commerce Funds or
its agent, to verify that such person is the
shareowner of record or authorized to give
purchase/redemption instructions, provided
proceeds are sent by federal wire (minimum
$1,000) or electronic funds transfer to/from
the bank account indicated on your voided check
or deposit slip or mailed to the account
registration address. Neither a Fund nor its
agent shall be liable for telephone purchases
or redemptions or for payments made to any
unauthorized account for instructions
reasonably believed to be genuine. The Commerce
Funds will employ reasonable procedures to
confirm that such instructions given are
genuine.
- --------------------------------------------------------------------------------
9. Telephone Exchange See "Can I Exchange My Investment From One
Commerce Fund To Another?" in the Prospectus
Exchange Privilege (you will have this privilege
unless declined)
[ ] I/We do not wish to authorize telephone
exchanges.
- --------------------------------------------------------------------------------
10. Automatic Exchanges See "Can I Have Exchanges Made Automatically?"
in the Prospectus
The originating Fund's balance must be at least
$2,000 after the exchange and the receiving Fund's
minimum investment must be met. Exchanges will take
place each month after such exchanges commence
until terminated.
I/We hereby authorize automatic exchanges of
$_____________ (exact dollars - $250 minimum) into
my/our identically registered account:
Exchange from (Name of Fund)
------------------------
to (Name of Fund)
------------------------
Account No. (if known)
-----------------------------
Please make exchanges on the day beginning
the month of _____________________
- --------------------------------------------------------------------------------
11. Duplicate Mailings Check the box if you would like duplicate
confirmations/statements sent to another address:
---------------------------------------------------
Name
---------------------------------------------------
Street Address City State Zip
<PAGE>
- --------------------------------------------------------------------------------
12. Automatic Minimum account balance must be $5,000.
Withdrawal Plan Withdrawal minimum is $100.
Check One: [ ] Monthly [ ] Quarterly
[ ] Semi-Annual [ ] Annual
Please make payments via (check one)
[ ] check [ ] ACH (Bank must be ACH affiliated.
Attach voided check). Payments made via check are
withdrawn from your account on or about the 1st or
15th of a month for monthly withdrawals or the 15th
of the month for quarterly/semi-annual/annual
withdrawals. (I understand that I may change the
date of redemption, via ACH, or the amount at any
time in writing to the Fund at the address stated
above.)
If withdrawal payments are to be made via ACH
(attach voided check/deposit slip)
Please withdraw $________________ from my
account on the ___________ of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered
owner. Signature Guarantee required. (See Section
13 of this Form.)
---------------------------------------------------
Name of check recipient Address
---------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
13. Taxpayer ID 1) The number shown on this Account Application
Certification Form is my/our correct Taxpayer Identification
and Signature number, and 2) I/we am/are not subject to backup
Authorization withholding because (a) I/we am/are exempt from
backup withholding, or (b) I/we have not been
notified by the Internal Revenue Service (IRS) that
I/we am/are subject to backup withholding as a
result of a failure to report all interest or
dividends, or (c) the IRS has notified me/us that
I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject
to federal backup withholding because of under
reporting interest or dividends on your federal tax
return or if you have not been notified by the IRS
that you are no longer subject to backup
withholding.
I/we further certify that I/we am/are neither a
citizen nor a resident of the United States for the
purpose of the Internal Revenue Code. I/we am/are a
resident of ___________________________________.
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT
IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE
TO YOU.
By checking only the appropriate box and signing
below, I/we certify under penalties of perjury
that:
[ ] I/we do not have a taxpayer identification
number, but I/we have applied for or intent
to apply for one. I/we understand that the
required 31% withholding may apply before
I/we provide such number and certifications,
which should be provided within 60 days.
or [ ] I/we am/are an exempt recipient.
or [ ] I/we am/are neither a citizen nor a
resident of the United States for the
purpose of the Internal Revenue Code. I/we
am/are a resident of ______________________.
Permanent Foreign Address:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
- --------------------------------------------------------------------------------
By the execution of this Account Application Form,
the undersigned represents and warrants that it has
the full right, power and authority to make the
investment applied for pursuant to this Form and is
acting for itself or in some fiduciary capacity in
making such investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED
THE SAME.
Sign Here:
---------------------------------------------------
Signature Name (print) and Title
---------------------------------------------------
Signature Name (print) and Title
Signature Guarantee required only if a special
payee/address is designated under item #'s 4 and
12. See "How To Sell Shares" in the Prospectus.
---------------------------------------------------
Signature Guarantee (if required)
<PAGE>
- --------------------------------------------------------------------------------
14. For Dealer Only Investment dealer's signature is required for
Automatic Withdrawal Plan or Letter of Intent. If
an Automatic Withdrawal Plan is being opened, we
believe that the amount to be withdrawn is
reasonable in light of the investor's circumstances
and we recommend establishment of the account.
---------------------------------------------------
Branch Office Location Branch Number/Branch Phone
---------------------------------------------------
Reg. Rep. Number Reg. Rep.'s Name
---------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read the disclosure
statement and has been told and understands that:
. shares of the Funds are not bank 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 company or its affiliates, or any
other bank
. are not federally insured or guaranteed by the U.S. Government, Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other
government agency
. investment in the Funds involves investment risks, including possible loss of
the principal amount invested
. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to the Funds and receive compensation for such
services as disclosed in the current prospectus.
. sales charges may apply.
Dated:
--------------------- --------------------------------
Signature
--------------------------------
Signature
<PAGE>
[ART APPEARS HERE]
<PAGE>
CROSS REFERENCE SHEET
---------------------
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
Aggressive Growth
International Equity Fund
National Tax-Free Bond Fund
Missouri Tax-Free Bond Fund
<TABLE>
<CAPTION>
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
<S> <C>
10. Cover Page....................................... Cover Page
11. Table of Contents................................ Table of Contents
12. General Information and History.................. Description of Shares
13. Investment Objectives and Policies............... Investment Objectives, Policies
and Risk Factors
14. Management of Registrant......................... Management
15. Control Persons and Principal.................... Description of Shares
Holders of Securities
16. Investment Advisory and Other Services........... Management
17. Brokerage Allocation and other Practices......... Investment Objectives, Policies
and Risk Factors
18. Capital Stock and Other Securities............... Net Asset Value; Additional
Purchase and Redemption Information;
Description of Shares
19. Purchase, Redemption and Pricing................. Net Asset Value;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status....................................... Additional Information
Concerning Taxes
21. Underwriters..................................... Not Applicable
22. Calculation of Performance Data.................. Additional Information on
Performance
23. Financial Statements............................. Report of Independent Auditors
Financial Statements
</TABLE>
<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.
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<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.
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<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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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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"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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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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<PAGE>
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
-22-
<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
-23-
<PAGE>
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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<PAGE>
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.
-25-
<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
-26-
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
-34-
<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>
-36-
<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
-38-
<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
-39-
<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:
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<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
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<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
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<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
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<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>
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>
[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
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.
A-4
<PAGE>
"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.
A-5
<PAGE>
"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
- ----------------------------
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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<PAGE>
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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<PAGE>
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.
B-9
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements
(1) Included in Part A: Financial Highlights with respect to 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.
(2) Included in Part B are the following financial statements for 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:
Audited
- An Independent Auditor's Report dated September 2, 1994, a
Statement of Assets and Liabilities dated September 2, 1994 and
Notes to Statement of Assets and Liabilities.
Unaudited
- Statements of Assets and Liabilities dated April 30, 1995.
- Statements of Operations dated April 30, 1995.
- Statements of Changes in Net Assets dated April 30, 1995.
- Financial Highlights dated April 30, 1995.
- Schedules of Investments dated April 30, 1995.
- Notes to the Financial Statements.
(b) Exhibits
(1) Trust Instrument dated February 7, 1994 is filed herein.
(2) Bylaws of Registrant are filed herein.
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Advisory Agreement among Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City) is filed
herein.
(b) Sub-Advisory Agreement among Commerce Bank, N.A. (St.
Louis), Commerce Bank, N.A. (Kansas City) and Rowe Price-
Fleming International, Inc. is filed herein.
(6) Distribution Agreement between Registrant and Goldman, Sachs &
Co. is filed herein.
(7) Not Applicable.
(8) (a) Custodian Agreement between Registrant and State Street
Bank and Trust Company is filed herein.
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<PAGE>
(b) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company is filed herein.
(9) (a) Administration Agreement between Registrant and Goldman
Sachs Asset Management is filed herein.
(b) Form of Shareholder Service Plan and Servicing Agreement
between Registrant, Commerce Bank, N.A. (St. Louis) and
Commerce Bank, N.A. (Kansas City) are filed herein.
(10) Opinion and Consent of Counsel.*
(11) (a) Consent of Drinker Biddle & Reath is filed herein.
(b) Consent of Independent Auditors is filed herein.
(12) Not Applicable.
(13) (a) Purchase Agreement between Registrant and Initial Trustee
is filed herein.
(b) Purchase Agreement between Registrant and Goldman, Sachs &
Co. is filed herein.
(c) Purchase Agreement between Registrant and Commerce Bank,
N.A. (Kansas City) is filed herein.
(14) Not Applicable.
(15) Not Applicable.
(16) Schedule of Computation of Performance Quotations for 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.
(17) Financial Data Schedules as of April 30, 1995 are filed herein.
_________________________
* Opinion and Consent of Counsel to be filed under Rule 24f-2 as part of
Registrant's Rule 24f-2 Notice.
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<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Registrant is controlled by its Board of Trustees. As of the
effective date of the Registration Statement, all of the
outstanding shares of the Registrant will be held by Goldman,
Sachs & Co., the Registrant's distributor. As of the date of this
Registration Statement, no person is controlled by or under
common control with the Registrant.
Item 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
Number of Record
Holders as of
Title of Series April 30, 1995
--------------- ------------------
Short-Term Government Fund 257
Bond Fund 527
Balanced Fund 218
Growth Fund 751
Aggressive Growth Fund 608
International Equity Fund 480
National Tax-Free Bond Fund 84
Missouri Tax-Free Bond Fund 78
Item 27. INDEMNIFICATION
---------------
Section IV of the form Administration Agreement and Section XIII
of the form Distribution Agreement between the Registrant and Goldman, Sachs &
Co. ("Goldman") provides for indemnification of Goldman in connection with
certain claims and liabilities to which Goldman, in its capacity as Registrant's
Administrator and Distributor, may be subject. A copy of the Form Administration
Agreement is included herewith as Exhibit 9 and Form Distribution Agreement is
incorporated by reference in Exhibit 6.
Registrant intends to obtain from a major insurance carrier a
trustees and officers' liability policy covering certain types of errors and
omissions.
In addition, Section 10.2 of Registrant's Trust Instrument, a
copy of which is incorporated herein by reference as Exhibit 1, provides for
indemnification of the Trustees and officers as follows:
Section 10.2 Indemnification. The Trust shall indemnify each of
---------------
its Trustees against all liabilities and expenses (including
amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by
him in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a
Trustee or thereafter, by reason of his being or having been such
a Trustee except with respect to any matter as to which he shall
------
have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his
duties, provided that as to any matter disposed of by a
--------
compromise payment by such person, pursuant to a consent decree
or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have
received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter
or willful misfeasance, gross negligence or reckless disregard of
duty, or the matter of bad faith had been adjudicated, it would
in the opinion of such counsel have been adjudicated in favor of
such person. The rights accruing to any person under these
provisions shall not exclude any other right to which he may be
lawfully entitled, provided that no person may satisfy any right
--------
of indemnity or
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<PAGE>
reimbursement hereunder except out of the property of the Trust.
The Trustees may make advance payments in connection with the
indemnification under this Section 10.2, provided that the
--------
indemnified person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification.
The Trust shall indemnify officers, and shall have the power to
indemnify representatives and employees of the Trust, to the same
extent that Trustees are entitled to indemnification pursuant to
this Section 10.2.
Section 10.3 of Registrant's Trust Instrument provides for
indemnification of shareholders as follows:
Section 10.3 Shareholders. In case any Shareholder or
------------
former Shareholder of any Series shall be held to be personally
liable solely by reason of his being or having been a Shareholder
of such Series and not because of his acts or omissions or for
some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives,
or in the case of a corporation or other entity, its corporate or
other general successor) shall be entitled out of the assets
belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such
liability. The Trust, on behalf of the affected Series, shall,
upon request by the Shareholder, assume the defense of any claim
made against the Shareholder for any act or obligation of the
Series and satisfy any judgment thereon from the assets of the
Series.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by Registrant of expenses incurred or paid by a Trustee,
officer or controlling person of Registrant in the successful defense of
any action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas
City), the Registrant's investment advisers, provide a comprehensive range
of financial services including investment management, trust, retail,
commercial, brokerage, and correspondent banking services.
Set forth below is a list of all of the directors and senior
executive officers of Commerce Bank, N.A. (Kansas City) and Commerce Bank,
N.A. (St. Louis) and, with respect to each such person, the name and
business address of the company or companies (if any) with which such
person has been connected at any time since November 1, 1992, as well as
the capacity in which such person was connected.
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(Kansas City) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. John O. Brown, Key Industries, Inc. Director
Vice Chairman of the Board 523 East Wall
Ft. Scott, KS
66701-1554
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(Kansas City) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. Jonathan M. Kemper, Tower Properties Director
Chairman and CEO Company
911 Main Street,
Suite 100
Kansas City, MO 64106
Commerce Bancshares, Vice Chairman
Inc.
1000 Walnut Street
Kansas City, MO
Mr. L.W. Stolzer, Commerce Bank, N.A. Chairman and CEO
Director (St. Louis)
727 Poyntz Avenue
P.O. Box 1087
Manhattan, KS
66502-0045
Commerce Bancshares, Vice President
Inc.
Mr. Warren W. Weaver, Roddis Lumber Co. Director
Vice Chairman 727 N. Cherry
P.O. Box 1446
San Antonio, TX 78295
Commerce Bancshares, Vice Chairman
Inc.
Mr. Thomas M. Block, H&R Block, Inc. President
Director 4410 Main Street
Kansas City, MO 64111
Mr. H.D. Cleberg, Farmland Industries, President
Director Inc.
P.O. Box 7305
Kansas City, MO 64116
Mr. Stephen D. Dunn, J.E. Dunn Construction Senior Vice President
Director Co. and Assistant Treasurer
929 Holmes
Kansas City, MO 64106
Mr. Brian D. Everist, Intercontinental President
Director Engineering
Manufacturing
Corporation
P.O. Box 9055
Kansas City, MO 64168
Mrs. Anita B. Gorman, 917 N.E. Vivion Road Civic Leader
Director Kansas City, MO 64118
Mr. Richard C. Green, Jr., UtiliCorp United, Inc. President
Director P.O. Box 13287
Kansas City, MO 64199
Mr. C.L. William Haw, National Farms, Inc. President
Director 1600 Genessee, Suite
846
Kansas City, MO 64102
Mr. William L. Johnson, Northern Pipeline Chief Executive
Director Construction Co. Officer
3435 Broadway, #103
Kansas City, MO 64111
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(Kansas City) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. James M. Kemper, Jr., Tower Properties Chairman and President
Director Company
911 Main, Suite 100
Kansas City, MO 64106
Commerce Bank, N.A. Director
(St. Louis)
8000 Forsyth Blvd.
Clayton, MO 63105
Commerce Bancshares, Director
Inc.
Richard J. Markham, Marion Merrell Dow President and CEO
Director 9300 Ward Parkway
Kansas City, MO 64114
Mr. John N. McConnell, Labconco Corporation Chairman and President
Director 8811 Prospect
Kansas City, MO 64132
Mr. Thomas R. McGee, 4900 Main, Suite 717 Consultant
Director Kansas City, MO 64112
Mr. Robert J. Reintjes, George P. Reintjes President and CEO
Sr., Company, Inc.
Director 3800 Summit
P.O. Box 410856
Kansas City, MO 64141
Mr. Lamson Rheinfrank, Jr., BHA Group, Inc. Chairman
Director 8800 E. 63rd Street
Kansas City, MO 64133
Mr. John H. Robinson, Jr., Black & Veatch Managing Partner -
Director P.O. Box 8405 Facilities Group
Kansas City, MO 64114
Mr. Laidacker M. Seaberg, Midwest Grain President and CEO
Director Products, Inc.
P.O. Box 130
Atchison, KS
66002-2666
Mr. Louis W. Smith, Kansas City Division President
Director Allied-Signal Aerospace
Company
2000 E. Bannister Road
P.O. Box 419159
Kansas City, MO
64141-6159
Mr. Charles S. Sosland, Sosland Companies, Inc. President and CEO
Director 4800 Main Street,
Suite 100
Kansas City, MO 64112
Ms. Susan M. Stanton, Payless Cashways, Inc. President
Director 2300 Main
P.O. Box 419466
Kansas City, MO
64141-0466
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(Kansas City) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. Jack W. Steadman, Kansas City Chiefs Chairman of the Board
Director Football
Club, Inc.
1528 Commerce Bank
Bldg.
1000 Walnut Street
Kansas City, MO 64106
Mr. Heinz K. Wehner, None None
Director
Mr. Hugh J. Zimmer, A.W. Zimmer & Company President
Director 1220 Washington
P.O. Box 414317
Kansas City, MO 64141
Mr. Walter E. Knowles, III, None None
Executive Vice President
Mr. Stephen Melcher, Health Midwest, Inc. Director
Executive Vice President 2142 E. Meyer Blvd.
Kansas City, MO
64132-1199
Mr. John R. Owen, None None
Executive Vice President
Mr. Kenneth J. Ragan, None None
Executive Vice President
Mr. Marc J. Andreoli, None None
Senior Vice President &
Assistant Secretary
Mr. John S. Archer, Commerce Bancshares, Vice President
Senior Vice President Inc.
Mr. Kevin G. Barth, None None
Senior Vice President
Mr. Dan Bolen, None None
Senior Vice President
Mr. Charles G. Buffum, III, LaCrosse Lumber Co. Director
Senior Vice President 200 N. Main
Louisiana, MO 63353
Mr. Norman B. Dawson, None None
Senior Vice President
Community President
Mr. Ralf E. Dirksen, None None
Senior Vice President
Mr. Hugh Graff, None None
Senior Vice President
Ms. Cathy L. Griffis, None None
Senior Vice President
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(Kansas City) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. David R. Goodman, None None
Senior Vice President
Community President
Mr. David H. Lindsey, None None
Senior Vice President
Mr. Steven C. Lynn, None None
Senior Vice President
Mr. Julius A. Madas, None None
Senior Vice President
Michael F. Marlow, None None
Senior Vice President
Mr. T. Alan Peschka, Commerce Bancshares, Vice President,Secretary
Senior Vice President Inc. and General Counsel
Mr. Edward Reardon, None None
President
Mr. George T. Reichman, Broderson Director
Senior Vice President Manufacturing Co.
P.O. Box 14770
14741 W. 106th St.
Lenexa, KS 66215-2015
Mr. Stanley E. Ricketts, None None
Senior Vice President
Ms. Teresa Rouse, None None
Senior Vice President
Mr. James R. Rucker, None None
Senior Vice President
Mr. Michael S. Spafford, None None
Senior Vice President
Mr. Thomas L. Steffens, None None
Senior Vice President
Thomas A. Wallingford, None Alwaco
Senior Vice President Kansas City, MO
Mr. Thomas E. Weiford, None Alwaco
Senior Vice President Kansas City, MO
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. (St. Business Address of Connection with Other
Louis) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. David W. Kemper, Tower Properties Director
Chairman of the Board/CEO Company
911 Main Street, Suite
100
Kansas City, MO 64106
Commerce Bancshares, Chairman, President and
Inc. Chief Executive Officer
Business Men's Director
Assurance Company of
America
One Penn Valley Park
Kansas City, MO 64108
Seafield Capital Director
Corporation
2600 Grand Avenue
Suite 500
Kansas City, MO 64108
Venture Stores, Inc. Director
2001 E. Terra Lane
P.O. Box 110
O'Fallon, MO 63366
Wave Technologies
International, Inc.
10845 Olive Blvd.
St. Louis, MO 63146
Ralcorp Holdings, Inc.
901 Chouteau Avenue
St. Louis, MO 63102
Mr. Seth M. Leadbeater, None None
President and Director
Charles S. Betz None None
Executive Vice President
Jonathan Ford None None
Executive Vice President
Paul D. Kalslbeck None None
Executive Vice President
Charles G. Kim None None
Executive Vice President
Peter F. Mackie Commerce Bancshares, Vice President
Executive Vice President Inc.
Darrell J. Procter Commerce Bancshares, Executive Vice President
Executive Vice President Inc.
Robert Smith None None
Executive Vice President
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. (St. Business Address of Connection with Other
Louis) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
John J. Thiebauth Dotmar, Inc. d/b/a The Director
Executive Vice President Stange Company
2324 Walden Parkway
St. Louis, MO 63146
Norman T. Williams None None
Executive Vice President
Mr. Adrian N. Baker, II, Adrian Baker President
Director Reinsurance
Intermediaries, Inc.
34 North Meramec Ave.
P.O. Box 66871
St. Louis, MO
63166-6871
Mr. William E. Ball, Ladue Building & President
Director Engineering Corp.
11543 Page Service Dr.
St. Louis, MO 63146
Mr. John R. Capps, Plaza Motor Company President
Director 755 N. New Dallas Rd.
St. Louis, MO 63141
Mr. William A. Christison, Husch & Eppenberger Attorney at Law
III, 101 Southwest Adams St.
Director Suite 800
Peoria, IL 61602
Robert E. Conyers, None None
Director
Mr. Thomas P. Danis, Rollins Hudig Hall of Chairman
Director Missouri, Inc.
100 N. Broadway
Suite 1700
St. Louis, MO 63102
Mr. Ken J. Elkins, Pulitzer Broadcasting President and CEO
Director Company
101 South Hanley Rd.
Suite 1250
St. Louis, MO
63105-3428
Mr. James G. Forsyth, III, Moto, Inc. President
Director 721 W. Main St.
P.O. Box 122
Belleville, IL 62222
Mr. Harold L. Helmkampf, Harold F. Helmkampf President
Director General Contractor,
Inc.
121 Hunter Avenue
St. Louis, MO 63124
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(St. Louis) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. James M. Kemper, Jr., Tower Properties Chairman and President
Director Company
911 Main Street,
Suite 100
Kansas City, MO 64106
Commerce Bank, N.A. Director
(Kansas City)
1000 Walnut Street
Kansas City, MO 64106
Commerce Bancshares, Director
Inc.
Mr. Alois J. Koller, Sr., Koller-Craft Plastic Chairman
Director Products, Inc.
Drawer K
Fenton, MO 63026
Ms. Mary Ann Krey, Krey Distributing Chief Executive Officer
Director Company
150 Turner Blvd.
P.O. Box 1030
St. Peters, MO
63376-8030
Mr. Hal A. Kroeger, HALAK, Inc. President
Director P.O. Box 8440
St. Louis, MO 63132
Mr. Ronald K. Lohr, Lohr Distributing Co., President
Director Inc.
1100 S. 9th St.
St. Louis, MO 63104
Mr. John B. Morgan, Subsurface President
Director Constructors, Inc.
110 Angelica St.
St. Louis, MO 63147
Mr. Edward J. Nusrala, Famous Brand Shoes, President
Director Inc.
8620 Olive
St. Louis, MO 63132
Mr. Benjamin J. Rassieur, Paulo Products Co. President
Director 5711 West Park Avenue
St. Louis, MO 63110
Mr. Bruce G. Robert, Sr., Siegel-Robert, Inc. Chairman & CEO
Director 8645 S. Broadway
St. Louis, MO 63111
Mr. Jerome M. Rubenstein, Bryan, Cave Partner
Director One Metro Square
211 N. Broadway
St. Louis, MO
63102-2750
Mr. James E. Schiele, St. Louis Screw & Bolt Chairman and President
Director Co.
6900 N. Broadway
St. Louis, MO 63147
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Position with Name and Principal
Commerce Bank, N.A. Business Address of Connection with Other
(St. Louis) Other Company Company
- --------------------------- ----------------------- --------------------------
<S> <C> <C>
Mr. Gregory B. Vatterott, Charles J. Vatterott & President
Director Company
10449 St. Charles Rock
Rd.
St. Ann, MO 63074
Mr. Earl E. Walker, Carr Lane President
Director Manufacturing Co.
4200 Carr Lane Court
St. Louis, MO 63119
Mr. Mahlon B. Wallace, III, Wallace Properties President & CEO
Director 2001 S. Hanley Rd.
St. Louis, MO 63144
Mr. Horace Wilkins, Jr., Missouri Southwestern President
Director Bell Telephone Company
100 N. Tucker
Rm. 118
St. Louis, MO 63101
</TABLE>
The information required by this Item 28 with respect to each director and
officer of Rowe Price-Fleming International, Inc. is incorporated by
reference to Form ADV and Schedules A and D filed by Rowe Price-Fleming
International, Inc. with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934 (File No.801-14713).
Item 29. PRINCIPAL UNDERWRITER
---------------------
(a) Goldman, Sachs & Co., or an affiliate or a division thereof,
currently serves as investment adviser and distributor of the units or
shares of Goldman Sachs-Money Market Trust, Financial Square Trust, Goldman
Sachs Trust, Goldman Sachs Equity Portfolios, Inc., Trust for Credit Unions
and Paragon Treasury Money Market Fund, and as administrator and
distributor for the units of The Benchmark Funds and for the Shares of
Paragon Portfolio.
(b) Set forth below is certain information pertaining to the general
partners of Goldman, Sachs & Co., distributor for Registrant. None of the
Partners hold positions or offices with the Registrant.
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<PAGE>
GOLDMAN, SACHS & CO. GENERAL PARTNERS
-------------------------------------
<TABLE>
<CAPTION>
Name and Principal Name and Principal
Business Address Business Address
- ------------------------------------ -------------------------------
<S> <C>
Jon S. Corzine, Chairman (1)(2) Gavyn Davies (7)
Henry M. Paulson, Jr. Chairman (8) Dexter D. Earle (2)
Roy J. Zuckerberg (2) John Ehara (10)
David M. Silfen (2) J. Christopher Flowers (2)
Eugene V. Fife (7) Gary Gensler (2)
Richard M. Hayden (2) Charles T. Harris, III (2)
Robert J. Hurst (2) Thomas J. Healey (2)
Howard C. Katz (2) Stephen Hendel (2)
Peter K. Barker (9) Robert E. Higgins (2)
Eric S. Dobkin (2) Ernest S. Liu (2)
Willard J. Overlock, Jr. (2) Eff W. Martin (11)
Frederic B. Garonzik (7) Charles B. Mayer, Jr. (2)
Kevin W. Kennedy (2) Michael J. O'Brien (7)
William C. Landreth (11) Mark Schwartz (2)
Daniel M. Neidich (2) Stephen M. Semlitz (2)
Edward Spiegel (2) Robert K. Steel (7)
Fischer Black (2) John A. Thain (2)
Robert F. Cummings, Jr. (2) John L. Thornton (7)
Angelo De Caro (7) H. Young, Jr. (10)
Steven G. Einhorn (2) Joseph R. Zimmel (2)
David B. Ford (5) Barry L. Zubrow (2)
David M. Leuschen (2) Gary L. Zwerling (2)
Michael R. Lynch (2) Jon R. Aisbitt (7)
Michael D. McCarthy (2) Andrew M. Alper (2)
Donald C. Opatrny, Jr. (7) William J. Buckley (2)
Thomas E. Tuft (2) Frank L. Coulson, Jr. (2)
Robert J. Katz (1)(2) Connie Duckworth (8)
Michael P. Mortara (2) Richard A. Friedman (2)
Llyod C. Blankfun (2) Alan R. Gillespie (7)
John P. Cautain, Jr. (2) John H. Gleberman (2)
Scott M. Pinkus (2) Jacob D. Goldfield (2)
John J. Powers (2) Steven M. Heller (2)
Stephen D. Quinn (2) Ann F. Kaplan (2)
Arthur J. Reimers, III (7) Peter D. Kiernan, III (2)
James P. Riley, Jr. (2) T. Willem Mesdag (7)
Richard A. Sapp (7) Gaetano J. Muzio (2)
Donald F. Textor (2) Robin Neustein (2)
Thomas B. Walker, III (2) Timothy J. O'Neill (2)
Patrick J. Ward (10) Suzanne M. Nora Johnson (9)
Jeffrey M. Weingarten (7) Terence M. O'Toole (2)
Jon Winkelried (2) Carl G.E. Palmstierna (7)
Richard E. Witten (2) Michael G. Rantz (2)
Gregory K. Palm (7) J. David Rogers (10)
Carlos A. Cordeiro (7) Joseph Sassoon (7)
John O. Downing (7) Peter Savitz (10)
Mark Evans (7) Charles B. Seelig, Jr. (2)
Michael D. Fascitelli (2) Ralph F. Severson (11)
Sylvain M. Hefes (7) Gene T. Sykes (9)
Reuben Jeffrey, III (2) Gary A. Syman (10)
Lawrence H, Linden (2) Leslie C. Tortora (2)
Jun Makihara (9) John L. Townsend, III (2)
Masanori Mochida (10) Lee G. Vance (7)
Robert B. Morris, III (11) David A. Viniar (2)
Philip D. Murphy (14) John S. Weinberg (2)
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Name and Principal
Business Address Business Address
- ------------------------------------ -------------------------------
<S> <C>
Hideo Ishihara Kevin M. Kelly
Paul M. Achleitner John C. Kleinert
Armen A. Avanessians Jonathan L. Kolatch
Joel S. Beckman Peter S. Kraus
David W. Blook Robert Litterman
Zachariah Cobrinik Jonathan M. Lopatin
Gary D. Cohn Thomas J. Macirowski
Christopher A. Cole Peter G.C. Mallinson
Henry Cornell Oki Matsumoto
Robert V. Delaney E. Scott Mead
Joseph Della Rosa Eric M. Mindich
J. Michael Evans Steven T. Mnuchin
Lawton W. Fitt Thomas K. Montag
Joseph D. Gatto Edward A. Mule
Peter C. Gerhard Kipp M. Nelson
Nomi P. Ghez Christopher K. Norton
David T. Hamamoto Robert J. O'Shea
Walter H. Haydock Wiet H. Pot
David L. Henle Jack L. Salzman
Francis J. Ingrassia Eric S. Schwartz
Scott B. Kapnick Michael F. Schwerin
Fredric E. Steck Richard S. Sharp
Byron D. Trott Richard G. Sherwood
Barry S. Volpert Cody J. Smith
Peter S. Wheeler Daniel W. Stanton
Anthony G. Williams Esta E. Stecher
Michael J. Zamkow Gary W. Williams
Mark A. Zurack Tracy R. Wolstencroft
Danny O. Yee
</TABLE>
- --------------------
(1) Management Committee
(2) 85 Broad Street, New York, NY 10004
(3) Mellon Bank Center, 1735 Market Street, 26th Floor,
Philadelphia, PA 19103
(4) 100 Crescent Court, Suite 1000, Dallas, TX 75201
(5) One New York Plaza, New York, NY 10004
(6) 1000 Louisiana Street, Suite 550, Houston, TX 77002
(7) Peterborough Court, 133 Fleet Street, London
EC4A 2BB, England
(8) 4900 Sears Tower, Chicago, IL 60606
(9) 333 South Grand Avenue, Suite 1900, Los Angeles, CA 90071
(10) ARK Mori Bldg., 10th Floor, 12-32 Akasaka, 1-chome,
Minato-ku, Tokyo 107, Japan
(11) 555 California Street, 45th Floor, San Francisco, CA 94104
(12) Exchange Place, 53 State Street, 13th Floor,
Boston, MA 02109
(13) Asia Pacific Finance Tower, 37th Floor, Citibank Plaza,
C-14
<PAGE>
3 Garden Road, Hong Kong
(14) Finanz GmbH, MesseTurm, 60308 Frankfurt am Main, Germany
(c) None.
Item 30. Location of Accounts and Records
(1) Commerce Bank, N.A., 8000 Forsyth Boulevard, Clayton, Missouri and Commerce
Bank, N.A. (Kansas City), 1000 Walnut Street, Kansas City, Missouri
(records relating to their functions as investment adviser to each of
Registrant's investment portfolios).
(2) Rowe-Price Fleming International, Inc., 100 East Pratt Street, Baltimore,
Maryland (records relating to its function as sub-investment adviser to
Registrant's International Equity Fund).
(3) Goldman, Sachs & Co., 85 Broad Street, New York, New York (records relating
to its function as administrator and distributor to each of Registrant's
investment portfolios).
(4) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts (records relating to its function as custodian and transfer
agent to each of Registrant's investment portfolios).
(5) Drinker Biddle & Reath, Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania (Registrant's Trust Instrument, By-Laws
and minute books).
Item 31. Management Services
-------------------
(a) Not Applicable.
Item 32. Undertakings
------------
(a) Registrant undertakes to provide its Annual Report upon request without
charge to any recipient of the Prospectuses for 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.
(b) Registrant undertakes to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940 as though they were applicable to it.
C-15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri, on the 30th day of June, 1995.
THE COMMERCE FUNDS
Registrant
/s/ Pleasant Voorhees Miller*
------------------------------
Pleasant Voorhees Miller
President
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment to Registrant's Registration Statement has been signed below
by the following persons in the capacities and on the date indicated.
Signatures Title Date
---------------------------- ------------- ------------
/s/ Randall D. Barron*
- -----------------------------
Randall D. Barron Trustee, Treasurer June 30, 1995
/s/ David L. Bodde*
- -----------------------------
David L. Bodde Trustee June 30, 1995
/s/ John Eric Helsing*
- ------------------------------
John Eric Helsing Trustee, Chairman June 30, 1995
/s/ John Joseph Holland*
- -----------------------------
John Joseph Holland Trustee June 30, 1995
/s/ Pleasant Voorhees Miller*
- ------------------------------
Pleasant Voorhees Miller Trustee June 30, 1995
*By:/s/ W. Bruce McConnel, III
---------------------------
W. Bruce McConnel, III
Attorney-in-Fact
C-16
<PAGE>
COMMERCE FUNDS
--------------
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
99.B1 Trust Instrument dated February 7, 1994.
99.B2 Bylaws of Registrant.
99.B5(a) Advisory Agreement among Registrant,
Commerce Bank, N.A. (St. Louis) and Commerce
Bank, N.A. (Kansas City).
99.B5(b) Sub-Advisory Agreement among Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City)
and Rowe Price-Fleming International.
99.B6 Distribution Agreement between Registrant and
Goldman, Sachs & Co.
99.B8(a) Custodian Agreement between Registrant and State
Street Bank and Trust Company.
99.B8(b) Transfer Agency Agreement between Registrant and
Goldman Sachs Asset Management.
99.B9(a) Administration Agreement between Registrant and
Goldman Sachs Asset Management.
99.B9(b) Form of Shareholder Service Plan and Servicing
Agreement between Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City).
99.B11(a) Consent of Drinker Biddle & Reath.
99.B11(b) Consent of Independent Auditors.
99.B13(a) Purchase Agreement between Registrant and Initial Trustee.
99.B13(b) Purchase Agreement between Registrant and Goldman,
Sachs & Co.
99.B13(c) Purchase Agreement between Registrant and Commerce
Bank, N.A. (Kansas City).
99.B16 Schedule of Computation of Performance Quotations for the
Short-Term Government Fund, Bond Fund, Balanced Fund, Growth
Fund, Aggressive Growth Fund, International Equity Fund,
National Tax-Free Bond and Missouri Tax-Free Bond Fund.
27 Financial Data Schedules as of April 30, 1995.
</TABLE>
C-17
<PAGE>
Exhibit 99.B1
THE COMMERCE FUNDS
------------------
TRUST INSTRUMENT
DATED February 7, 1994
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
NAME AND DEFINITIONS................................ 1
Section 1.1 Name...................................................... 1
Section 1.2 Definitions............................................... 1
ARTICLE II
BENEFICIAL INTEREST................................. 2
Section 2.1 Shares of Beneficial Interest............................. 2
Section 2.2 Issuance of Shares........................................ 2
Section 2.3 Register of Shares and Share Certificates................. 3
Section 2.4 Transfer of Shares........................................ 3
Section 2.5 Treasury Shares........................................... 4
Section 2.6 Establishment of Series................................... 4
Section 2.7 Investment in the Trust................................... 4
Section 2.8 Assets and Liabilities of Series.......................... 5
Section 2.9 No Preemptive Rights...................................... 6
Section 2.10 Personal Liability of Shareholders........................ 6
Section 2.11 Assent to Trust Instrument................................ 6
ARTICLE III
THE TRUSTEES........................................ 6
Section 3.1 Management of the Trust................................... 6
Section 3.2 Initial Trustee........................................... 7
Section 3.3 Term of Office of Trustees................................ 7
Section 3.4 Vacancies and Appointment of Trustees..................... 7
Section 3.5 Temporary Absence of Trustee.............................. 8
Section 3.6 Number of Trustees........................................ 8
Section 3.7 Effect of Death, Resignation, Etc. of a Trustee........... 8
Section 3.8 Ownership of Assets of the Trust.......................... 8
ARTICLE IV
POWERS OF THE TRUSTEES................................. 9
Section 4.1 Powers.................................................... 9
Section 4.2 Issuance and Repurchase of Shares......................... 12
Section 4.3 Trustees and Officers as Shareholders..................... 12
Section 4.4 Action by the Trustees.................................... 12
Section 4.5 Chairman of the Trustees.................................. 13
Section 4.6 Principal Transactions.................................... 13
ARTICLE V
EXPENSES OF THE TRUST................................. 13
Section 5.1 General................................................... 13
-i-
<PAGE>
Section 5.2 Expenses of Series........................................ 14
ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER, ADMINISTRATOR
AND TRANSFER AGENT................................................ 14
Section 6.1 Investment Adviser........................................ 14
Section 6.2 Principal Underwriter..................................... 14
Section 6.3 Administrator............................................. 15
Section 6.4 Transfer Agent............................................ 15
Section 6.5 Parties to Contract....................................... 15
ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS....................... 15
Section 7.1 Voting Powers............................................. 15
Section 7.2 Meetings.................................................. 16
Section 7.3 Quorum and Required Vote.................................. 16
Section 7.4 Action by Written Consent................................. 17
ARTICLE VIII
CUSTODIAN....................................... 17
Section 8.1 Appointment and Duties.................................... 17
Section 8.2 Central Certificate System................................ 18
ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS............................. 18
Section 9.1 Distributions............................................. 18
Section 9.2 Redemptions............................................... 19
Section 9.3 Determination of Net Asset Value and
Valuation of Portfolio Assets..................................... 19
Section 9.4 Suspension of the Right of Redemption..................... 20
Section 9.5 Mandatory Redemption of Shares............................ 20
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION...................... 21
Section 10.1 Limitation of Liability.................................. 21
Section 10.2 Indemnification.......................................... 22
Section 10.3 Shareholders............................................. 22
ARTICLE XI
MISCELLANEOUS..................................... 23
Section 11.1 Trust Not a Partnership.................................. 23
Section 11.2 Trustees' Good Faith Action, Expert
Advice, No Bond or Surety......................................... 23
Section 11.3 Establishment of Record Dates............................ 23
Section 11.4 Termination of Trust or Series........................... 24
Section 11.5 Reorganization........................................... 25
-ii-
<PAGE>
Section 11.6 Filing of Copies, References, Headings................... 25
Section 11.7 Applicable Law........................................... 26
Section 11.8 Amendments............................................... 26
Section 11.9 Fiscal Year.............................................. 27
Section 11.10 Use of the Name "THE COMMERCE FUNDS"..................... 27
Section 11.11 Provisions in Conflict with Law.......................... 27
-iii-
<PAGE>
THE COMMERCE FUNDS
------------------
TRUST INSTRUMENT, made February 7, l994 by Roberta Sampson (the "Trustee").
WHEREAS, the Trustee desires to establish a business trust under the
Delaware Business Trust Act for the investment and reinvestment of funds
contributed thereto;
NOW, THEREFORE, the Trustee declares that all money and property
contributed to the trust hereunder shall be held and managed in trust under this
Trust Instrument as herein set forth below.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
Section 1.1 Name. The name of the trust created hereby is the "THE
----
COMMERCE FUNDS."
Section 1.2 Definitions. Wherever used herein, unless otherwise required
-----------
by the context or specifically provided:
(a) "By-laws" means the by-laws referred to in Article IV, Section
4.1(e) hereof, as from time to time amended;
(b) The terms "Affiliated Person," "Assignment," "Commission,"
"Interested Person" and "Principal Underwriter" shall have the meanings given
them in the 1940 Act. "Majority Shareholder Vote" shall have the same meaning as
the term "vote of a majority of the outstanding voting securities" is given in
the 1940 Act;
(c) "Net Asset Value" means the net asset value of each Series (or
class thereof) of the Trust determined in the manner provided in Article IX,
Section 9.3 hereof;
(d) "Outstanding Shares" means those Shares recorded from time to time
in the books of the Trust or its Transfer Agent as then issued and outstanding,
but shall not include Shares which have been redeemed or repurchased by the
Trust and which are at the time held in the treasury of the Trust;
(e) "Series" means a series of Shares of the Trust established in
accordance with the provisions of Article II, Section 2.6 hereof;
(f) "Shareholder" means a record owner of Outstanding Shares of the
Trust;
-1-
<PAGE>
(g) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust (or class thereof) shall be divided and may include fractions of Shares as
well as whole Shares;
(h) The "Trust" refers to THE COMMERCE FUNDS and reference to the
Trust, when applicable to one or more Series of the Trust, shall refer to such
Series;
(i) The "Trustee" or "Trustees" means the person or persons who has or
have signed this Trust Instrument, so long as such person or persons shall
continue in office in accordance with the terms hereof, and all other persons
who may from time to time be duly qualified and serving as Trustees in
accordance with the provisions of Article III hereof and reference herein to a
Trustee or to the Trustees shall refer to the individual Trustees in their
capacity as Trustees hereunder;
(j) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one or
more of the Trust or any Series, or the Trustees on behalf of the Trust or any
Series.
(k) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time.
(l) "Covered Persons" means the Trustees, officers and Shareholders
entitled to indemnification in accordance with Article X, and such other
representatives and employees of the Trust as the Trustees, in their sole
discretion, may from time to time indemnify pursuant to Article X.
ARTICLE II
----------
BENEFICIAL INTEREST
-------------------
Section 2.1 Shares of Beneficial Interest. The beneficial interest in the
-----------------------------
Trust 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 number of Shares of each Series, and class thereof,
authorized hereunder is unlimited. Each Share shall have no par value. All
Shares issued hereunder, including without limitation, Shares issued in
connection with a dividend in Shares or a split or reverse split of Shares,
shall be fully paid and nonassessable.
Section 2.2 Issuance of Shares. The Trustees in their discretion may,
------------------
from time to time, without vote of the Shareholders, issue Shares to such party
or parties and for such amount and type of consideration, subject to applicable
law,
-2-
<PAGE>
including cash or securities (including Shares of a different Series), at such
time or times and on such terms as the Trustees may deem appropriate, and may in
such manner acquire other assets (including the acquisitions of assets subject
to, and in connection with, the assumption of liabilities) and businesses. In
connection with any issuance of Shares, the Trustees may issue fractional Shares
and Shares held in the treasury. 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 Trust.
Section 2.3 Register of Shares and Share Certificates. A register shall
-----------------------------------------
be kept at the principal office of the Trust or an office of the Trust's
transfer agent which shall contain the names and addresses of the Shareholders
of each Series, the number of Shares of that Series (or any class or classes
thereof) held by them respectively and a record of all transfers thereof. As to
Shares for which no certificate has been issued, such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or other distributions or otherwise to exercise or enjoy the
rights of Shareholders. No Shareholder shall be entitled to receive payment of
any dividend or other distribution, nor to have notice given to him as herein or
in the By-laws provided, until he has given his address to the transfer agent or
such other officer or agent of the Trustees as shall keep the said register for
entry thereon. The Trustees, in their discretion, may authorize the issuance of
share certificates and promulgate appropriate rules and regulations as to their
use. In the event that one or more certificates are issued, whether in the name
of a shareholder or a nominee, such certificate or certificates shall constitute
evidence of ownership of Shares for all purposes, including transfer, assignment
or sale of such Shares, subject to such limitations as the Trustees may, in
their discretion, prescribe.
Section 2.4 Transfer of Shares. Except as otherwise provided by the
------------------
Trustees, Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing, upon
delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer, together with a Share certificate, if one is
outstanding, and such evidence of the genuineness of each such execution and
authorization and of such other matters as may be required by the Trustees. Upon
such delivery the transfer shall be recorded on the register of the Trust. Until
such record is made, the Shareholder of record shall be deemed to be the holder
of such Shares for all purposes hereunder and neither the Trustees nor the
Trust, nor any transfer agent or registrar nor any officer, employee or agent of
the Trust shall be affected by any notice of the proposed transfer.
-3-
<PAGE>
Section 2.5 Treasury Shares. Shares held in the treasury shall, until
---------------
reissued pursuant to Section 2.2 hereof, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
Section 2.6 Establishment of Series. The Trust created hereby shall
-----------------------
consist of one or more Series and separate and distinct records shall be
maintained by the Trust for each Series and the assets associated with any such
Series shall be held and accounted for separately from the assets of the Trust
or any other Series. The Trustees shall have full power and authority, in their
sole discretion, and without obtaining any prior authorization or vote of the
Shareholders of any Series of the Trust, 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 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.
All references to Shares in this Trust Instrument shall be deemed to be
Shares of any or all Series, or classes thereof, as the context may require. All
provisions in this Trust Instrument, relating to a Series of the Trust shall
refer and apply to each class thereof, except as the Trustees may determine or
the context otherwise requires.
The establishment and designation of any Series shall be effective upon the
adoption of a resolution by the Trustees setting forth such establishment and
designation and the relative rights and preferences of the Shares of such
Series. A Series may issue any number of Shares and need not issue shares.
Each Share of a Series of the Trust shall represent an equal beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
shall be entitled to receive distributions of income and capital gains, if any,
which are made with respect to such Series and which are attributable to such
Shares. Upon redemption of Shares, such Shareholder shall be paid solely out of
the funds and property of such Series of the Trust.
Section 2.7 Investment in the Trust. The Trustees shall accept
-----------------------
investments in any Series of the Trust from such persons and on such terms as
they may from time to time authorize. At the Trustees' discretion, such
investments, subject to applicable law, may be in the form of cash or securities
in which the affected Series is authorized to invest, valued as provided in
-4-
<PAGE>
Article IX, Section 9.3 hereof. Investments in a Series shall be credited to
each Shareholder's account in the form of full Shares at the Net Asset Value per
Share next determined after the investment is received; provided, however, that
the Trustees may, in their sole discretion, (a) fix the Net Asset Value per
Share of the initial capital contribution, (b) impose sales or other charges
upon investments in the Trust, or (c) issue fractional Shares.
Section 2.8 Assets and Liabilities of Series. All consideration received
--------------------------------
by the Trust for the issue or sale of Shares of a particular Series, together
with all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall be held and accounted for separately from the other assets of the Trust
and of every other Series and may be referred to herein as "assets belonging to"
that Series. The assets belonging to a particular Series shall belong to that
Series for all purposes, and to no other Series, subject only to the rights of
creditors of that Series. In addition, any assets, income, earnings, profits or
funds, or payments and proceeds with respect thereto, which are not readily
identifiable as belonging to any particular Series shall be allocated by the
Trustees between and among one or more of the Series in such manner as the
Trustees, in their sole discretion, deem fair and equitable. Each such
allocation shall be conclusive and binding upon the Shareholders of all Series
for all purposes, and such assets, income, earnings, profits or funds, or
payments and proceeds with respect thereto shall be assets belonging to that
Series. The assets belonging to a particular Series shall be so recorded upon
the books of the Trust, and shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Series. The assets belonging to each
particular Series shall be charged with the liabilities of that Series and all
expenses, costs, charges and reserves attributable to that Series. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees between or among any one or more of the Series in
such manner as the Trustees in their sole discretion deem fair and equitable.
Each such allocation shall be conclusive and binding upon the Shareholders of
all Series for all purposes. Without limitation of the foregoing provisions of
this Section 2.8, but subject to the right of the Trustees in their discretion
to allocate general liabilities, expenses, costs, charges or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally. Notice of this
-5-
<PAGE>
contractual limitation on inter-Series liabilities shall be set forth in the
certificate of trust of the Trust (whether originally or by amendment) as filed
or to be filed in the Office of the Secretary of State of the State of Delaware
pursuant to the Delaware Business Trust Act, and upon the giving of such notice
in the certificate of trust, the statutory provisions of Section 3804 of the
Delaware Business Trust Act relating to limitations on inter-Series liabilities
(and the statutory effect under Section 3804 of setting forth such notice in the
certificate of trust) shall become applicable to the Trust and each Series. Any
person extending credit to, contracting with or having any claim against any
Series may satisfy or enforce any debt, liability, obligation or expense
incurred, contracted for or otherwise existing with respect to that Series from
the assets of that Series only. No Shareholder or former Shareholder of any
Series shall have a claim on or any right to any assets allocated or belonging
to any other Series.
Section 2.9 No Preemptive Rights. Shareholders shall have no preemptive
--------------------
or other right to subscribe to any additional Shares or other securities issued
by the Trust or the Trustees, whether of the same or other Series.
Section 2.10 Personal Liability of Shareholders. Each Shareholder of the
----------------------------------
Trust and of each Series shall not be personally liable for the debts,
liabilities, obligations and expenses incurred by, contracted for, or otherwise
existing with respect to, the Trust or by or on behalf of any Series. The
Trustees shall have no power to bind any Shareholder personally or to call upon
any Shareholder for the payment of any sum of money or assessment whatsoever
other than such as the Shareholder may at any time personally agree to pay by
way of subscription for any Shares or otherwise. Every note, bond, contract or
other undertaking issued by or on behalf of the Trust or the Trustees relating
to the Trust or to a Series shall include a recitation limiting the obligation
represented thereby to the Trust or to one or more Series and its or their
assets (but the omission of such a recitation shall not operate to bind any
Shareholder or Trustee of the Trust).
Section 2.11 Assent to Trust Instrument. Every Shareholder, by virtue of
--------------------------
having purchased or otherwise acquired a Share, shall become a Shareholder and
shall be held to have expressly assented and agreed to be bound by the terms
hereof.
ARTICLE III
-----------
THE TRUSTEES
------------
Section 3.1 Management of the Trust. The Trustees shall have exclusive
-----------------------
and absolute control over the Trust Property and over the business of the Trust
to the same extent as if the
-6-
<PAGE>
Trustees were the sole owners of the Trust Property and business in their own
right, but with such powers of delegation as may be permitted by this Trust
Instrument. The Trustees shall have power to conduct the business of the Trust
and carry on its operations in any and all of its branches and maintain offices
both within and without the State of Delaware, in any and all states of the
United States of America, in the District of Columbia, in any and all
commonwealths, territories, dependencies, colonies, or possessions of the United
States of America, and in any foreign jurisdiction and to do all such other
things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Trust Instrument, the presumption shall be
in favor of a grant of power to the Trustees.
The enumeration of any specific power in this Trust Instrument shall not be
construed as limiting the aforesaid power. The powers of the Trustees may be
exercised without order of or resort to any court.
Except for the Trustee named herein or Trustees appointed to fill vacancies
pursuant to Section 3.4 of this Article III, the Trustees shall be elected by
the Shareholders owning of record a plurality of the Shares voting at a meeting
of Shareholders. Each Trustee elected or appointed shall indicate in writing his
acceptance of such election or appointment.
Section 3.2 Initial Trustee. The initial Trustee shall be the person
---------------
named herein.
Section 3.3 Term of Office of Trustees. The Trustees shall hold office
--------------------------
during the existence of this Trust, and until its termination as herein
provided; except (a) that any Trustee may resign his trust by written instrument
signed by him and delivered to the Chairman, President, Secretary, or other
Trustees of the Trust, which shall take effect upon such delivery or upon such
later date as is specified therein; (b) that any Trustee may be removed at any
time by written instrument, signed by at least two-thirds of the number of
Trustees prior to such removal, specifying the date when such removal shall
become effective; (c) that any Trustee who requests in writing to be retired or
who has died, become physically or mentally incapacitated by reason of disease
or otherwise, or is otherwise unable to serve, may be retired by written
instrument signed by a majority of the other Trustees, specifying the date of
his retirement; and (d) that a Trustee may be removed at any meeting of the
Shareholders of the Trust by a vote of Shareholders owning at least two-thirds
of the outstanding Shares.
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<PAGE>
Section 3.4 Vacancies and Appointment of Trustees. In case of the
-------------------------------------
declination to serve, death, resignation, retirement, removal, physical or
mental incapacity by reason of disease or otherwise of a Trustee, or a Trustee
is otherwise unable to serve, or an increase in the number of Trustees, a
vacancy shall occur. Whenever a vacancy in the Board of Trustees shall occur,
until such vacancy is filled, the other Trustees shall have all the powers
hereunder and the certificate of the other Trustees of such vacancy shall be
conclusive. In the case of an existing vacancy, the remaining Trustees shall
fill such vacancy by appointing such other person as they in their discretion
shall see fit consistent with the limitations under the 1940 Act.
An appointment of a Trustee may be made by the Trustees then in office in
anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees effective at a later date, provided that said
appointment shall become effective only at or after the effective date of said
retirement, resignation or increase in number of Trustees. As soon as any
Trustee appointed pursuant to this Section 3.4 shall have accepted this trust,
he shall be deemed a Trustee hereunder.
Section 3.5 Temporary Absence of Trustee. Any Trustee may, by power of
----------------------------
attorney, delegate his power for a period not exceeding six months at any one
time to any other Trustee or Trustees, provided that in no case shall less than
two Trustees personally exercise the other powers hereunder except as herein
otherwise expressly provided.
Section 3.6 Number of Trustees. The number of Trustees shall be one, or
------------------
such other number as shall be fixed from time to time by the Trustees.
Section 3.7 Effect of Death, Resignation, Etc. of a Trustee. The
-----------------------------------------------
declination to serve, death, resignation, retirement, removal, incapacity, or
inability of the Trustees, or any one of them, shall not operate to terminate
the Trust or to revoke any existing agency created pursuant to the terms of this
Trust Instrument.
Section 3.8 Ownership of Assets of the Trust. Legal title in and
--------------------------------
beneficial ownership of all of the assets of the Trust shall at all times be
considered as vested in the Trust, except that the Trustees may cause legal
title in and beneficial ownership of any Trust Property to be held by, or in the
name of one or more of the Trustees acting for and on behalf of the Trust, or in
the name of any person as nominee acting for and on behalf of the Trust. No
Shareholder shall be deemed to have a severable ownership interest in any
individual asset of the Trust or of any Series or any right of partition or
possession thereof, but each Shareholder shall have, except as otherwise
provided for herein, a proportionate undivided beneficial interest in the Trust
or
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<PAGE>
Series. The Shares shall be personal property giving only the rights
specifically set forth in this Trust Instrument. The Trust, or at the
determination of the Trustees one or more of the Trustees or a nominee acting
for and on behalf of the Trust, shall be deemed to hold legal title and
beneficial ownership of any income earned on securities of the Trust issued by
any business entities formed, organized, or existing under the laws of any
jurisdiction, including the laws of any foreign country.
ARTICLE IV
----------
POWERS OF THE TRUSTEES
----------------------
Section 4.1 Powers. The Trustees in all instances shall act as
------
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall have full authority and power to make any and all investments
which they, in their sole discretion, shall deem proper to accomplish the
purpose of this Trust. Subject to any applicable limitation in this Trust
Instrument, the Trustees shall have power and authority:
(a) To invest and reinvest cash and other property, and to hold cash
or other property uninvested, and to sell, exchange, lend, pledge, mortgage,
hypothecate, write options on and lease any or all of the assets of the Trust;
(b) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operators;
(c) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of an obligation or engagement of any other person and
to lend Trust Property;
(d) To provide for the distribution of interests of the Trust either
through a Principal Underwriter in the manner hereinafter provided for or by the
Trust itself, or both, or otherwise pursuant to a plan of distribution of any
kind;
(e) To adopt By-laws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders,
which By-laws shall be deemed a part of this Trust Instrument and are
incorporated herein by reference;
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<PAGE>
(f) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;
(g) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as custodians
of any assets of the Trust, subject to the 1940 Act and to any conditions set
forth in this Trust Instrument;
(h) To retain one or more transfer agents and shareholder servicing
agents, or both;
(i) To set record dates in the manner provided herein or in the By-
laws;
(j) To delegate such authority (which delegation may include the power
to subdelegate) as they consider desirable to any officers of the Trust and to
any investment adviser, manager, administrator, custodian, underwriter or other
agent or independent contractor;
(k) To purchase and pay for entirely out of Trust Property such
insurance as they may deem necessary or appropriate for the conduct of the
business of the Trust, including insurance policies insuring the Trust Property
and payment of distributions and principal on its investments, and insurance
policies insuring the Shareholders, Trustees, officers, representatives,
employees, agents, investment advisers, managers, administrators, custodians,
underwriters, or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person in such capacity, including any
action taken or omitted that may be determined to constitute negligence, whether
or not the Trust would have the power to indemnify such person against such
liability.
(l) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, Section 11.4(b) hereof;
(m) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(n) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities;
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<PAGE>
(o) To hold any security or property in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form; or
either in the name of the Trust or in the name of a custodian or a nominee or
nominees;
(p) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes of
such Series having relative preferences, voting powers, rights, and privileges
as they may provide consistent with applicable law;
(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust;
(r) To compromise, arbitrate, or otherwise adjust claims in favor of
or against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(s) To make distributions of income and of capital gains to
Shareholders in the manner hereinafter provided;
(t) To establish, from time to time, a minimum investment for
Shareholders in the Trust or in one or more Series (or class), and to require
the redemption of the Shares of any Shareholders whose investment is less than
such minimum upon giving notice to such Shareholder;
(u) To establish one or more committees composed of one or more of the
Trustees, and to delegate any of the powers of the Trustees to said committees;
(v) To interpret the investment policies, practices or limitations of
any Series (or class);
(w) To establish a registered office and have a registered agent in
the state of Delaware; and
(x) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
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<PAGE>
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees. Any action by one or
more of the Trustees in their capacity as such hereunder shall be deemed an
action on behalf of the Trust or the applicable Series, and not an action in an
individual capacity.
No one dealing with the Trustees shall be under any obligation to make any
inquiry concerning the authority of the Trustees, or to see to the application
of any payments made or property transferred to the Trustees or upon their
order.
Section 4.2 Issuance and Repurchase of Shares. The Trustees shall have
---------------------------------
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, exchange, and otherwise deal in Shares and, subject
to the provisions set forth in Article II and Article IX, to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust, or the particular Series of the Trust, with
respect to which such Shares are issued.
Section 4.3 Trustees and Officers as Shareholders. Any Trustee, officer
-------------------------------------
or other agent of the Trust may acquire, own and dispose of Shares to the same
extent as if such person were not a Trustee, officer or agent; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which such person is interested,
subject to the general limitations herein contained as to the sale and purchase
of such Shares.
Section 4.4 Action by the Trustees and Committees. The Trustees (and
-------------------------------------
any committee thereof) may act at a meeting held in person or in whole or in
part by conference telephone equipment. One-third, but (except at such times as
there is only one Trustee) no less than two, of the Trustees shall constitute a
quorum at any meeting. Except as the Trustees may otherwise determine, one-third
of the members of any committee shall constitute a quorum at any meeting. The
vote of a majority of the Trustees (or committee members) present at a meeting
at which a quorum is present shall be the act of the Trustees (or any committee
thereof). The Trustees (and any committee thereof) may also act by written
consent signed by a majority of the Trustees (or committee members). Regular
meetings of the Trustees may be held at such places and at such times as the
Trustees may from time to time determine. Special meetings of the Trustees (and
meetings of any committee thereof) may be called orally or in writing by the
Chairman of the Board of Trustees (or the chairman of any committee thereof) or
by the President, the Secretary or any two other Trustees. Notice of the time,
date and place of all meetings of the Trustees (or any committee thereof) shall
be
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<PAGE>
given by the party calling the meeting to each Trustee (or committee member) by
telephone, telefax, or telegram sent to the person's home or business address at
least twenty-four hours in advance of the meeting or by written notice mailed to
the person's home or business address at least seventy-two hours in advance of
the meeting. Notice of all proposed written consents of Trustees (or committees
thereof) shall be given to each Trustee (or committee member) by telephone,
telefax, telegram, or first class mail sent to the person's home or business
address. Notice need not be given to any person who attends a meeting without
objecting to the lack of notice or who executes a written consent or a written
waiver of notice with respect to a meeting. Written consents or waivers may be
executed in one or more counterparts. Execution of a written consent or waiver
and delivery thereof may be accomplished by telefax.
Section 4.5 Chairman of the Trustees. The Trustees shall appoint one of
------------------------
their number to be Chairman of the Board of Trustees. The Chairman shall preside
at all meetings of the Trustees at which he is present and may be (but is not
required to be) designated the chief executive officer of the Trust.
Section 4.6 Principal Transactions. Except to the extent prohibited
----------------------
by applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, distributor or transfer agent for the Trust or with any Interested
Person of such person; and the Trust may employ any such person, or firm or
company in which such person is an Interested Person, as broker, legal counsel,
registrar, investment adviser, distributor, transfer agent, dividend disbursing
agent, custodian or in any other capacity upon customary terms.
ARTICLE V
---------
EXPENSES OF THE TRUST
---------------------
Section 5.1 General. The Trustees shall have the power to incur and pay
-------
or be reimbursed from the assets of the Trust or the assets of the appropriate
Series any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the Trust or such Series, and to
pay reasonable compensation from the funds of the Trust to themselves as
Trustees. The Trustees shall fix the compensation of all officers, employees and
Trustees, and shall be reimbursed from the assets of the Trust or the assets of
the appropriate Series for expenses reasonably incurred by themselves on behalf
of the Trust.
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<PAGE>
Section 5.2 Expenses of Series. The Trustees shall have the power to
------------------
allocate and charge all expenses which are not readily identifiable as belonging
to any particular Series between or among any one or more of the Series as set
forth in Article II, Section 2.8 of this Trust Instrument.
ARTICLE VI
----------
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER, ADMINISTRATOR
--------------------------------------------------------
AND TRANSFER AGENT
------------------
Section 6.1 Investment Adviser. The Trustees may in their discretion,
------------------
from time to time, enter into an investment advisory or management contract or
contracts with respect to the Trust or any Series whereby the other party or
parties to such contract or contracts shall undertake to furnish the Trust with
such management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions, as the Trustees may in their discretion determine; provided,
however, that the initial approval and entering into of such contract or
contracts shall be subject to a Majority Shareholder Vote. Notwithstanding any
other provision of this Trust Instrument, the Trustees may authorize any
investment adviser (subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases, sales or exchanges of
portfolio securities, other investment instruments of the Trust, or other Trust
Property on behalf of the Trustees, or may authorize any officer, agent, or
Trustee to effect such purchases, sales or exchanges pursuant to recommendations
of the investment adviser (and all without further action by the Trustees). Any
such purchases, sales and exchanges shall be deemed to have been authorized by
the Trustees.
The Trustees may authorize, subject to applicable requirements of the 1940
Act, the investment adviser to employ, from time to time, one or more sub-
advisers to perform such of the acts and services of the investment adviser, and
upon such terms and conditions, as may be agreed upon between the investment
adviser and sub-adviser. Any reference in this Trust Instrument to the
investment adviser shall be deemed to include such sub-advisers, unless the
context otherwise requires.
Section 6.2 Principal Underwriter. The Trustees may in their discretion
---------------------
from time to time enter into an exclusive or non-exclusive underwriting contract
or contracts providing for the sale of Shares, whereby the Trust may either
agree to sell Shares to the other party to the contract or appoint such other
party its sales agent for such Shares. In either case, the contract may also
provide for the repurchase or sale of Shares by such other party as principal or
as agent of the Trust.
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<PAGE>
Section 6.3 Administrator. The Trustees may in their discretion from
-------------
time to time enter into one or more contracts whereby the other party or parties
shall undertake to furnish the Trust with administrative services. The contract
or contracts shall be on such terms and conditions as the Trustees may in their
discretion determine.
Section 6.4 Transfer Agent. The Trustees may in their discretion from
--------------
time to time enter into one or more transfer agency and Shareholder service
contracts whereby the other party or parties shall undertake to furnish the
Trustees with transfer agency and Shareholder services. The contract or
contracts shall be on such terms and conditions as the Trustees may in their
discretion determine.
Section 6.5 Parties to Contract. Any contract described in this Article
-------------------
VI or any contract described in Article VIII hereof may be entered into with any
corporation, firm, partnership, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered void or voidable by reason of the existence of
any relationship, nor shall any person holding such relationship be disqualified
from voting on or executing the same in his capacity as Shareholder and/or
Trustee, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article VI or Article VIII hereof. The
same person (including a firm, corporation, partnership, trust, or association)
may be the other party to contracts entered into pursuant to this Article VI or
pursuant to Article VIII hereof, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 6.5.
ARTICLE VII
-----------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
Section 7.1 Voting Powers. The Shareholders shall have power to vote
-------------
only (i) for the election of Trustees as provided in Article III, Section 3.1
hereof, (ii) for the removal of Trustees as provided in Article III, Section
3.3(d) hereof, and (iii) with respect to such additional matters relating to the
Trust as may be required by law, by this Trust Instrument, or as the Trustees
may consider desirable. On any matter submitted to a vote of the Shareholders,
all Shares shall be voted separately by individual Series, except (i) when
required by the 1940 Act,
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<PAGE>
Shares shall be voted in the aggregate and not by individual Series; and (ii)
when the Trustees have determined that the matter affects the interests of more
than one Series, then the Shareholders of all such Series shall be entitled to
vote thereon. 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. Anything in this Trust Instrument to the contrary notwithstanding, in the
event a proposal by anyone other than the officers or Trustees of the Trust is
submitted to a vote of the Shareholders of one or more Series or of the Trust,
or in the event of any proxy contest or proxy solicitation or proposal in
opposition to any proposal by the officers or Trustees of the Trust, Shares may
be voted only in person or by written proxy. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required or permitted by law, this Trust Instrument or any of the By-laws of the
Trust to be taken by Shareholders.
Section 7.2 Meetings. Meetings of Shareholders may be held within or
--------
without the State of Delaware. Special meetings of the Shareholders of any
Series may be called by the Trustees and shall be called by the Trustees upon
the written request of Shareholders owning at least one-tenth of the Outstanding
Shares entitled to vote. Whenever ten or more Shareholders meeting the
qualifications set forth in Section 16(c) of the 1940 Act seek the opportunity
of furnishing materials to the other Shareholders with a view to obtaining
signatures on such a request for a meeting, the Trustees shall comply with the
provisions of said Section 16(c) with respect to providing such Shareholders
access to the list of the Shareholders of record of the Trust or the mailing of
such materials to such Shareholders of record, subject to any rights provided to
the Trust or any Trustees provided by said Section 16(c). Notice shall be sent,
by mail or such other means determined by the Trustees, at least 15 days prior
to any such meeting.
Section 7.3 Quorum and Required Vote. One-third of Shares entitled to
------------------------
vote in person or by proxy shall be a quorum for the transaction of business at
a Shareholders' meeting, except that where any provision of law or of this 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
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<PAGE>
lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held without the necessity of further notice. Except when a
larger vote is required by law or by any provision of this Trust Instrument, a
majority of the Shares voted in person or by proxy shall decide any questions
and a plurality shall elect a Trustee, provided that where any provision of law
or of this Trust Instrument permits or requires that the holders of any Series
shall vote as a Series (or that the holders of any class shall vote as a class),
then a majority of the Shares present in person or by proxy of that Series or,
if required by law, a Majority Shareholder Vote of that Series (or class), voted
on the matter in person or by proxy shall decide that matter insofar as that
Series (or class) is concerned.
Section 7.4 Action by Written Consent. Any action which may be taken by
-------------------------
the Shareholders of the Trust or of a Series may be taken without a meeting if
Shareholders 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 this Trust
Instrument, shall consent to the action in writing, provided that such action by
--------
written consent is approved by the Board of Trustees. If the consents of all
Shareholders entitled to vote have not been solicited in writing and if the
unanimous written consent of all such Shareholders shall not have been received,
the Secretary shall give prompt notice to all Shareholders of actions approved
by the Shareholders without a meeting.
ARTICLE VIII
------------
CUSTODIAN
---------
Section 8.1 Appointment and Duties. The Trustees shall at all times
----------------------
employ a bank, a company that is a member of a national securities exchange, or
a trust company, each having capital, surplus and undivided profits of at least
two million dollars ($2,000,000) as custodian with authority as its agent:
(1) to hold the securities owned by the Trust and deliver the same upon
written order or oral order confirmed in writing;
(2) to receive and receipt for any moneys due to the Trust and deposit the
same in its own banking department or elsewhere as the Trustees may direct;
and
(3) to disburse such funds upon orders or vouchers; and the Trust may also
employ such custodian as its agent:
(4) to keep the books and accounts of the Trust or of any Series or class
and furnish clerical and accounting services; and
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<PAGE>
(5) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series, or class thereof, in accordance with the provisions
hereof;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian.
In accordance with the 1940 Act, the Trustees may also authorize the
custodian to employ one or more sub-custodians from time to time to perform such
of the acts and services of the custodian, and upon such terms and conditions,
as may be agreed upon between the custodian and such sub-custodian and approved
by the Trustees.
Section 8.2 Central Certificate System. Subject to the 1940 Act, the
--------------------------
Trustees may direct the custodian to deposit all or any part of the securities
owned by the Trust in a system for the central handling of securities
established by a national securities exchange or a national securities
association, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible and may
be transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust or its custodians, subcustodians or other agents.
ARTICLE IX
----------
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
Section 9.1 Distributions.
-------------
(a) The Trustees may from time to time declare and pay dividends or
other distributions with respect to any Series, or class thereof. The amount of
such dividends or distributions and the payment of them and whether they are in
cash or any other Trust property shall be wholly in the discretion of the
Trustees.
(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other distribution
or among the Shareholders of record at such other date or time or dates or times
as the Trustees shall determine, which dividends or distributions, at the
election of the Trustees, may be paid pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine. All dividends and other distributions on Shares of a particular
Series shall be distributed pro rata to the Shareholders of that Series in
proportion to the number of Shares of that Series they held on the record date
established for such payment, except that such dividends and distributions shall
reflect expenses allocated to a particular class of such Series. The Trustees
may adopt and
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<PAGE>
offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate.
(c) Anything in this Trust Instrument to the contrary notwithstanding,
the Trustees may at any time declare and distribute a stock dividend pro rata
among the Shareholders of a particular Series, or class thereof, as of the
record date of that Series (or class) fixed as provided in Section (b) hereof.
Section 9.2 Redemptions. In case any holder of record of Shares of a
-----------
particular Series desired to dispose of his Shares or any portion thereof, he
may deposit at the office of the transfer agent or other authorized agent of
that Series a written request or such other form of request as the Trustees may
from time to time authorize, requesting that the Series purchase the Shares in
accordance with this Section 9.2; and the Shareholder so requesting shall be
entitled to require the Series to purchase, and the Series or the Principal
Underwriter of the Series shall purchase his said Shares, but only at the Net
Asset Value thereof (as described in Section 9.3 of this Article IX). The Series
shall make payment for any such Shares to be redeemed, as aforesaid, in cash or
property from the assets of that Series and payment for such Shares shall be
made by the Series or the Principal Underwriter of the Series to the Shareholder
of record within seven (7) days after the date upon which the request is
effective. Upon redemption, shares shall become Treasury shares and may be re-
issued from time to time.
Section 9.3 Determination of Net Asset Value and Valuation of Portfolio
-----------------------------------------------------------
Assets. The term "Net Asset Value" of any Series shall mean that amount of
- ------
which the assets of that Series exceed its liabilities, all as determined by or
under the direction of the Trustees. Such value shall be determined separately
for each Series and shall be determined on such days and at such times as the
Trustees may determine. Such determination shall be made with respect to
securities for which market quotations are readily available, at the market
value of such securities; and with respect to other securities and assets, at
the fair value as determined in good faith by the Trustees; provided, however,
that the Trustees, without Shareholder approval, may alter the method of valuing
portfolio securities consistent with the 1940 Act. The Trustees may delegate any
of their powers and duties under this Section 9.3 with respect to valuation of
assets and liabilities. The resulting amount, which shall represent the total
Net Asset Value of the particular Series, shall be divided by the total number
of shares of that Series outstanding at the time and the quotient so obtained
shall be the Net Asset Value per Share of that Series. At any time the Trustees
may cause the Net Asset Value per Share last determined to be determined again
in similar manner and may fix the time when such redetermined value shall become
effective. If, for any reason, the net income
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<PAGE>
of any Series, determined at any time, is a negative amount, the Trustees shall
have the power with respect to that Series (i) to offset each Shareholder's pro
rata share of such negative amount from the accrued dividend account of such
Shareholder, or (ii) to reduce the number of Outstanding Shares of such Series
by reducing the number of Shares in the amount of each Shareholder by a pro rata
portion of that number of full and fractional Shares which represents the amount
of such excess negative net income, or (iii) to cause to be recorded on the
books of such Series an asset account in the amount of such negative net income
(provided that the same shall thereupon become the property of such Series and
shall not be paid to any Shareholder), which account may be reduced by the
amount, of dividends declared thereafter upon the Outstanding Shares of such
Series on the day such negative net income is experienced, until such asset
account is reduced to zero; (iv) to combine the methods described in clauses (i)
and (ii) and (iii) of this sentence; or (v) to take any other action they deem
appropriate, in order to cause (or in order to assist in causing) the Net Asset
Value per Share of such Series to remain at a constant amount per Outstanding
Share immediately after each such determination and declaration. The Trustees
shall also have the power not to declare a dividend out of net income for the
purpose of causing the Net Asset Value per Share to be increased. The Trustees
shall not be required to adopt, but may at any time adopt, discontinue or amend
the practice of maintaining the Net Asset Value per Share of a Series at a
constant amount.
Section 9.4 Suspension of the Right of Redemption. The Trustees may
-------------------------------------
declare a suspension of the right of redemption or postpone the date of payment
as permitted under the 1940 Act. Such suspension shall take effect at such time
as the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share next determined after the termination of
the suspension. In the event that any Series is divided into classes, the
provisions of this Section 9.4, to the extent applicable as determined in the
discretion of the Trustees and consistent with applicable law, may be equally
applied to each such class.
Section 9.5 Mandatory Redemption of Shares.
------------------------------
(a) If the Trustees shall be of the opinion that direct or indirect
ownership of Shares of any Series has or may become concentrated in any Person
to an extent which would disqualify any Series as a regulated investment company
under the Internal Revenue Code, then the Trustees shall have the power
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<PAGE>
(but not the obligation) by lot or other means deemed equitable by them (i) to
call for redemption by any such person of a number, or principal amount, of
Shares sufficient to maintain or bring the direct or indirect ownership of
Shares into conformity with the requirements for such qualification and (ii) to
refuse to transfer or issue Shares to any person whose acquisition of the Shares
in question would result in such disqualification. The redemption shall be
effected at the redemption price and in the manner provided in this Article IX.
The holders of Shares shall upon demand disclose to the Trustees in writing such
information with respect to direct and indirect ownership of Shares as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other taxing authority.
(b) The Trust shall, to the extent permitted by applicable law, have
the right at any time to redeem the Shares owned by any holder thereof: (i) in
connection with the termination of any class or Series of Shares as provided
hereunder; (ii) if the value of such Shares in the account or accounts
maintained by the Trust or its transfer agent for any class or Series of Shares
is less than the value determined from time to time by the Trustees as the
minimum required for an account or accounts of such class or Series, provided
--------
that the Trust shall provide a Shareholder with written notice at least fifteen
(15) days prior to effecting a redemption of Shares as a result of not
satisfying such requirement; (iii) to reimburse the Trust for any loss it has
sustained by reason of the failure of such Shareholder to make full payment for
Shares purchased by such Shareholder; (iv) to collect any charge relating to a
transaction effected for the benefit of such Shareholder which is applicable to
Shares as provided in the prospectus relating to such Shares; or (v) if the net
income with respect to any particular class or Series of Shares should be
negative or it should otherwise be appropriate to carry out the Trust's
responsibilities under the Act, in each case subject to such further terms and
conditions as the Trustees may from time to time establish. The redemption price
of Shares in the Trust shall, except as otherwise provided in this subsection,
be the net asset value thereof as determined by the Trustees from time to time
in accordance with the provisions of applicable law, less such redemption fee or
other charge, if any, as may be fixed by the Trustees.
ARTICLE X
---------
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
Section 10.1 Limitation of Liability. A Trustee, when acting in such
-----------------------
capacity, shall not be personally liable to any person other than the Trust or a
beneficial owner for any act, omission or obligation of the Trust or any
Trustee. A Trustee
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<PAGE>
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 Trust or of any other
person or party, provided that nothing contained herein or in the Delaware
Business Trust Act shall protect any Trustee against any liability to the Trust
or to Shareholders 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 hereunder.
Section 10.2 Indemnification. The Trust shall indemnify each of its
---------------
Trustees against all liabilities and expenses (including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties, and as counsel
fees) reasonably incurred by him in connection with the defense or disposition
of any action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee except with
------
respect to any matter as to which he shall have been adjudicated to have acted
in bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties, provided that as to any matter disposed of by a compromise payment by
--------
such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter or willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
bad faith had been adjudicated, it would in the opinion of such counsel have
been adjudicated in favor of such person. The rights accruing to any person
under these provisions shall not exclude any other right to which he may be
lawfully entitled, provided that no person may satisfy any right of indemnity
--------
or reimbursement hereunder except out of the property of the Trust. The Trustees
may make advance payments in connection with the indemnification under this
Section 10.2, provided that the indemnified person shall have given a written
--------
undertaking to reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification.
The Trust shall indemnify officers, and shall have the power to
indemnify representatives and employees of the Trust, to the same extent that
Trustees are entitled to indemnification pursuant to this Section 10.2.
Section 10.3 Shareholders. In case any Shareholder or former Shareholder
------------
of any Series shall be held to be personally liable solely by reason of his
being or having been a Shareholder of such Series and not because of his acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
his heirs, executors, administrators or other legal representatives,
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<PAGE>
or, in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the applicable
Series to be held harmless from and indemnified against all loss and expense
arising from such liability. The Trust, on behalf of the affected Series, shall,
upon request by the Shareholder, assume the defense of any claim made against
the Shareholder for any act or obligation of the Series and satisfy any judgment
thereon from the assets of the Series.
ARTICLE XI
----------
MISCELLANEOUS
-------------
Section 11.1 Trust Not a Partnership. It is hereby expressly declared
-----------------------
that a trust and not a partnership is created hereby. No Trustee hereunder shall
have any power to bind personally either the Trust's officers or any
Shareholder. All persons extending credit to, contracting with or having any
claim against the Trust or the Trustees may satisfy or enforce any debt,
liability, obligation or expense incurred, contracted for or otherwise existing
with respect to the Trust from the assets of the Trust only; and neither the
Shareholders nor the Trustees, nor any of their agents, whether past, present or
future, shall be personally liable therefor.
Section 11.2 Trustees' Good Faith Action, Expert Advice, No Bond or
------------------------------------------------------
Surety. The exercise by the Trustees of their powers and discretions hereunder
- ------
in good faith and with reasonable care under the circumstances then prevailing
shall be binding upon everyone interested. Subject to the provisions of Article
X hereof, the Trustees shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Trust Instrument, and subject to
the provisions of Article X hereof, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is obtained.
Section 11.3 Establishment of Record Dates. The Trustees may close the
-----------------------------
Share transfer books of the Trust for a period not exceeding ninety (90) days
preceding the date of any meeting of Shareholders, or the date for the payment
of any dividends or other distributors, or the date for the allotment of rights,
or the date when any change or conversion or exchange of Shares shall go
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<PAGE>
into effect; or in lieu of closing the stock transfer books as aforesaid, the
Trustees may fix in advance a date, not exceeding ninety (90) days preceding the
date of any meeting of Shareholders, or the date for payment of any dividend or
other distribution, or the date for the allotment of rights, or the date when
any change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend
or other distribution, or to any such allotment of rights, or to exercise the
rights in respect of any such change, conversion or exchange of Shares, and in
such case such Shareholders and only such Shareholders as shall be Shareholders
of record on the date so fixed shall be entitled to such notice of, and to vote
at, such meeting, or to receive payment of such dividend or other distribution,
or to receive such allotment or rights, or to exercise such rights, as the case
may be, notwithstanding any transfer of any Shares on the books of the Trust
after any such record date fixed as aforesaid.
Section 11.4 Termination of Trust or Series.
------------------------------
(a) This Trust shall continue without limitation of time but subject
to the provisions of sub-section (b) of this Section 11.4.
(b) The Trustees may
(i) sell and convey all or substantially all of the assets of the
Trust or any Series to another trust, partnership, association or
corporation, or to a separate series of shares thereof, organized
under the laws of any state, for adequate consideration which may
include the assumption of all outstanding obligations, taxes and other
liabilities, accrued or contingent, of the Trust or any Series, and
which may include shares of beneficial interest, stock or other
ownership interests of such trust, partnership, association or
corporation or of a series thereof; or
(ii) at any time sell and convert into money all of the assets of
the Trust or any Series.
Upon making reasonable provision, in the determination of the Trustees, for
the payment of all such liabilities in either (i) or (ii), by such assumption or
otherwise, the Trustees shall distribute the remaining proceeds or assets (as
the case may be) of each Series (or class) ratably among the holders of Shares
of that Series then outstanding.
(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in sub-section (b), the Trust or any affected
Series shall terminate and the Trustees and the Trust shall be discharged of any
and all further liabilities and duties hereunder and the right, title and
interest of all parties with respect to the Trust or Series shall be cancelled
and discharged.
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<PAGE>
Upon termination of the Trust, following completion of winding up of its
business, the Trustees shall cause a certificate of cancellation of the Trust's
certificate of trust to be filed in accordance with the Delaware Business Trust
Act, which certificate of cancellation may be signed by any one Trustee.
Section 11.5 Reorganization. Anything in this Trust Instrument to the
--------------
contrary notwithstanding, the Trustees, in order to change the form of
organization and/or domicile of the Trust, may, without prior Shareholder
approval, (i) cause the Trust to merge or consolidate with or into one or more
trusts, partnerships, associations or corporations which is formed, organized or
existing under the laws of a state, commonwealth possession or colony of the
United States or (ii) cause the Trust to incorporate under the laws of Delaware.
Any agreement of merger or consolidation or certificate of merger may be signed
by a majority of the Trustees. Pursuant to and in accordance with the provisions
of Section 3815(f) of the Delaware Business Trust Act, and notwithstanding
anything to the contrary contained in this Trust Instrument, an agreement of
merger or consolidation approved by the Trustees in accordance with this Section
11.5 may effect any amendment to the Trust Instrument or effect the adoption of
a new trust instrument of the Trust if it is the surviving or resulting trust in
the merger or consolidation. Any merger or consolidation of the Trust other than
as described in the foregoing provisions of this Section 11.5, and any sale of
all or substantially all of the assets of the Trust shall, in addition to the
approval of the Trustees, require the approval of the holders of a majority of
the Outstanding Shares of each class or Series of Shares affected.
Section 11.6 Filing of Copies, References, Headings. The original or a
--------------------------------------
copy of this Trust Instrument and of each amendment hereof or Trust Instrument
supplemental hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer or Trustee of the Trust as to whether or not any such
amendments or supplements have been made and as to any matters in connection
with the Trust hereunder, and with the same effect as if it were the original,
may rely on a copy certified by an officer or Trustee of the Trust to be a copy
of this Trust Instrument or of any such amendment or supplemental Trust
Instrument. In this Trust Instrument or in any such amendment or supplemental
Trust Instrument, references to this Trust Instrument, and all expressions like
"herein," "hereof" and "hereunder," shall be deemed to refer to this Trust
Instrument as amended or affected by any such supplemental Trust Instrument.
All expressions like "his", "he" and "him", shall be deemed to include the
feminine and neuter, as well as masculine, genders. Headings are placed herein
for convenience of reference only and in case of any conflict, the text of this
Trust Instrument rather than the headings, shall control. This Trust Instrument
may be
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<PAGE>
executed in any number of counterparts each of which shall be deemed an
original.
Section 11.7 Applicable Law. The trust set forth in this instrument is
--------------
made in the State of Delaware, and the Trust and this Trust Instrument, and the
rights and obligations of the Trustees and Shareholders hereunder, are to be
governed by and construed and administered according to the Delaware Business
Trust Act and the laws of said State; provided, however, that there shall not be
applicable to the Trust, the Trustees or this Trust Instrument (a) the
provisions of Section 3540 of Title 12 of the Delaware Code or (b) any
provisions of the laws (statutory or common) of the State of Delaware (other
than the Delaware Business Trust Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (ii) affirmative requirements
to post bonds for trustees, officers, agents or employees of a trust, (iii) the
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards or responsibilities or limitations on the acts or powers of
trustees, which are inconsistent with the limitations or liabilities or
authorities and powers of the Trustees set forth or referenced in this Trust
Instrument. The Trust shall be of the type commonly called a "business trust",
and without limiting the provisions hereof, the Trust may exercise all powers
which are ordinarily exercised by such a trust under Delaware law. The Trust
specifically reserves the right to exercise any of the powers or privileges
afforded to trusts or actions that may be engaged in by trusts under the
Delaware Business Trust Act, and the absence of a specific reference herein to
any such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.
Section 11.8 Amendments. Except as specifically provided herein, the
----------
Trustees may, without shareholder vote, amend or otherwise supplement this Trust
Instrument by making an amendment, a Trust Instrument supplemental hereto or an
amended and restated trust instrument. Shareholders shall have the right to vote
(i) on any amendment which would affect their right to vote granted in Section
7.1 of Article VII hereof, (ii) on any amendment to this Section 11.8, (iii) on
any amendment as may be required by law and (iv) on any amendment submitted to
them by the Trustees. Any amendment required or permitted to be submitted to
Shareholders which, as the Trustees determine, shall
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<PAGE>
affect the Shareholders of one or more Series shall be authorized by vote of the
Shareholders of each Series affected and no vote of Shareholders of a Series not
affected shall be required. Anything in this Trust Instrument to the contrary
notwithstanding, any amendment to Article X hereof shall not limit the rights to
indemnification or insurance provided therein with respect to action or omission
of Covered Persons prior to such amendment.
Section 11.9 Fiscal Year. The fiscal year of the Trust shall end on a
-----------
specified date as determined from time to time by the Trustees.
Section 11.10 Use of the Name "THE COMMERCE FUNDS". The symbol "THE
------------------------------------
COMMERCE FUNDS" and the logo of Commerce Bancshares, Inc., and all rights to the
use thereof belong to ("Commerce"), the investment adviser of the Trust.
Commerce has consented to the use by the Trust of such symbol and logo and has
granted to the Trust a non-exclusive license to the use of such symbol and logo
as part of the name of the Trust and the name of any Series of Shares. In the
event Commerce or an affiliate of Commerce is not appointed as investment
adviser or ceases to be the investment adviser of the Trust or of any Series
using such symbol or logo, the non-exclusive license granted herein may be
revoked by Commerce and the Trust promptly shall cease using such symbol and
logo as part of its name or the name of any Series of Shares, upon receipt of
the written request therefor by Commerce or any successor to its interests in
such name.
Section 11.11 Provisions in Conflict with Law. The provisions of this
-------------------------------
Trust Instrument are severable, and if the Trustees shall determine, with the
advice of counsel, that any of such provisions is in conflict with the 1940 Act,
the regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Trust Instrument; provided, however,
that such determination shall not affect any of the remaining provisions of this
Trust Instrument or render invalid or improper any action taken or omitted prior
to such determination. If any provision of this Trust Instrument shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach
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<PAGE>
only to such provision in such jurisdiction and shall not in any manner affect
such provisions in any other jurisdiction or any other provision of this Trust
Instrument in any jurisdiction.
IN WITNESS WHEREOF, the undersigned, being the initial Trustee of the
Trust, has executed this instrument this 7th day of February, 1994.
/s/ Roberta Sampson
-------------------
Initial Trustee
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<PAGE>
Exhibit 99.B2
THE COMMERCE FUNDS
------------------
BY-LAWS
These By-laws of THE COMMERCE FUNDS (the "Trust"), a Delaware business
trust, are subject to the Trust Instrument of the Trust dated February 7, 1994,
as from time to time amended, supplemented or restated (the "Trust Instrument").
Capitalized terms used herein which are defined in the Trust Instrument are used
as therein defined.
ARTICLE I
---------
PRINCIPAL OFFICE
----------------
The principal office of the Trust shall be located in such location as
the Trustees may from time to time determine. The Trust may establish and
maintain such other offices and places of business as the Trustees may from time
to time determine.
ARTICLE II
----------
OFFICERS AND THEIR ELECTION
---------------------------
Section 2.1 Officers. The officers of the Trust shall be a
President, a Treasurer, a Secretary, and such other officers as the Trustees may
from time to time elect. It shall not be necessary for any Trustee or other
officer to be a holder of Shares in the Trust.
Section 2.2 Election of Officers. Two or more offices may be held by
a single person. Subject to the provisions of Section 2.3 hereof, the officers
shall hold office until their successors are chosen and qualified and serve at
the pleasure of the Trustees.
Section 2.3 Resignations. Any officer of the Trust may resign by
filing a written resignation with the President, the Secretary or the Trustees,
which resignation shall take effect on being so filed or at such later time as
may be therein specified.
ARTICLE III
-----------
POWERS AND DUTIES OF OFFICERS AND TRUSTEES
------------------------------------------
Section 3.1 Chief Executive Officer. Unless the Trustees have
designated the Chairman as the chief executive
<PAGE>
officer of the Trust, the President shall be the chief executive officer of the
Trust. Subject to the direction of the Trustees, the chief executive officer
shall have general administration of the business and policies of the Trust.
Except as the Trustees may otherwise order, the chief executive officer shall
have the power to grant, issue, execute or sign such powers of attorney,
proxies, agreements or other documents as may be deemed advisable or necessary
in the furtherance of the interests of the Trust or any Series thereof. He shall
also have the power to employ attorneys, accountants and other advisers and
agents and counsel for the Trust. If the President is not the chief executive
officer, he shall perform such duties as the Trustees or the chief executive
officer may from time to time designate and, at the request or in the absence or
disability of the chief executive officer, may perform all the duties of the
chief executive officer and, when so acting, shall have all the powers of and be
subject to all the restrictions upon the chief executive officer.
Section 3.2 Treasurer. The Treasurer shall be the principal
financial and accounting officer of the Trust. He shall deliver all funds and
securities of the Trust which may come into his hands to such company as the
Trustees shall employ as Custodian in accordance with the Trust Instrument and
applicable provisions of law. He shall make annual reports regarding the
business and condition of the Trust, which reports shall be preserved in Trust
records, and he shall furnish such other reports regarding the business and
condition of the Trust as the Trustees may from time to time require. The
Treasurer shall perform such additional duties as the Trustees or the chief
executive officer may from time to time designate.
Section 3.3 Secretary. The Secretary shall record in books kept for
the purpose all votes and proceedings of the Trustees and the Shareholders at
their respective meetings. He shall have the custody of the seal of the Trust.
The Secretary shall perform such additional duties as the Trustees or the chief
executive officer may from time to time designate.
Section 3.4 Vice President. Any Vice President of the Trust shall
perform such duties as the Trustees or the chief executive officer may from time
to time designate. At the request or in the absence or disability of the
President, the most senior Vice President present and able to act may perform
all the duties of the President and, when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 3.5 Assistant Treasurer. Any Assistant Treasurer of the
Trust shall perform such duties as the Trustees or the Treasurer may from time
to time designate, and, in the absence of the Treasurer, the most senior
Assistant Treasurer
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<PAGE>
present and able to act may perform all the duties of the Treasurer.
Section 3.6 Assistant Secretary. Any Assistant Secretary of the
Trust shall perform such duties as the Trustees or the Secretary may from time
to time designate, and, in the absence of the Secretary, the most senior
Assistant Secretary present and able to act may perform all the duties of the
Secretary.
Section 3.7 Subordinate Officers. The Trustees from time to time may
appoint such other officers or agents as they may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine.
Section 3.8 Surety Bonds. The Trustees may require any officer or
agent of the Trust to execute a bond (including, without limitation, any bond
required by the 1940 Act) in such sum and with such surety or sureties as the
Trustees may determine, conditioned upon the faithful performance of his duties
to the Trust including responsibility for negligence and for the accounting of
any of the Trust's property, funds or securities that may come into his hands.
Section 3.9 Removal. Any officer may be removed from office at any
time by the Trustees.
Section 3.10 Remuneration. The salaries or other compensation, if
any, of the officers of the Trust shall be fixed from time to time by resolution
of the Trustees.
ARTICLE IV
----------
SHAREHOLDERS' MEETINGS
----------------------
Section 4.1 Notices. Notices of any meeting of the Shareholders
shall be given by the Secretary by delivering or mailing, postage prepaid, to
each Shareholder entitled to vote at said meeting, written or printed
notification of such meeting at least fifteen days before the meeting, to such
address as may be registered with the Trust by the Shareholder. Notice of any
Shareholder meeting need not be given to any Shareholder if a written waiver of
notice, executed before or after such meeting, is filed with the record of such
meeting, or to any Shareholder who shall attend such meeting in person or by
proxy. Notice of adjournment of a Shareholders' meeting to another time or place
need not be given, if such time and place are announced at the meeting or
reasonable notice is given to persons present at the meeting.
-3-
<PAGE>
Section 4.2 Voting-Proxies. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by proxy,
provided that either (i) an instrument authorizing such proxy to act is executed
by the Shareholder in writing and dated not more than eleven months before the
meeting, unless the instrument specifically provides for a longer period or (ii)
the Trustees adopt by resolution an electronic, telephonic, computerized or
other alternative to execution of a written instrument authorizing the proxy to
act, which authorization is received not more than eleven months before the
meeting. Proxies shall be delivered to the Secretary of the Trust or other
person responsible for recording the proceedings before being voted. A proxy
with respect to Shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the Trust
receives a specific written notice to the contrary from any one of them. Unless
otherwise specifically limited by their terms, proxies shall entitle the holder
thereof to vote at any adjournment of a meeting. A proxy purporting to be
exercised by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden or proving invalidity
shall rest on the challenger. At all meetings of the Shareholders, unless the
voting is conducted by inspectors, all questions relating to the qualifications
of voters, the validity of proxies, and the acceptance or rejection of votes
shall be decided by the Chairman of the meeting. Except as otherwise provided
herein or in the Trust Instrument, all matters relating to the giving, voting or
validity of proxies shall be governed by the General Corporation Law of the
State of Delaware relating to proxies, and judicial interpretations thereunder,
as if the Trust were a Delaware corporation and the Shareholders were
shareholders of a Delaware corporation.
Section 4.3 Place of Meeting. All meetings of the Shareholders shall
be held at such places as the Trustees may designate.
ARTICLE V
---------
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 5.1 Share Certificate. No certificates certifying the
ownership of Shares shall be issued except as the Trustees may otherwise
authorize. The Trustees may issue certificates to a Shareholder of any Series or
class thereof for any purpose and the issuance of a certificate to one or more
Shareholders shall not require the issuance of certificates generally. In the
event that the Trustees authorize the issuance of Share certificates, such
certificate shall be in the form prescribed from time to time by the Trustees
and shall be signed by the President or a Vice President and by the Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary. Such
-4-
<PAGE>
signatures may be facsimiles if the certificate is signed by a transfer or
shareholder services agent or by a registrar, other than a Trustee, officer or
employee of the Trust. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Trust with
the same effect as if he or she were such officer at the time of its issue.
Section 5.2 Loss of Certificate. In case of the alleged loss or
destruction or the mutilation of a Share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
Section 5.3. Discontinuance of Issuance of Certificates. The
Trustees may at any time discontinue the issuance of Share certificates and may,
by written notice to each Shareholder, require the surrender of Share
certificates to the Trust for cancellation. Such surrender and cancellation
shall not affect the ownership of Shares in the Trust.
ARTICLE VI
----------
INSPECTION OF BOOKS
-------------------
The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and regulations
the accounts and books of the Trust or any of them shall be open to the
inspection of the Shareholders; and no Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees.
ARTICLE VII
-----------
SEAL
----
The seal of the Trust shall be circular in form bearing the
inscription:
"THE COMMERCE FUNDS -- 1994
THE STATE OF DELAWARE"
The form of the seal shall be subject to alteration by the Trustees
and the seal may be used by causing it or a facsimile to be impressed or affixed
or printed or otherwise reproduced.
Any officer or Trustee of the Trust shall have authority to affix the
seal of the Trust to any document, instrument or other paper executed and
delivered by or on behalf
-5-
<PAGE>
of the Trust; however, unless otherwise required by the Trustees, the seal shall
not be necessary to be placed on and its absence shall not impair the validity
of any document, instrument, or other paper executed by or on behalf of the
Trust.
ARTICLE VIII
------------
AMENDMENTS
----------
These By-laws may be amended from time to time by the Trustees.
ARTICLE IX
----------
HEADINGS
--------
Headings are placed in these By-laws for convenience of reference only
and, in case of any conflict, the text of these By-laws rather than the headings
shall control.
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<PAGE>
Exhibit 99.B5(a)
THE COMMERCE FUNDS
ADVISORY AGREEMENT
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
This Agreement, dated as of December 1, 1994, among COMMERCE BANK, N.A.
(St. Louis), with its principal office and place of business in St. Louis,
Missouri, COMMERCE BANK, N.A. (Kansas City), with its principal office and place
of business in Kansas City, Missouri (together, the "Advisor"), and THE COMMERCE
FUNDS, a Delaware Business Trust having its principal office and place of
business at 4900 Sears Tower, Chicago, IL (the "Trust");
WHEREAS, the Trust is a registered open-end, diversified, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust wishes to retain the Advisor as investment adviser to
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 (individually, a "Fund," and collectively, the
"Funds"), and the Advisor is willing to serve in such capacity;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. (a) The Trust hereby appoints the Advisor to act as
investment adviser for each of the Funds for the period and on the terms set
forth in this Agreement. The Advisor accepts such appointment and agrees,
jointly and severally, to render the services required hereby for the
compensation provided in this Agreement.
(b) In the event that the Trust establishes one or more investment
portfolios other than the Funds with respect to which it desires to retain
either or both of the Advisors to act as investment adviser(s) hereunder, the
Trust shall notify the Advisor(s) in writing. If the Advisor(s) are willing to
render such services, they shall notify the Trust in writing whereupon, subject
to such shareholder approval as may be required pursuant to the 1940 Act each
such portfolio shall become a Fund hereunder
<PAGE>
and the compensation payable by such Fund to the Advisor(s) will be as agreed in
writing at the time.
2. Delivery of Documents. The Trust has furnished the Advisor, and the
Advisor acknowledges that it has received, copies of each of the following:
(a) The Trust's Trust Instrument, as filed with the Delaware
Secretary of State on February 7, 1994 and all amendments thereto (such
Trust Instrument, as presently in effect and as it shall from time to time
be amended, is herein called the "Trust Instrument");
(b) The Trust's By-Laws and any amendments thereto (such By-Laws, as
presently in effect and as they shall from time to time be amended, is
herein called the "By-Laws");
(c) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Advisers as the investment advisers for the Funds and
approving the execution, delivery and performance of this Agreement;
(d) The Trust's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission ("SEC") on
June 30, 1994 and all amendments thereto;
(e) The Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act") (Registration No. 33-
80996) and under the 1940 Act (Registration No. 811-8598) as filed with the
SEC on June 30, 1994 and all amendments thereto; and
(f) The Trust's most recent prospectuses statement of additional
information and supplements thereto, with respect to the Funds (such
prospectuses, statement of additional information and supplements thereto,
as presently in effect and all amendments and supplements thereto, herein
collectively called "Prospectuses").
Promptly after the date of execution, the Trust will furnish the Advisor
from time to time with execution copies of all amendments of, or supplements to,
the foregoing.
3. Services. Subject to the supervision of the Trust's Board of
Trustees, the Advisor, in consultation with any Sub-Advisor appointed pursuant
to Section 4 hereof with respect to a particular Fund, will provide a continuous
investment program for each Fund, including investment research and management
with respect to all securities and investments and cash equivalents in such
Fund. The Advisor will determine from time to time what securities and other
investments will be purchased, retained or
-2-
<PAGE>
sold by each Fund and will arrange for the purchase and sale of securities and
other investments of each Fund. The Advisor will provide the services under
this Agreement in accordance with each Fund's investment objective, policies and
restrictions as stated in the relevant Prospectus and resolutions adopted from
time to time by the Trust's Board of Trustees. The Advisor further agrees that
it:
(a) will perform its obligations hereunder in conformity with all
applicable Rules and Regulations of the SEC, and will in addition
conduct their activities under this Agreement in accordance with other
applicable law, including but not limited to banking law;
(b) will place all orders for the purchase and sale of portfolio
securities for the account of each Fund with brokers or dealers
selected by the Advisor. In executing portfolio transactions and in
selecting brokers or dealers, the Advisor will use their reasonable
efforts to seek on behalf of each Fund the best overall terms
available. In assessing the best overall terms available for any
transaction, the Advisor shall 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
evaluating the best overall terms available, and in selecting the
broker or dealer to execute a particular transaction, the Advisor may
also consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934, as
amended) provided to any Fund and/or other accounts to which the
Advisor or any affiliate thereof exercises investment discretion. The
Advisor is authorized, subject to the prior approval of the Trust's
Board of Trustees, to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for any Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting
that transaction if, but only if, the Advisor determines in good faith
that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer --
viewed in terms of that particular transaction or in terms of the
overall responsibilities of the Advisor to the particular Fund and to
the Trust. In no instance will portfolio securities be purchased from
or sold to the Advisor, any Sub-Advisor, or the principal underwriter
for the Funds or an affiliated
-3-
<PAGE>
person of either acting as principal or as broker, except as permitted
by law. In addition, the Advisor is authorized to take into take into
account the sale of shares of the Trust in allocating to brokers or
dealers (including brokers and dealers that are affiliated with the
Advisor or the principal underwriter for the Trust) purchase and sale
orders for the Funds' portfolio securities, provided that the Advisor
believes that the quality of the transaction and the commission are
comparable to what it would be with other qualified firms. In
executing portfolio transactions for any Fund, the Advisor, to the
extent permitted by applicable laws and regulations, may but shall not
be obligated to, aggregate the securities to be sold or purchased with
those of other Funds and their other clients where such aggregation is
not inconsistent with the policies set forth in the Funds'
Prospectuses. In such event, the Advisor will allocate the securities
so purchased or sold, and the expenses incurred in the transaction, in
the manner they consider to be the most equitable and consistent with
their fiduciary obligations to the Funds and such other clients;
(c) will not make loans to any person to purchase or carry Fund shares or
make interest bearing loans to a Fund;
(d) will review, monitor, and report to the Board of Trustees on the
performance and investment procedures of any Sub-Advisor appointed
pursuant to Section 4;
(e) will assist and consult with any Sub-Advisor in connection with a
Fund's continuous investment program;
(f) will approve lists of foreign countries which may be recommended by
any Sub-Advisor for investment by a Fund;
(g) will maintain a policy and practice of conducting its investment
advisory operations independently of its commercial banking
operations. When the Advisor makes investment recommendations for a
Fund, its investment advisory personnel will not inquire or take into
consideration whether the issuers of securities proposed for purchase
or sale for the Fund's account are customers of its commercial
department. In dealing with commercial customers, the Advisor's
commercial department will not inquire or take into consideration
whether securities of those customers are held by the Funds;
-4-
<PAGE>
(h) will maintain all books and records with respect to the securities
transactions of the Funds entered into pursuant to this Agreement;
keep books of account with respect to the Funds as required in
connection with its services under the 1940 Act; and furnish the
Trust's Board of Trustees with such periodic and special reports as
the Board may request; and
(i) will treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and prior,
present or potential shareholders of the Funds except for such
information that is in the public domain, and will not use such
records and information for any purpose other than performance of
their responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where an
Advisor may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
4. Sub-Advisor. It is understood that the Advisor may from time to time
employ or associate with such person or persons as the Advisor believe to be
suitable to assist them in the performance of their obligations under this
Agreement (herein a "Sub-Advisor"); provided, however, that the compensation of
any Sub-Advisor shall be paid by the Advisors and that the Advisors shall be as
fully responsible to the Trust for the acts and omissions of any Sub-Advisor as
for its own acts and omissions as limited by Section 9 hereof; and provided
further, that the retention of any Sub-Advisor shall be approved as may be
required by the 1940 Act.
5. Services Not Exclusive. (a) The services furnished by the Advisor
hereunder are deemed not to be exclusive and nothing in this Agreement shall:
(i) prevent the Advisor or any affiliated person (as defined in the 1940 Act) of
the Advisor from acting as investment adviser or manager for any other person or
persons, including without limitation other management investment companies with
investment objectives and policies the same as or similar to those of any Fund
or (ii) limit or restrict the Advisor or any such affiliated person from buying,
selling or trading any securities or other investments (including any securities
or other investments which a Fund is eligible to buy) for its or their own
accounts or for the accounts of others for whom the Advisor may be acting;
provided, however, that the Advisor agrees that in the performance of its duties
under this Agreement, it will not undertake any activities which, in its
-5-
<PAGE>
reasonable judgment, will adversely affect the performance of its obligations to
the Funds under this Agreement.
(b) Nothing contained in this Agreement (including, without
limitation, the Advisor's confidentiality obligation under Section 3(i)),
however, shall prohibit the Advisor from advertising or soliciting the public
generally with respect to other products (including mutual funds) or services,
regardless of whether such advertisement or solicitation may include prior,
present or potential shareholders of the Trust.
6. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Advisor hereby agrees that all records which they
maintain for the Trust and each Fund are the property of the Trust and further
agree to surrender promptly to the Trust any of such records upon the Trust's
request. The Advisor further agrees to preserve for the periods prescribed by
Rule 31a-2 the records required to be maintained by Rule 31a-1.
7. Expenses. During the term of this Agreement, the Advisor will pay all
expenses incurred in connection with their activities under this Agreement other
than the cost of securities, commodities and other investments (including
brokerage commissions, if any) purchased for the Funds.
8. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Advisor and the Advisor will
accept as full compensation therefor: (a) with respect to the Short-Term
Government, Bond, National Tax-Free Bond and Missouri Tax-Free Bond Funds, .50
of 1% of each Fund's average daily net assets; (b) with respect to the Growth
and Aggressive Growth Funds, .75 of 1% of each Fund's average daily net assets;
(c) with respect to the Balanced Fund, 1% of the Fund's average daily net
assets; and (d) with respect to the International Equity Fund, 1.5% of the
Fund's average daily net assets.
Such fee as is attributable to a particular Fund will be a separate charge
to it and therefore the several obligation of such Fund (and not joint or joint
and several obligation of any other Fund). If in any fiscal year the aggregate
expenses of any Fund (as defined under the securities regulations of any state
having jurisdiction over each Fund) exceed the expense limitations of any state,
the Advisor will reimburse the Trust for such excess expenses to the extent
described in any written undertaking provided by the Advisor to such state.
9. Limitation of Liability. Subject to the provisions of Section 4
hereof concerning the Advisor's responsibility for the acts and omissions of a
Sub-Advisor, the Advisor shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust or any Fund in connection
with the
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<PAGE>
matters to which this Agreement relates, except a loss resulting from bad faith,
willful misconduct or gross negligence in the performance of these duties or for
losses resulting from a breach of their fiduciary duty with respect to the
receipt of compensation for services.
10. Confidentiality. The Trust will treat confidentially and as
proprietary information of the Advisor all records and other information
relative to the Advisor and prior, present or potential clients of the Advisor
except for such information that is in the public domain, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Advisor, which approval shall not be unreasonably
withheld and may not be withheld where the Trust may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Advisor.
11. Duration and Termination. The term of this Agreement shall begin on
the date first above written and, unless sooner terminated as hereinafter
provided, shall continue with respect to a Fund until November 30, 1995 and
thereafter shall continue automatically for successive annual periods, provided
such continuance is specifically approved at least annually by the Trust's Board
of Trustees or vote of the lesser of (a) 67% of the shares of such Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of such Fund are present in person or by proxy or (b) more than 50% of
the outstanding shares of such Fund, provided that in either event its
continuance also is approved by a majority of the Trustees of the Trust who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable with respect to a Fund at any
time without penalty, on 60 days' notice, by the Advisor, by the Trust's Board
of Trustee or by a vote of the lesser of (a) 67% of the shares of such Fund
represented at a meeting if holders of more than 50% of its outstanding shares
are present in person or by proxy or (b) more than 50% of the outstanding shares
of such Fund. This Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act). Termination of this Agreement shall
not affect the right of the Advisor to receive payments on any unpaid balance of
the compensation earned prior to such termination.
12. Amendment of this Agreement. No provisions in this Agreement may be
waived, changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the waiver, change,
discharge or termination is sought, and no amendment of this Agreement
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<PAGE>
affecting a Fund shall be effective until approved by vote of the holders of a
majority of the outstanding voting securities of such Fund.
13. Notice. Any notice, advice or report to be given pursuant to this
Agreement shall be delivered or mailed:
To the Advisor at:
-----------------
J. Daniel Stinnett, Esquire
Commerce Bank of Kansas City, N.A.
P.O. Box 419248
1000 Walnut Street
Kansas City, Missouri 64199-3686
To the Trust at:
---------------
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
14. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to
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<PAGE>
the benefit of the parties hereto and their respective successors and shall be
governed by Delaware law. However, any litigation brought by either party to
this Agreement shall be adjudicated in the appropriate court of jurisdiction
within the State of Missouri.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE COMMERCE FUNDS
Attest:
/s/ Mark H. Nicholas By: /s/ Pleasant V. Miller
- -------------------- ----------------------
COMMERCE BANK, N.A. (St. Louis)
Attest:
/s/ Thomas K. Edelmann By: /s/ Peter F. Mackie
- ---------------------- -------------------
(Corporate Seal)
COMMERCE BANK, N.A. (Kansas City)
Attest:
/s/ J. Daniel Stinnett By: /s/ Thomas E. Weiford
- ---------------------- ---------------------
(Corporate Seal)
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<PAGE>
Exhibit 99.B5(b)
THE COMMERCE FUNDS
SUB-ADVISORY AGREEMENT
INTERNATIONAL EQUITY FUND
AGREEMENT, dated as of December 1, 1994, among COMMERCE BANK, N.A. (St.
Louis) with its principal office and place of business in St. Louis, Missouri,
and COMMERCE BANK, N.A. (Kansas City) with its principal office and place of
business in Kansas City, Missouri (the "Advisor"), and Rowe Price-Fleming
International, Inc., a corporation with its principal office and place of
business at 100 East Pratt Street, Baltimore, Maryland ("Sub-Advisor");
WHEREAS, THE COMMERCE FUNDS (the "Trust") is registered as an open-end,
diversified management investment company under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, the Advisor has been appointed as investment advisor to the
Trust's International Equity Fund (the "Fund"); and
WHEREAS, the Advisor wishes to retain the Sub-Advisor to assist them in the
provision of a continuous investment program for the Fund and the Sub-Advisor is
willing to render such assistance;
WHEREAS, the Board of Trustees of the Fund and the Fund's sole shareholder
have approved this Agreement, and the Sub-Advisor is willing to furnish such
services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Appointment. The Advisor hereby appoints Sub-Advisor to act as sub-
advisor for the Fund as permitted by the Advisor's Advisory Agreement with the
Trust. The Sub-Advisor accepts such appointment and agrees to render the
services required hereby for the compensation provided in this Agreement.
2. Sub-Advisory Services. Subject to the supervision of the Trust's Board
of Trustees and the Advisor, the Sub-Advisor will provide a continuous
investment program for the Fund, including investment research and management
with respect to all securities and investments and cash equivalents in the Fund.
The Sub-Advisor will determine from time to time what securities and other
investments will be purchased, retained or sold by the Fund, subject to the
Advisor's approval of the overall investment objective of each Fund, and will
arrange for the purchase and sale of securities and other investments of the
Fund. The Sub-Advisor will provide the services under this Agreement, in
accordance with the Fund's investment objective,
<PAGE>
policies and restrictions as stated in the Prospectus, Statement of Additional
Information and supplements and resolutions adopted from time to time by the
Trust's Board of Trustees. The Sub-Advisor further agrees that it:
(a) will perform its obligations hereunder in conformity with all
applicable Rules and Regulations of the SEC, and will in addition
conduct its activities under this Agreement in accordance with other
applicable law;
(b) will telecopy trade information to the Advisor on the first business
day following the day of the trade and cause broker confirmations to
be sent directly to the Advisor;
(c) will place all orders for the purchase and sale of portfolio
securities for the account of the Fund with brokers or dealers
selected by the Sub-Advisor. In executing portfolio transactions and
in selecting brokers or dealers, the Sub-Advisor will use its
reasonable effort to seek on behalf of the Fund the best overall terms
available. In assessing the best overall terms available for any
transaction, the Sub-Advisor shall 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 evaluating the best overall terms available, and
in selecting the broker or dealer to execute a particular transaction,
the Sub-Advisor may also consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided to the Fund and/or other
accounts to which the Sub-Advisor or any affiliate thereof exercise
investment discretion. The Sub-Advisor is authorized, subject to the
prior approval of the Trust's Board of Trustees, to pay to a broker or
dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess
of the amount of commission another broker or dealer would have
charged for effecting that transaction if, but only if, the Sub-
Advisor determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services
provided by such broker or dealer -- viewed in terms of that
particular transaction or in terms of the overall responsibilities of
the Sub-Advisor to the Fund and to the Trust. In no instance will
portfolio securities be purchased from or sold to the Sub-Advisor or
the principal underwriter for the Trust or an affiliated person of
either acting as principal or as broker, except as permitted by law.
In executing portfolio transactions for the Fund, the
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<PAGE>
Sub-Advisor, to the extent permitted by applicable laws and
regulations, may but shall not be obligated to aggregate the
securities to be sold or purchased with those of their other clients
where such aggregation is not inconsistent with the policies set forth
in the Fund's Prospectus. In such event, the Sub-Advisor will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in the manner it considers to be the most
equitable and consistent with its fiduciary obligation to the Fund and
such other clients;
(d) will not make loans to any person to purchase or carry Fund shares or
make interest bearing loans to the Fund, except as provided in the
Fund's Prospectus and Statement of Additional Information;
(e) will maintain all books and records with respect to the securities
transactions of the Fund entered into pursuant to this Agreement; keep
books of account with respect to the Fund as required in connection
with its services under the 1940 Act; and furnish the Trust's Board of
Trustees with such periodic and special reports as the Board may
reasonably request; and
(f) will treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and prior,
present or potential shareholders of the Fund, except for such
information that is in the public domain, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder except where the Sub-Advisor may
be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
Without limiting the generality of the foregoing, the Sub-Advisor
further agrees that it will:
(g) manage in periodic consultation with the Advisor the Fund's temporary
investments in securities;
(h) place orders for the Fund either directly with the issuer or with any
broker or dealer;
(i) manage the Fund's overall cash position, and determine from time to
time what portion of the Fund's assets will be held in different
currencies;
(j) as requested on a reasonable basis, provide the Advisor with foreign
broker research;
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<PAGE>
(k) provide the advisor with a quarterly review of international economic
and investment developments, and occasional "White Papers" on
international investment issues; and
(l) attend regular business and investment related meetings with the
Trust's Board of Trustees and the Advisor if requested to do so by the
Trust or Advisor.
3. Services Not Exclusive. (a) Sub-Advisor agrees not to solicit any
bank prospect for the purposes of providing the services provided hereunder with
respect to an investment program similar to the International Equity Fund in
Kansas, Missouri and the region of Southern Illinois. Provided however, that
nothing in this paragraph shall preclude the Sub-Advisor from servicing bank
clients in the above-mentioned area or any bank prospect that relocates its
headquarters in Kansas, Missouri or Southern Illinois.
(b) Subject to subsection (a) above, the services furnished by the
Sub-Advisor hereunder are deemed not to be exclusive and nothing in this
Agreement shall (i) prevent the Sub-Advisor or any affiliated person (as defined
in the 1940 Act) of the Sub-Advisor from acting as investment advisor or manager
for any other person or persons, including without limitation other management
investment companies with investment objectives and policies the same as or
similar to those of the Fund or (ii) limit or restrict the Sub-Advisor or any
such affiliated person from buying, selling or trading any securities or other
investments (including any securities or other investments which the Fund is
eligible to buy) for its own accounts or for the accounts of others for whom it
may be acting.
(c) Nothing contained in this agreement (including, without
limitation, the Sub-Advisor's confidentiality obligation under Section 2(f)),
however, shall prohibit the Sub-Advisor from advertising or soliciting the
public generally with respect to other products or services, regardless of
whether such advertisement or solicitation may include prior, present or
potential shareholders of the Trust.
4. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Advisor hereby agrees that all records which
it maintains for the Trust and the Fund are the property of the Trust and
further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Sub-Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1.
5. Expenses. During the term of this Agreement, the Sub-Advisor will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including
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<PAGE>
brokerage commissions and other transaction charges, if any) purchased for the
Fund.
6. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Advisor will pay the Sub-Advisor monthly and the
Sub-Advisor will accept as full compensation therefor: a fee at an annual rate
of .75 of 1% of the first $20 million of average daily net assets; .60 of 1% of
the next $30 million of average daily net assets; and .50 of 1% of the average
daily net assets above $50 million.
7. Limitation of Liability of the Sub-Advisor. The Sub-Advisor or
any of its officers, directors or employees shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust or any Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from bad faith, willful misconduct or gross negligence in the
performance of these duties or for losses resulting from a breach of its
fiduciary duty with respect to the receipt of compensation for services.
8. Duration and Termination. The term of this Agreement shall begin
on the date first above written and, unless sooner terminated as hereinafter
provided, shall continue until November 30, 1995 and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees or vote
of the lesser of (a) 67% of the shares of the Fund represented at a meeting if
holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy or (b) more than 50% of the outstanding shares of the Fund,
provided that in either event its continuance also is approved by a majority of
the Trust's Trustees who are not "interested persons" (as defined in the 1940
Act) of any party to this Agreement, by vote cast in person at a meeting called
for the purpose of voting on such approval. This Agreement is terminable at any
time without penalty, on 60 days' notice, by the Advisor, Sub-Advisor or by the
Trust's Board of Trustees or by a vote of the lesser of (a) 67% of the shares of
the Fund represented at a meeting if holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund. This Agreement will terminate automatically in
the event of its assignment (as defined in the 1940 Act). Termination of this
Agreement shall not affect the right of the Sub-Advisor to receive payments on
any unpaid balance of the compensation earned prior to such termination.
9. Amendment of this Agreement. No provision of this Agreement may
be waived, changed, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the waiver, change,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved by the vote of a majority of the outstanding voting
securities of the Fund.
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<PAGE>
10. Notice. Any notice, advice or report to be given pursuant to
this Agreement shall be delivered or mailed:
To the Sub-Advisor at:
---------------------
Hannes Van Wagenberg
Rowe Price-Fleming International, Inc.
c/o T. Rowe Price
100 E. Pratt Street
Baltimore, Maryland 21202
With copy to:
Laura Chasney
Rowe Price-Fleming International, Inc.
c/o T. Rowe Price
100 E. Pratt Street
Baltimore, Maryland 21202
To the Advisor at:
-----------------
J. Daniel Stinnett, Esquire
Commerce Bank of Kansas City, N.A.
P.O. Box 419248
1000 Walnut Street
Kansas City, Missouri 64199-3686
To the Trust at:
---------------
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected
-6-
<PAGE>
thereby. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by
Delaware law. However, any litigation brought by either party to this Agreement
shall be adjudicated in the appropriate court of jurisdiction within the State
of Missouri.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
COMMERCE BANK, N.A. (St. Louis)
Attest:
/s/ Jodi L. Lucas By: /s/ Gary D. Campbell
- ----------------- -----------------------------
COMMERCE BANK, N.A. (Kansas City)
Attest:
/s/ Bridgett Keath By: /s/ Thomas E. Weiford
- ------------------ ------------------------------
ROWE PRICE-FLEMING INTERNATIONAL,
INC.
Attest:
/s/ Laura Chasney By: /s/ Nancy M. Morris
- ----------------- ------------------------------
-7-
<PAGE>
Exhibit 99.B6
The Commerce Funds
4900 Sears Tower
Chicago, IL 60606
October 18, 1994
Goldman, Sachs & Co.
4900 Sears Tower
Chicago, Illinois 60606
DISTRIBUTION AGREEMENT
----------------------
Dear Sirs:
The Commerce Funds (hereinafter called the "Trust") has been organized as a
Delaware business trust under the laws of Delaware to engage in the business of
an investment company. The shares of beneficial interest of the Trust (the
"Shares") are divided into multiple series ("Series"), including the Commerce
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, a "Fund" and collectively, the "Funds"), as
established from time to time pursuant to a written instrument executed by the
Trustees of the Trust. Each Series will represent the interest in a separate
portfolio of securities and other assets. Series may be terminated, and
additional Series established, from time to time by action of the Trustees. The
Trust, on behalf of the Funds, has selected you to act as principal underwriter
(as such term is defined in Section 2(a)(29) of the Investment Company Act of
1940, as amended (the "1940 Act")) of the Shares and you are willing to act as
such principal underwriter and to perform the duties and functions of
underwriter in the manner and on the terms and conditions hereinafter set forth.
Accordingly, the Trust hereby agrees with you as follows:
I. REGISTRATION AND SALE OF ADDITIONAL SHARES
The Trust will from time to time use its best efforts to register under
the Securities Act of 1933 (the "1933 Act") such number of Shares not
already so registered as you may reasonably be expected to sell. You and
the Trust will cooperate in taking such action as may be necessary from
time to time to qualify Shares so registered for sale by you or the Trust
in any states mutually agreeable to you and the Trust, and to maintain
such qualification. This Agreement relates to the issue and sale of
Shares that are duly authorized and registered and available for sale by
the Trust, including redeemed or repurchased Shares if and
<PAGE>
to the extent that they may be legally sold and if, but only if, the
Trust sees fit to sell them.
II. SALE OF SHARES
Subject to the provisions of paragraphs IV and VI hereof, and to such
minimum purchase requirements as may from time to time be currently
indicated in the Funds' prospectuses or Statement of Additional
Information, you are authorized to sell, as agent on behalf of the Trust,
Shares authorized for issue and registered under the 1933 Act. You may
also purchase as principal Shares for resale to the public. Such sales
will be made by you by accepting unconditional orders to purchase Shares
placed with you by investors and such purchases will be made by you only
after acceptance by you of such orders. The sales price to the public of
Shares shall be the public offering price as defined in paragraph V
hereof.
The Trust, or designated agents thereof, shall be promptly advised of all
purchase orders for shares you receive. Procedures may be established by
you and the Trust whereby purchase orders for shares of any Series are
presented directly to the Trust or a designated agent thereof, upon the
condition that in such cases it shall be deemed that the sale of the
shares to be purchased is made pursuant to this agreement. Any order may
be rejected by the Trust in its sole discretion. The Trust, or their
designated agents, will confirm orders in accordance with the rules and
regulations, or any exemptive order, of the SEC and will make appropriate
book entries pursuant to your instructions. The Trust, however, will not
confirm the sale of any shares in any jurisdiction in which the shares
are not qualified for offer and sale unless the offer and sale by you
under the circumstances is exempt from qualification. Purchase orders
are effective when Federal Funds become available to the Trust or as
otherwise stated in the Prospectuses. You agree to cause such payment
and such instructions received by them to be delivered promptly to the
Trust.
III. SOLICITATION OF ORDERS
You will use your best efforts (but only in states in which you may
lawfully do so) to obtain from investors unconditional orders for Shares
authorized for issue by the Trust and registered under the 1933 Act,
provided that you may in your discretion refuse to accept orders for
Shares from any particular applicant, provided, however, that you will
not arbitrarily or without reasonable cause refuse to transmit orders for
the purchase of shares.
-2-
<PAGE>
IV. SALE OF SHARES BY THE FUNDS
Unless you are otherwise notified by the Trust, any right granted to you
to accept orders for Shares or to make sales on behalf of the Trust or to
purchase Shares for resale will not apply to (i) Shares issued in
connection with the merger or consolidation of any other investment
company with the Trust or its acquisition, by purchase or otherwise, of
all or substantially all of the assets of any investment company or
substantially all the outstanding shares of any such company, (ii) Shares
that may be offered by the Trust to shareholders of the Trust by virtue
of their being such shareholders and (iii) the Trust may, upon written
notice to you, from time to time designate other principal underwriters
and distributors of shares of one or more Series with respect to areas
other than the United States as to which you have expressly waived in
writing your right to act as such. If such designation is deemed
exclusive, your right to act as agent for the distribution of shares in
the areas so designated shall terminate, but this Agreement shall remain
otherwise in full effect until terminated in accordance with the other
provisions hereof.
V. PUBLIC OFFERING PRICE
All Shares sold to investors by you will be sold at the public offering
price. The public offering price for all accepted subscriptions will be
(i) the net asset value per Share, next determined, in the manner
provided in the Funds' registration statements as from time to time in
effect under the 1933 Act and the 1940 Act, after the order is accepted
by you plus (ii) the applicable sales charge, if any.
VI. SUSPENSION OF SALES
If and whenever the determination of net asset value is suspended and
until such suspension is terminated, no further orders for Shares shall
be accepted by you except for unconditional orders placed with you before
you had knowledge of the suspension. In addition, the Trust reserves the
right to suspend sales and your authority to accept orders for Shares on
behalf of the Trust if, in the judgment of a majority of the Board of
Trustees or a majority of the Executive Committee of such Board, if such
body exists, it is in the best interests of the Trust to do so, such
suspension to continue for such period as may be determined by such
majority; and in that event, no shares will be sold by you on behalf of
the Trust while such suspension remains in effect except for Shares
-3-
<PAGE>
necessary to cover unconditional orders accepted by you before you had
knowledge of the suspension.
VII. PORTFOLIO SECURITIES
Portfolio securities of the Trust may be bought or sold by or through you
as agent and you may participate directly or indirectly in brokerage
commissions or "spread" in respect of such transactions in portfolio
securities of the Trust.
VIII. DUTIES AND REPRESENTATIONS OF THE TRUST
Notwithstanding other duties and representations required elsewhere in
this Agreement, the Trust shall furnish to you copies of all information,
financial statements, copies of annual and interim reports of each Series
and other documents which you may reasonably request for use in
connection with the distribution of Shares of the Trust, and this shall
include one certified copy, upon your request, of all financial
statements of each Series audited by independent public accountants.
The Trust represents to you that all registration statements and
prospectuses filed by the Trust have been prepared in conformity with the
requirements of said Securities and Exchange Act and rules and
regulations of the Securities and Exchange Commission thereunder. The
Trust represents and warrants that any registration statement and
prospectuses, when such registration statement and prospectuses become
effective, will contain all statements required to be stated therein,
will not include an untrue statement or material omission necessary to
make a statement not misleading and will be in conformity with said Act
and the rules and regulations of said Commission.
The Trust will amend the registration statement from time to time as
required by the Securities Act so long as it is offering shares; and so
long as it is offering shares shall supplement or amend the Prospectuses
if necessary in order to make the statements therein, in light of the
circumstances when the Prospectuses are delivered to a purchaser, not
misleading or if it is necessary to modify or amend the Prospectuses to
comply with law.
The Trust agrees to advise you promptly in writing:
(i) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectuses then in
effect or for additional information;
-4-
<PAGE>
(ii) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the
registration statement or the Prospectuses then in effect or the
initiation of any proceeding for that purpose;
(iii) of the happening of any event which makes untrue any
statement of a material fact made in the registration statement or the
Prospectuses then in effect or which requires the making of a change
in such registration statement or Prospectuses in order to make the
statements therein not misleading;
(iv) of all actions of the Securities and Exchange Commission
with respect to any amendments to any registration statement or
Prospectuses which may from time to time be filed with the Securities
and Exchange Commission;
IX. DUTIES OF THE DISTRIBUTOR
Notwithstanding other duties and responsibilities required elsewhere in
this agreement, you shall
(a) make available one or more persons to perform your duties
hereunder, to respond to inquiries of prospective shareholders, to mail
prospectuses thereto, and to otherwise assist prospective shareholders in
completing a purchase of shares; and shall assist shareholders in
effecting exchanges as described in the Prospectuses and in processing
orders for redemption drafts;
(b) act in conformity with the Trust Agreement, By-Laws, Prospectuses
and Registration Statement and with the instructions and directions of
the Trustees of the Trust.
(c) maintain and preserve for the periods prescribed by Rule 31a-2 of
the SEC under the 1940 Act, such records as are required to be maintained
by Rule 31a-1(d) under the 1940 Act.
You shall be free to render to others services similar to those
rendered to the Trust hereunder so long as your services hereunder are
not impaired thereby.
X. EXPENSES
A. The Trust, pursuant to this Agreement, will pay (or will enter into
arrangements providing that parties other than you will pay) all fees
and expenses:
-5-
<PAGE>
(1) in connection with the preparation, setting in type and filing of
any registration statement (including the Prospectuses and
Statement of Additional Information) under the 1933 Act or the
1940 Act, or both, and any amendments or supplements thereto that
may be made from time to time;
(2) in connection with the registration and qualification of Shares
for sale in the various jurisdictions in which the Trust shall
determine it advisable to qualify such Shares for sale (including
registering the Trust as a broker or dealer or any officer of the
Trust or other person as agent or salesman of the Trust in any
such jurisdictions);
(3) of preparing, setting in type, printing and mailing any notice,
proxy statement, report, prospectus or other communication to
shareholders of the Trust in their capacity as such;
(4) of preparing, setting in type, printing and mailing the
Prospectuses annually, and any supplements thereto, to existing
shareholders;
(5) in connection with the issue and transfer of Shares resulting
from the acceptance by you of orders to purchase Shares placed
with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses of
printing and mailing Prospectuses included with the confirmation
of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this paragraph X;
(8) of wiring funds in payment of Share purchases or in satisfaction
of redemption or repurchase requests, unless such expenses are
paid for by the investor or shareholder who initiates the
transaction;
(9) of the cost of printing and postage of business reply envelopes
sent to the Funds' shareholders;
(10) of one or more CRT terminals connected with the computer
facilities of the transfer agent other than the portion allocated
to you in this paragraph X;
-6-
<PAGE>
(11) permitted to be paid or assumed by the Trust pursuant to a plan
("12b-1 Plan"), if any, adopted by the Trust in conformity with
the requirements of Rule 12b-1 under the 1940 Act ("Rule 12b-1")
or any successor rule, notwithstanding any other provision to the
contrary herein;
(12) of the expense of setting in type, printing and postage of the
periodic newsletter to shareholders other than the portion
allocated to you in this paragraph X; and
(13) of the salaries and overhead of persons employed by you as
shareholder representatives other than the portion allocated to
you in this paragraph X.
B. You shall pay or arrange for the payment of all fees and expenses:
(1) of printing and distributing any Prospectuses or reports prepared
for your use in connection with the offering of Shares to the
public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of Shares
to the public;
(3) of advertising in connection with the offering of Shares to the
public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
partners, directors, agents or representatives under federal and
state laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information or Prospectuses;
(6) of that portion of the expense of setting in type, printing and
postage of the periodic newsletter to shareholders attributable
to promotional material included in such newsletter at your
request concerning investment companies other than the Trust or
concerning the Trust to the extent you are required to assume the
expense thereof pursuant to this paragraph X, except such
material which is limited to information, such as listings of
other investment companies and their investment
-7-
<PAGE>
objectives, given in connection with the exchange privilege as
from time to time described in the Funds' Prospectuses;
(7) of that portion of the salaries and overhead of persons employed
by you as shareholder representatives attributable to the time
spent by such persons in responding to requests from investors,
but not shareholders, for information about the Funds;
(8) of any activity which is primarily intended to result in the sale
of Shares, unless a 12b-1 Plan shall be in effect which provides
that the Trust shall bear some or all of such expenses, in which
case the Trust shall bear such expenses in accordance with such
Plan; and
(9) of that portion of one or more CRT terminals connected with the
computer facilities of the transfer agent attributable to your
use of such terminal(s) to gain access to such of the transfer
agent's records as also serve as your records.
Expenses which are to be allocated between you and the Trust shall be
allocated pursuant to reasonable procedures or formulae mutually agreed
upon from time to time, which procedures or formulae shall to the extent
practicable reflect studies of relevant empirical data.
XI. CONFORMITY WITH LAW
You agree that in selling Shares you will duly conform in all respects
with the laws of the United States and any state in which Shares may be
offered for sale by you pursuant to this Agreement and to the rules and
regulations of the National Association of Securities Dealers, Inc., of
which you are a member.
XII. INDEPENDENT CONTRACTOR
You shall be an independent contractor and neither you nor any of your
officers or employees is or shall be an employee of the Trust in the
performance of your duties hereunder. You shall be responsible for your
own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through
your agents or employees. You assume full responsibility for your agents
and employees under applicable statutes and agree to pay all applicable
employment taxes thereunder.
-8-
<PAGE>
XIII. INDEMNIFICATION
You agree to indemnify and hold harmless the Trust and each of its
Trustees and officers and each person, if any, who controls the Funds
within the meaning of Section 15 of the 1933 Act, against any and all
losses, claims, damages, liabilities or litigation (including legal and
other expenses) to which the Trust or such Trustees, officers, or
controlling person may become subject under such Act, under any other
statute, at common law or otherwise, arising out of the acquisition of
any Share by any person which (i) may be based upon any wrongful act by
you or any of your employees or representatives, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement (including the Prospectuses or
Statement of Additional Information) covering Shares or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Trust by
you, or (iii) may be incurred or arise by reason of your acting as the
Trust's agent instead of purchasing and reselling shares as principal in
distributing the Shares to the public, provided, however, that in no case
(i) is your indemnity in favor of a Trustee or officer or any other
person deemed to protect such Trustee or officer or other person against
any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or negligence in the
performance of his duties or by reason of his reckless disregard of
obligations and duties under this Agreement or (ii) are you to be liable
under your indemnity agreement contained in this paragraph with respect
to any claim made against the Trust or any person indemnified unless the
Trust or such person, as the case may be, shall have notified you in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claims shall have been
served upon the Trust or upon such person (or after the Trust or such
person shall have received notice of such service on any designated
agent), but failure to notify you of any such claim shall not relieve you
from any liability which you may have to the Trust or any person against
whom such action is brought otherwise than on account of your indemnity
agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so elect, to
assume the defense of any suit brought to enforce any such liability, but
if you elect to assume the defense, such defense shall be conducted by
counsel chosen by you and satisfactory to the
-9-
<PAGE>
Trust to its officers and Trustees, or to any controlling person or
persons, defendant or defendants in the suit. In the event that you
elect to assume the defense of any such suit and retain such counsel, the
Trust, such officers and trustees or controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses of
any additional counsel retained by them, but, in case you do not elect to
assume the defense of any such suit, you will reimburse the Trust such
officers and Trustees or controlling person or persons, defendant or
defendants in such suit for the reasonable fees and expenses of any
counsel retained by them. You agree promptly to notify the Trust of the
commencement of any litigation or proceedings against it in connection
with the issue and sale of any of Shares.
The Trust agrees to indemnify and hold harmless you and each of your
partners and officers and each person, if any, who controls you within
the meaning of Section 15 of the 1933 Act, against any and all losses,
claims, damages, liabilities or litigation (including legal and other
expenses) to which you or such partners, officers or controlling person
may become subject under such Act, under any other statute, at common law
or otherwise, arising out of the acquisition of any shares by any person
which (i) may be based upon any wrongful act by the Trust or any of its
employees or representatives, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement (including a prospectus or statement of additional
information) covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance
upon information furnished to you by the Trust; provided, however, that
in no case (i) is the Trust indemnity in favor of a partner or officer or
any other person deemed to protect such partner or officer or other
person against any liability to which any such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of his duties or by reason of his reckless disregard
of obligations and duties under this Agreement or (ii) is the Trust to be
liable under its indemnity agreement contained in this paragraph with
respect to any claims made against you or any such partner, officer or
controlling person unless you or such partner, officer or controlling
person, as the case may be, shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
-10-
<PAGE>
served upon you or upon such partner, officer or controlling person (or
after you or such partner, officer or controlling person shall have
received notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve it from any
liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in
this paragraph. The Trust will be entitled to participate at its own
expense in the defense, or, if it so elects, to assume the defense of any
suit brought to enforce any such liability, but if the Trust elects to
assume the defense, such defense shall be conducted by counsel chosen by
it and satisfactory to you, your partners, officers or controlling person
or persons, defendant or defendants in the suit. In the event that the
Trust elects to assume the defense of any such suit and retain such
counsel, you, your partners, officers or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and expenses of
any additional counsel retained by them, but, in case the Trust does not
elect to assume the defense of any such suit, it will reimburse you or
such partners, officers or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust agrees to promptly notify you of the
commencement of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of any
Shares.
XIV. AUTHORIZED REPRESENTATIONS
The Trust is not authorized to give any information or to make any
representations on behalf of you other than the information and
representations contained in a registration statement (including the
Prospectuses or Statement of Additional Information) covering Shares, as
such registration statement and Prospectuses may be amended or
supplemented from time to time.
You are not authorized to give any information or to make any
representations on behalf of the Trust or in connection with the sale of
Shares other than the information and representations contained in a
registration statement (including the Prospectuses or Statement of
Additional Information) covering Shares, as such registration statement
may be amended or supplemented from time to time. No person other than
you is authorized to act as principal underwriter (as such term is
defined in the 1940 Act) for the Trust.
-11-
<PAGE>
XV. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall remain in effect until November 30, 1995 and from
year to year thereafter, but only so long as such continuance is
specifically approved at least annually by the vote of the majority of
the Trustees who are not interested persons of you or of the Trust, cast
in person at a meeting called for the purpose of voting on such approval,
and by vote of the Board of Trustees or of a majority of the outstanding
voting securities of the Trust. This Agreement may, on 60 days' written
notice, be terminated at any time without the payment of any penalty, by
the Board of Trustees of the Trust, by a vote of a majority of the
outstanding voting securities of the Trust, or by you. This Agreement
will automatically terminate in the event of its assignment. In
interpreting the provisions of this paragraph XV, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions
of "interested person," "assignment" and "majority of the outstanding
voting securities"), as modified by any applicable order of the
Securities and Exchange Commission, shall be applied.
XVI. AMENDMENT OF THIS AGREEMENT
No provisions of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or
termination is sought. This Agreement may be amended by mutual consent
provided that such amendment is approved by vote of a majority of those
Trustees of the Trust who are not parties to this Agreement or interested
persons (as defined in the 1940 Act) of any such party, cast in person at
a meeting called for the purpose of voting on such amendment.
XVII. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
XVIII. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and
the same instrument.
-12-
<PAGE>
If you are in agreement with the foregoing, please sign the form of acceptance
on the accompanying counterpart of this letter and return such counterpart to
the Trust, whereupon this letter shall become a binding contract.
Very truly yours,
The Commerce Funds
By: /s/ Pleasant Voorhees Miller
----------------------------
President of the Trust
The forgoing Agreement is hereby accepted
as of the date thereof.
GOLDMAN, SACHS & CO.
By: /s/ Marcia L. Beck
-------------------------------
Title: Vice President
------------------------------
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<PAGE>
Exhibit 99.B8(a)
CUSTODIAN CONTRACT
Between
THE COMMERCE FUNDS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held
By It................................................................ 2
2. Duties of the Custodian with Respect to Property of the Fund
Held By the Custodian in the United States........................... 3
2.1 Holding Securities............................................. 3
2.2 Delivery of Securities......................................... 4
2.3 Registration of Securities..................................... 10
2.4 Bank Accounts.................................................. 11
2.5 Availability of Federal Funds.................................. 12
2.6 Collection of Income........................................... 12
2.7 Payment of Fund Monies......................................... 13
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased........................................... 16
2.9 Appointment of Agents.......................................... 17
2.10 Deposit of Fund Assets in Securities Systems................... 17
2.10A Fund Assets Held in the Custodian's Direct Paper System........ 21
2.11 Segregated Account............................................. 22
2.12 Ownership Certificates for Tax Purposes........................ 24
2.13 Proxies ....................................................... 24
2.14 Communications Relating to Portfolio Securities................ 25
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States......................................... 26
3.1 Appointment of Foreign Sub-Custodians.......................... 26
3.2 Assets to be Held.............................................. 26
3.3 Foreign Securities Depositories................................ 27
3.4 Agreements with Foreign Banking Institutions................... 27
3.5 Access of Independent Accountants of the Fund.................. 28
3.6 Reports by Custodian........................................... 28
3.7 Transactions in Foreign Custody Account........................ 29
3.8 Liability of Foreign Sub-Custodians............................ 30
3.9 Liability of Custodian......................................... 30
3.10 Reimbursement for Advances..................................... 31
3.11 Monitoring Responsibilities.................................... 32
3.12 Branches of U.S. Banks......................................... 33
3.13 Tax Law........................................................ 33
4. Payments for Sales or Repurchases or Redemptions of Shares of
the Fund............................................................ 34
5. Proper Instructions................................................. 35
6. Actions Permitted without Express Authority......................... 36
7. Evidence of Authority............................................... 37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income....................... 37
9. Records............................................................. 38
10. Opinion of Fund's Independent Accountant............................ 39
11. Reports to Fund by Independent Public Accountants................... 39
12. Compensation of Custodian........................................... 40
13. Responsibility of Custodian......................................... 40
14. Effective Period, Termination and Amendment......................... 42
15. Successor Custodian................................................. 44
16. Interpretive and Additional Provisions.............................. 46
17. Additional Funds.................................................... 46
18. New York Law to Apply............................................... 47
19. Prior Contracts..................................................... 47
20. Equipment Failures.................................................. 47
21. Shareholder Communications Election.................................. 47
</TABLE>
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between The Commerce Funds, a business trust organized
and existing under the laws of the State of Delaware, having its principal place
of business at 4900 Sears Tower, Chicago, IL 60606, hereinafter called the
"Fund", and State Street Bank and Trust Company, a Massachusetts trust company,
having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian".
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in 8 series, the
Commerce Short-Term Government Bond Fund, Commerce High Quality Bond Fund,
Commerce Balanced Fund, Commerce Growth Fund, Commerce Aggressive Growth Fund,
Commerce International Equity Fund, Commerce National Tax-Free Bond Fund and
Commerce Missouri Tax-Free Bond Fund (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
<PAGE>
1. Employment of Custodian and Property to be Held by It
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The Fund hereby employs the Custodian as the custodian of the
assets of the Portfolios of the Fund, including securities which the
Fund, on behalf of the applicable Portfolio desires to be held in
places within the United States ("domestic securities") and securities
it desires to be held outside the United States ("foreign securities")
pursuant to the provisions of the Trust Instrument. The Fund on
behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with
respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury
shares of beneficial interest of the Fund representing interests in
the Portfolios ("Shares"), as may be issued or sold from time to time.
The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of
Article 5), the Custodian shall on behalf of the applicable
Portfolio(s) from time to time employ one or more sub-custodians,
located in the United States but only in accordance with an applicable
vote
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<PAGE>
by the Board of Trustees of the Fund on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or
less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian. The Custodian may employ as sub-
custodian for the Fund's foreign securities on behalf of the
applicable Portfolio(s) the foreign banking institutions and foreign
securities depositories designated in Schedule A hereto but only in
accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
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the Custodian in the United States
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2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by
such Portfolio, other than (a) securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which
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<PAGE>
is deposited and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio which are held by the
Custodian or in a Securities System account of the Custodian or in the
Custodian's Direct Paper book entry system account ("Direct Paper
System Account") only upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Portfolio;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.10 hereof;
4) To the depository agent in connection with tender or
other similar offers for securities of the Portfolio;
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<PAGE>
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or
other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into
the name of the Portfolio or into the name of any
nominee or nominees of the Custodian or into the name
or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any
subcustodian appointed pursuant to Article 1; or for
exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face
amount or number of units; provided that, in any such
case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against
a receipt, for examination in accordance with "street
delivery" custom; provided
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<PAGE>
that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from
the delivery of such securities prior to receiving
payment for such securities except as may arise from
the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization
or readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the
new securities and cash, if any, are to be delivered to
the Custodian;
9) In the case of warrants, rights or similar securities,
the surrender thereof in the exercise of such warrants,
rights or similar securities or the surrender of
interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if
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<PAGE>
any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities
made by the Portfolio, but only against receipt of
adequate collateral as agreed upon from time to time by
the Custodian and the Fund on behalf of the Portfolio,
which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any
loans for which collateral is to be credited to the
Custodian's account in the book-entry system authorized
by the U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for the delivery
of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any
borrowings by the Fund on behalf of the Portfolio
requiring a pledge of assets by the Fund on behalf
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<PAGE>
of the Portfolio, but only against receipt of amounts
borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with the
rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any
similar organization or organizations, regarding escrow
or other arrangements in connection with transactions
by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio,
the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating
to compliance with the rules of the Commodity Futures
Trading Commission and/or any Contract
-8-
<PAGE>
Market, or any similar organization or organizations,
regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the currently effective
prospectus and statement of additional information of
the Fund, related to the Portfolio ("Prospectus"), in
satisfaction of requests by holders of Shares for
repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions from the
Fund on behalf of the applicable Portfolio, a certified
copy of a resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the Fund
and certified by the Secretary or an Assistant
Secretary, specifying the securities of the Portfolio
to be
-9-
<PAGE>
delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be
made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment
adviser as the Portfolio, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities
accepted by the Custodian on behalf of the Portfolio under the terms
of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name," the Custodian shall utilize its best
efforts only to timely collect income due the Fund on such securities
and to notify the Fund on a best
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<PAGE>
efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained
by the Portfolio in a bank account established and used in accordance
with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for a Portfolio may be deposited by it to its credit
as Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall on behalf of each applicable Portfolio be approved by
vote of a majority of the Board of Trustees of the Fund. Such funds
shall be deposited by the
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<PAGE>
Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions from the Fund
on behalf of a Portfolio, make federal funds available to such
Portfolio as of specified times agreed upon from time to time by the
Fund and the Custodian in the amount of checks received in payment for
Shares of such Portfolio which are deposited into the Portfolio's
account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder
to which each Portfolio shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall credit such
income, as collected, to such Portfolio's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become
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<PAGE>
due and shall collect interest when due on securities held hereunder.
Income due each Portfolio on securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the
Fund, except with respect to income due on securities loaned under the
Custodian's securities lending program, in which case the Custodian's
responsibilities shall be set forth in the Securities Lending
Authorization Agreement duly executed between the Fund and the
Custodian. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to
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<PAGE>
such options, futures contracts or options on futures
contracts to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in
the name of the Portfolio or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper form
for transfer; (b) in the case of a purchase effected through
a Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or
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<PAGE>
(ii) against delivery of the receipt evidencing purchase by
the Portfolio of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to
repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section
2.2 hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following
payments for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses
are to be
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<PAGE>
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of
the Portfolio, a certified copy of a resolution of the Board
of Trustees or of the Executive Committee of the Fund signed
by an officer of the Fund and certified by its Secretary or
an Assistant Secretary, specifying the amount of such
payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to
be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the
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<PAGE>
absence of specific written instructions from the Fund on behalf of
such Portfolio to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in accordance
with applicable Federal Reserve Board and Securities and
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<PAGE>
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of
the Portfolio which are maintained in a Securities System
shall identify by book-entry those securities belonging to
the Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer
for the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio
upon (i) receipt of advice from the Securities System
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<PAGE>
that payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of
the Custodian to reflect such transfer and payment for the
account of the Portfolio. Copies of all advices from the
Securities System of transfers of securities for the account
of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian shall
furnish the Fund on behalf of the Portfolio confirmation of
each transfer to or from the account of the Portfolio in the
form of a written advice or notice and shall furnish to the
Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the Securities
System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding
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<PAGE>
securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial or annual certificate, as the case
may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for the benefit of
the Portfolio for any loss or damage to the Portfolio
resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or
from failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian
with respect to any claim against the Securities System or
any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Portfolio has not been made whole for any such loss
or damage.
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2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Portfolio
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented
in an account ("Account") of the Custodian in the Direct
Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
3) The records of the Custodian with respect to securities of
the Portfolio which are maintained in the Direct Paper
System shall identify by book-entry those securities
belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and
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<PAGE>
transfer of securities to the account of the Portfolio. The
Custodian shall transfer securities sold for the account of
the Portfolio upon the making of an entry on the records of
the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the
account of the Portfolio, in the form of a written advice or
notice, of Direct Paper on the next business day following
such transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account
of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal
accounting control as the Fund may reasonably request from
time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of
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each such Portfolio, into which account or accounts may be transferred
cash and/or securities, including securities maintained in an account
by the Custodian pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund on behalf of the
Portfolio, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Portfolio, (ii)
for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Portfolio or
commodity futures contracts or options thereon purchased or sold by
the Portfolio, (iii) for the purposes of compliance by the Portfolio
with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the securities and
Exchange Commission relating to the maintenance of segregated accounts
by registered investment companies and (iv) for other proper
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<PAGE>
corporate purposes, but only, in the case of clause (iv), upon receipt
of, in addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Portfolio held by
it and in connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Portfolio such proxies, all
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proxy soliciting materials and all notices relating to such
securities.
2.14 Communications Relating to Portfolio Securities.
Subject to the provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund for each Portfolio all written information
(including, without limitation, pendency of calls and maturities of
domestic securities and expirations of rights in connection therewith
and notices of exercise of call and put options written by the Fund on
behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to
the Portfolio all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the
Portfolio desires to take action with respect to any tender offer,
exchange offer or any other similar transaction, the Portfolio shall
notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
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<PAGE>
3. Duties of the Custodian with Respect to Property of the Fund Held Out
---------------------------------------------------------------------
side of the United States
- -------------------------
3.1 Appointment of Foreign Sub-Custodians.
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Portfolio's securities and other assets
maintained outside the United States the foreign banking institutions
and foreign securities depositories designated on Schedule A hereto
("foreign sub-custodians"). Upon receipt of "Proper Instructions," as
defined in Section 5 of this Contract, together with a certified
resolution of the Fund's Board of Trustees, the Custodian and the Fund
may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such sub-custodians for maintaining
custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities," as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably
-26-
<PAGE>
necessary to effect the Portfolio's foreign securities transactions.
The Custodian shall identify on its books as belonging to the Fund,
the foreign securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the
Portfolio(s) shall be maintained in foreign securities depositories
only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof.
Where possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of
each Portfolio will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for the
assets of each Portfolio will be freely transferable without the
payment of money or value other than for custody or administration;
(c) adequate records will be maintained identifying the assets as
belonging to each
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applicable Portfolio; (d) officers of or auditors employed by, or
other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with
the Custodian; and (e) assets of the Portfolio(s) held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign sub-
custodians, including but not limited to an identification of entities
having possession of the Portfolio(s) securities and other assets and
advices or notifications of any transfers of securities to or from
-28-
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each custodial account maintained by a foreign banking institution for
the Custodian on behalf of each applicable Portfolio indicating, as to
securities acquired for a Portfolio, the identity of the entity having
physical possession of such securities.
3.7 Transactions in Foreign Custody Account.
(a) Except as otherwise provided in paragraph (b) of this Section 3.7,
the provision of Sections 2.2 and 2.7 of this Contract shall apply,
mutatis mutandis to the foreign securities of the Fund held outside
the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
account of each applicable Portfolio may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor
(or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
-29-
<PAGE>
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund
agrees to hold any such nominee harmless from any liability as a
holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-
custodian shall require the institution to exercise reasonable care in
the performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been
made whole for any such loss, damage, cost, expense, liability or
claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract
-30-
<PAGE>
and, regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this paragraph 3.9, in
delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase
-31-
<PAGE>
or sale of foreign exchange or of contracts for foreign exchange, or
in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Portfolio shall be
security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Portfolio's assets to the extent necessary to
obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the
subject of an exemptive order from
-32-
<PAGE>
the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S. dollars
or the equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks.
(a) Except as otherwise set forth in this Contract, the provisions
hereof shall not apply where the custody of the Portfolio's assets are
maintained in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment Company Act of
1940 meeting the qualification set forth in Section 26(a) of said Act.
The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or
both.
-33-
<PAGE>
3.13 Tax Law.
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America
or any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of jurisdictions other than those mentioned in the above
sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
----------------------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that Portfolio
issued or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the
-34-
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Transfer Agent of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Trust Instrument and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
party of parties involved, and the specific transaction or type of transaction
involved, including a specific statement of the
-35-
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purpose for which such action is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes them to have been given
by a person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Trustees of the Fund accompanied by a detailed
description of procedures approved by the Board of Trustees, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board of Trustees and the Custodian are
satisfied that such procedures afford adequate safeguards for the Portfolios'
assets. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three -party agreement
which requires a segregated asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from
the Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund on behalf of
the Portfolio;
-36-
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2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Portfolio except as otherwise directed
by the Board of Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
- ---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each
-37-
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Portfolio and/or compute the net asset value per share of the outstanding shares
of each Portfolio or, if directed in writing to do so by the Fund on behalf of
the Portfolio, shall itself keep such books of account and/or compute such net
asset value per share. If so directed by the fund on behalf of the portfolio,
the Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
9. Records
-------
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and
-38-
<PAGE>
agents of the Securities and Exchange Commission. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities owned by each
Portfolio and held by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any
-39-
<PAGE>
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
--------------------------=
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian. Such
compensation schedule shall be set forth on Schedule B attached hereto and may
be amended from time to time.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. The Custodian
shall only be indemnified hereunder from the assets of the fund belonging to the
respective
-40-
<PAGE>
Portfolio involved. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take
any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable for
the payment of money or incurring liability of some other form, the Fund on
behalf of the Portfolio, as a prerequisite to requiring
-41-
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the Custodian to take such action, shall provide indemnity to the Custodian in
an amount and form satisfactory to it. The Custodian shall only be indemnified
hereunder from the assets of the fund belonging to the respective Portfolio
involved.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio including the purchase or sale of foreign
exchange or of contracts for foreign exchange or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
-42-
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postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio as
required in each case by Rule 17f-4 under the Investment Company Act of 1940, as
amended and that the Custodian shall not with respect to a Portfolio act under
Section 2.10A hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees has approved the
initial use of the Direct Paper System by such Portfolio and the receipt of an
annual certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has reviewed the use by such Portfolio of the Direct Paper System;
provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust, and further provided, that the Fund on
behalf of one or more of the Portfolios may at any time by action of its Board
of Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event
-43-
<PAGE>
at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements. This agreement may not be assigned
by the Custodian without the consent of the fund, authorized or approved by a
resolution of its Board of Trustees.
15. Successor Custodian
-------------------
If a successor custodian for the Fund, of one or more of the
Portfolios shall be appointed by the Board of Trustees of the Fund, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities of each applicable Portfolio then held by it hereunder and shall
transfer to an account of the successor custodian all of the securities of each
such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before
-44-
<PAGE>
the date when such termination shall become effective, then the Custodian shall
have the right to deliver to a bank or trust company, which is a "bank" as
defined in the Investment Company Act of 1940, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
-45-
<PAGE>
16. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to Commerce Short-Term Government Fund, Commerce High Quality Bond
Fund, Commerce Balanced Fund, Commerce Growth Fund, Commerce Aggressive Growth
Fund, Commerce International Equity Fund, Commerce National Tax-Free Bond Fund
and Commerce Missouri Tax-Free Bond Fund with respect to which it desires to
have the Custodian render services as custodian under the terms hereof, it shall
so notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder
to the same extent as the above Portfolios, except to the extent that
-46-
<PAGE>
such provisions are modified with respect to such fund in writing by the fund
and the Custodian at the time.
18. New York Law to Apply
---------------------
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of the State of New York.
19. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Equipment Failures
------------------
In the event of equipment failures beyond the Custodian's control,
Custodian shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruption but shall have no liability with respect thereto.
Custodian shall maintain access to alternate electronic data processing
equipment at its own back-up facilities or enter into and maintain in effect
with appropriate parties one or more agreements making reasonable provision for
emergency use of electronic data processing equipment to the extent appropriate
equipment is available.
21. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names,
-47-
<PAGE>
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Fund to indicate whether the fund authorizes the Custodian to provide the Fund's
name, address, and share position to requesting companies whose securities the
Fund owns. If the Fund tells the Custodian "no," the Custodian will not provide
this information to requesting companies. If the Fund tells the Custodian "yes"
or does not check either "yes" or "no" below, the custodian is required by the
rule to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
-48-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 1st day of December, 1994.
ATTEST THE COMMERCE FUNDS
/s/ Mark H. Nicholas By /s/ Pleasant V. Miller
- -------------------- ----------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ E. Soloma By /s/ Ronald E. Logue
- -------------------- ------------------------
Executive Vice President
-49-
<PAGE>
Schedule A
----------
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of for
use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
______________________________
Fund's Authorized Officer
Date:__________________
-50-
<PAGE>
Exhibit 1
SUBCUSTODIAN AGREEMENT
----------------------
AGREEMENT made this ____ day of ____________, 19__,; between State
Street Bank and Trust company, A Massachusetts Trust Company (hereinafter
referred to as the "Custodian"), having its principal place of business at 225
Franklin Street, Boston, MA, and ____________________________________________
(hereinafter referred to as the "Subcustodian"), a ____________ organized under
the laws of _______________________________________ and having an office at
___________________________________________
_______________________________________________________________.
WHEREAS, Custodian has been appointed to act as Trustee, Custodian or
Subcustodian of securities and monies on behalf of certain of its customers
including, without limitation, collective investment undertakings, investment
companies subject to the U.S. Investment Company Act of 1940, as amended, and
employee benefit plans subject to the U.S. Employee Retirement Income Security
Act of 1974, as amended;
WHEREAS, Custodian wishes to establish Account (the "Account") with
the Subcustodian to hold and maintain certain property for which Custodian is
responsible as custodian; and
WHEREAS, Subcustodian agrees to establish the Account and to hold and
maintain all Property in the Account in accordance with the terms and conditions
herein set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the Custodian and the Subcustodian agree as follows:
I. The Account
-----------
A. Establishment of the Account. Custodian hereby requests that
subcustodian establish for each client of the Custodian an Account which
shall be composed of:
1. A Custody Account for any and all Securities (as hereinafter
defined) from time to time received by Subcustodian therefor, and
2. A Deposit Account for any and all Cash (as hereinafter defined)
from time to time received by Subcustodian therefor.
<PAGE>
B. Use of the Account. The Account shall be used exclusively to hold,
acquire, transfer or otherwise care for, on behalf of Custodian as custodian and
the customers of Custodian and not for Custodian's own interest, Securities and
such Cash or cash equivalents as are transferred to Subcustodian or as are
received in payment of any transfer of, or as payment on, or interest on, or
dividend from, any such Securities (herein collectively called "Cash").
C. Transfer of Property in the Account. Beneficial ownership of the
Securities and Cash in the Account shall be freely transferable without payment
of money or value other than for safe custody and administration.
D. Ownership and Segregation of Property in the Account. The ownership
of the property in the Account, whether Securities, Cash or both, and whether
any such property is held by Subcustodian in an Eligible Depository, shall be
clearly recorded on Subcustodian's books as belonging to Custodian on behalf of
Custodian's customers, and not for Custodian's own interest and, to the extent
that Securities are physically held in the Account, such Securities shall also
be physically segregated from the general assets of Subcustodian, the assets of
Custodian in its individual capacity and the assets of Subcustodian's other
customers. In addition, Subcustodian shall maintain such other records as may
be necessary to identify the property hereunder as belonging to each Account.
E. Registration of Securities in the Account. Securities which are
eligible for deposit in a depository as provided for in paragraph III may be
maintained with the depository in an account for Subcustodian's customers.
Securities which are not held in a depository and that are ordinarily held in
registered form will be registered in the name of the Subcustodian or in the
name of Subcustodian's nominee, unless alternate Instructions are furnished by
Custodian.
II. Services to Be Provided By the Subcustodian
-------------------------------------------
The services Subcustodian will provide to Custodian and the manner in which
such services will be performed will be as set forth below in this Agreement.
A. Services Performed Pursuant to Instructions. All transactions
involving the Securities and Cash in the Account shall be executed solely in
accordance with Custodian's Instructions as that term is defined in Paragraph IV
hereof, except those described in paragraph B below.
B. Services to Be Performed Without Instructions. Subcustodian will,
unless it receives Instructions from Custodian to the contrary:
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<PAGE>
1. Collect Cash. Promptly collect and receive all dividends, income,
principal, proceeds from transfer and other payments with respect to property
held in the Account, and present for payment all Securities held in the Account
which are called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon presentation, and
credit Cash receipts therefrom to the Deposit Account.
2. Exchange Securities. Promptly exchange securities where the
exchange is purely ministerial including, without limitation, the exchange of
temporary Securities for those in definitive form and the exchange of warrants,
or other documents of entitlement to Securities, for the Securities themselves.
3. Sale of Rights and Fractional Interests. Whenever notification
of a rights entitlement or a fractional interest resulting from a rights issue,
stock dividend or stock split is received for the Account and such rights
entitlement or fractional interest bears an expiration date, Subcustodian will
promptly endeavor to obtain Custodian's Instructions, but should these not be
received in time for Subcustodian to take timely action, Subcustodian is
authorized to sell such rights entitlement or fractional interest and to credit
the Account.
4. Execute Certificates. Execute in Custodian's name for the
Account, whenever Subcustodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income from the
Securities held in the Account.
5. Pay Taxes and Receive Refunds. To pay or cause to be paid from
the Account any and all taxes and levies in the nature of taxes imposed on the
property in the Account by any governmental authority, and to take all steps
necessary to obtain all tax exemptions, privileges or other benefits, including
reclaiming and recovering any withholding tax, relating to the Account and to
execute any declaration, affidavits, or certificates of ownership which may be
necessary in connection therewith.
6. Prevent Losses. Take such steps as may be reasonably necessary
to secure or otherwise prevent the loss of, entitlements attached to or
otherwise relating to property held in the Account.
C. Additional Services.
-------------------
1. Transmission of Notices of Corporate Action. By such means as
will permit Custodian to take timely action with respect thereto, Subcustodian
will promptly notify Custodian upon receiving notices or reports, or otherwise
becoming aware, of corporate actions affecting Securities held in the Account
(including, but not limited to, calls for redemption, mergers,
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<PAGE>
consolidations, reorganizations, recapitalizations, tender offers, rights
offerings, exchanges, subscriptions and other offerings) and dividend, interest
and other income payments relating to such Securities.
2. Communications Recording the Exercise of Entitlements. Upon
request by Custodian, Subcustodian will promptly deliver, or cause any Eligible
Depository authorized and acting hereunder to deliver, to Custodian all notices,
proxies, proxy soliciting materials and other communications that call for
voting or the exercise of rights or other specific action (including material
relative to legal proceedings intended to be transmitted to security holders)
relating to Securities held in the Account to the extent received by
Subcustodian or said Eligible Depository, such proxies or any voting instruments
to be executed by the registered holder of the Securities, but without
indicating the manner in which such Securities are to be voted.
3. Monitor Financial Service. In furtherance of its obligations
under this Agreement, Subcustodian will monitor a leading financial service with
respect to announcements and other information respecting property held in the
Account, including announcements and other information with respect to corporate
actions and dividend, interest and other income payments.
III. Use of Securities Depository
----------------------------
Subcustodian may, with the prior written approval of Custodian, maintain
all or any part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the laws of a country
other than the United States of America and is supervised or regulated by a
government agency or regulatory authority in the foreign jurisdiction having
authority over such depositories or agencies, and which operates (a) the central
system for handling of designated securities or equivalent book entries in
_______________________________, or (b) a transnational system for the central
handling of securities or equivalent book entries (herein called "Eligible
Depository"), provided however, that, while so maintained, such Securities shall
be subject only to the directions of Subcustodian, and that Subcustodian duties,
obligations and responsibilities with regard to such Securities shall be the
same as if such Securities were held by Subcustodian on its premises.
IV. Claims Against Property in the Account
--------------------------------------
The property in the account shall not be subject to any right, charge,
security interest, lien or claim of any kind (collectively "Charges") in favor
of Subcustodian or any Eligible Depository or any creditor of Subcustodian or of
any Eligible Depository except a claim for payment by Subcustodian for such
property's safe custody or administration in accordance with the terms of this
Agreement. Subcustodian will immediately notify
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<PAGE>
Custodian of any attempt by any party to assert any Charge against the property
held in the Account and shall take all lawful actions to protect such property
from such Charges until Custodian has had reasonable time to respond to such
notice.
V. Subcustodian's Warranty
-----------------------
Subcustodian represents and warrants that:
(A) It is a branch of a "qualified U.S. bank" or an "eligible foreign
custodian" as those terms are defined in Rule 17f-5 of the Investment Company
Act of 1940, a copy of which is attached hereto as Attachment A (the "Rule"),
and Subcustodian shall immediately notify Custodian, in writing or by other
authorized means, in the event that there appears to be a substantial likelihood
that Subcustodian will cease to qualify under the Rule as currently in effect or
as hereafter amended, or
(b) It is the subject of an exemptive order issued by the United States
Securities and Exchange Commission which order permits Custodian to employ
Subcustodian notwithstanding the fact that Subcustodian fails to qualify under
the terms of the Rule, and Subcustodian shall immediately notify Custodian, in
writing or by other authorized means, if for any reason it is no longer covered
by such exemptive order.
Upon receipt of any such notification required under (A) or (B) of
this section, Custodian may terminate this Agreement immediately without prior
notice to Subcustodian.
VI. Definitions
-----------
A. Instructions. The term "Instructions" means:
------------
1. instructions in writing signed by authorized individuals designated as
such by Custodian;
2. telex or tested telex instructions of Custodian;
3. other forms of instructions in computer readable form as shall
customarily be used for the transmission of like information, and
4. such other forms of communication as from time to time may be agreed
upon by Custodian and Subcustodian, which Subcustodian believes in good faith to
have been given by Custodian or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Custodian may specify.
Unless otherwise expressly provided, all instructions shall continue
in full force and effect until canceled or superseded. Subcustodian shall act
in accordance with Instructions and shall not be liable for any act or omission
in respect of any Instruction except in the case of willful default, negligence,
fraud, bad faith, willful misconduct, or reckless disregard of duties on the
part of Subcustodian. Subcustodian in executing all Instructions will take
relevant action in accordance with accepted industry practice and local
settlement practice.
-5-
<PAGE>
B. Account. The term "Account" means collectively the Custody Account,
and the Deposit Account.
C. Securities. The term "Securities" includes, without limitation,
stocks, shares, bonds, debentures, debt securities (convertible or non-
convertible), notes, or other obligations or securities and any certificates,
receipts, futures contracts, foreign exchange contracts, options, warrants,
scrip or other instruments representing rights to receive, purchase or subscribe
for the same, or evidencing or representing any other rights or interests
therein, or in any property or assets.
VII. Miscellaneous Provisions
A. Statements Regarding the Account. Subcustodian will supply Custodian
with such statements regarding the Account as Custodian may request, including
the identity and location of any Eligible Depository authorized and acting
hereunder. In addition, Subcustodian will supply custodian an advice or
notification of any transfers of Securities to or from the Account indicating,
as to Securities acquired for the Account, if applicable, the Eligible
Depository having physical possession of such Securities.
B. Examination of Books and Records. Subcustodian agrees that its books
and records relating to the Account and Subcustodian's actions under this
Agreement shall be open to the physical, on-premises inspection and audit at
reasonable times by officers of, auditors employed by or other representatives
of Custodian including (to the extent permitted under the laws of
____________________________) the independent public accountants for any
customer of Custodian whose property is being held hereunder and such books and
records shall be retained for such period as shall be agreed upon by Custodian
and Subcustodian.
As Custodian may reasonably request from time to time, Subcustodian will
furnish its auditor's reports on its system of internal controls, and
Subcustodian will use its best efforts to obtain and furnish similar reports of
any Eligible Depository authorized and acting hereunder.
C. Standard of Care. In holding, maintaining, servicing and disposing of
Property under this Agreement, and in fulfilling any other obligations
hereunder, Subcustodian shall exercise the same standard of care that it
exercises over its own assets, provided that Subcustodian shall exercise at
least the degree of care and maintain adequate insurance as expected of a
prudent professional Subcustodian for hire and shall assume the burden of
proving that it has exercised such care in its maintenance of Property held by
Subcustodian in its Accounts. The maintenance of the Property in an Eligible
Depository shall not affect Subcustodian's standard of care, and Subcustodian
will remain as
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<PAGE>
fully responsible for any loss or damage to such securities as if it had itself
retained physical possession of them. Subcustodian shall indemnify and hold
harmless Custodian and each of Custodian's customers from and against any loss,
damage, cost, expense, liability or claim (including reasonable attorney's fees)
arising out of or in connection with the improper or negligent performance or
the nonperformance of the duties of Subcustodian.
Subcustodian shall be responsible for complying with all provisions of the
law of _________________________, or any other law, applicable to Subcustodian
in connection with its duties hereunder, including (but not limited to) the
payment of all transfer taxes or other taxes and compliance with any currency
restrictions and securities laws in connection with its duties as Subcustodian.
D. Loss of Cash or Securities. Subcustodian agrees that, in the event of
any loss of Securities or Cash in the Account, Subcustodian will use its best
efforts to ascertain the circumstances relating to such loss and will promptly
report the same to Custodian and shall use every legal means available to it to
effect the quickest possible recovery.
E. Compensation of Subcustodian. Custodian agrees to pay to Subcustodian
from time to time such compensation for its services and such out-of-pocket or
incidental expenses of Subcustodian pursuant to this Agreement as may be
mutually agreed upon in writing from time to time.
F. Operating Requirements. The Subcustodian agrees to follow such
Operating Requirements as the Custodian may establish from time to time. A copy
of the current Operating Requirements is attached as Attachment B to this
Agreement.
G. Termination. This Agreement may be terminated by Subcustodian or
Custodian on 60 days' written notice to the other party, sent by registered
mail, provided that any such notice, whether given by Subcustodian or Custodian,
shall be followed within 60 days by Instructions specifying the names of the
persons to whom Subcustodian shall deliver the Securities in the Account and to
whom the Cash in the Account shall be paid. If within 60 days following the
giving of such notice of termination, Subcustodian does not receive such
Instructions, Subcustodian shall continue to hold such Securities and Cash
subject to this Agreement until such Instructions are given. The obligations of
the parties under this Agreement shall survive the termination of this
Agreement.
-7-
<PAGE>
H. Notices. Unless otherwise specified in this Agreement, all notices
and communications with respect to matters contemplated by this Agreement shall
be in writing, and delivered by mail, postage prepaid, telex, SWIFT, or other
mutually agreed telecommunication methods to the following addresses (or to such
other address as either party hereto may from time to time designate by notice
duly given in accordance with this paragraph):
To Subcustodian:
To Custodian: State Street Bank and Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, Massachusetts 02105
I. Confidentiality. Subcustodian and Custodian shall each use its best
efforts to maintain the confidentiality of the property in the Account
and the beneficial owners thereof, subject, however, to the provisions
of any laws, requiring disclosure. In addition, Subcustodian shall
safeguard any test keys, identification codes or other security
devices which Custodian shall make available to it. The Subcustodian
further agrees it will not disclose the existence of this Agreement or
any current business relationship unless compelled by applicable law
or regulation or unless it has secured the Custodian's written
consent.
J. Assignment. This Agreement shall not be assignable by either party
but shall bind any successor in interest of Custodian and Subcustodian
respectively.
K. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of ___________________________________
______________________. To
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<PAGE>
the extent inconsistent with this Agreement or Custodian's Operating
Requirements as attached hereto, Subcustodian's rules and conditions regarding
accounts generally or custody accounts specifically shall not apply.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By:______________________________
Date: ___________________________
AGREED TO BY SUBCUSTODIAN:
BY:_______________________ ____________________________
Date: ____________________
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<PAGE>
THE COMMERCE FUNDS
4900 Sears Tower
Chicago, Illinois 60606
November 14, 1994
State Street Bank and
Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, MA 02105
Attn: David Reynolds
Re: The Commerce Funds
------------------
Gentlemen:
As President of The Commerce Funds (the "Trust") and pursuant to
Section 8 of the Custodian Contract between the Trust and State Street Bank and
Trust Company ("State Street") in which State Street has agreed to act as
Custodian for the Trust, you are hereby instructed to perform the following
accounting services for each of the Trust's existing and future investment
portfolios (each a "Fund" and collectively the "Funds") in accordance with the
Funds' prospectuses, as amended from time to time, and resolutions adopted by
the Trust's Board of Trustees (the "Board"):
(1) Journalize the Funds' respective investment, capital share and
income and expense activities;
(2) Verify investment buy/sell trade tickets when received from the
Funds' investment adviser (the "Adviser") and arrange for proper
settlement;
(3) Maintain individual ledgers for investment securities;
(4) Maintain historical tax lots for each security;
(5) Reconcile cash and investment balances of the respective Funds
with your custody records, and
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<PAGE>
provide the Adviser with a daily beginning cash balance available
for investment purposes;
(6) Update the cash availability throughout the day as required by
the Adviser;
(7) Post to and prepare the Funds' respective Statements of Assets
and Liabilities;
(8) Calculate various contractual expenses based on budgets provided
by the Funds' Administrator;
(9) Monitor daily expense accruals and notify the Adviser and
Administrator of any proposed adjustments;
(10) Control all disbursements from the respective Funds and authorize
such disbursements upon written Instructions;
(11) Calculate capital gains and losses;
(12) Determine each of the respective Fund's net income;
(13) Obtain security market values from independent pricing services
authorized by the Board, or if such prices are unavailable or
unreliable, then obtain such prices from the Adviser, and in
either case calculate the current market or fair value of each
Fund's investments;
(14) Transmit or mail a copy of each Fund's daily portfolio valuation
to the Adviser as requested;
(15) Compute the daily net asset value of each respective Fund's
shares;
(16) Provide Goldman Sachs Asset Management with information necessary
to compute each Fund's yield, total return, expense ratio,
portfolio turnover rate, and portfolio average dollar-weighted
maturity;
(17) Maintain general ledger and books and records for the Funds;
(18) Provide Goldman Sachs Asset Management with information necessary
to prepare monthly financial statements for the respective Funds,
which will include the following items (the form and content
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<PAGE>
of such statements shall be in accordance with generally accepted
accounting principles):
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
(19) Prepare quarterly broker security transaction summaries;
(20) Prepare monthly security transaction listings;
(21) Supply various statistical data as requested on an ongoing basis;
(22) Provide information as requested to complete Federal and state
income tax returns and Federal excise tax returns;
(23) Provide information as requested to complete the Funds' Semi-
Annual Reports with the Securities and Exchange Commission on
Form N-SAR;
(24) Provide information as requested to complete the Funds' annual
and semi-annual Shareholder reports;
(25) Provide information as requested to complete the registration
statements on Form N-1A and other filing relating to the
registration of the Funds' shares; and
(26) Prepare account analyses and reports as requested by the Board
from time to time.
State Street may re-evaluate items 16, 18, 21, 22, 23 and 26 should
Goldman Sachs Asset Management no longer continue to serve as The Commerce
Funds' administrator.
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<PAGE>
Please acknowledge this letter by signing and returning one of the
enclosed copies. This letter shall constitute Proper Instructions.
Very truly yours,
THE COMMERCE FUNDS
By: /s/ Pleasant V. Miller
----------------------
President
The foregoing instructions are hereby accepted as of the date thereof.
STATE STREET BANK AND TRUST
COMPANY
By: /s/ David Reynolds
---------------------------
Title: Vice President
------------------------
Attest: ____________________
Title: _____________________
cc: Messrs. Archer, Franklin, Gilman, Surloff and McConnel and Ms. Reilly
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<PAGE>
Exhibit 99.B8(b)
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
THE COMMERCE FUNDS
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
TRANSFER AGENCY AND SERVICE AGREEMENT...................... 1
Article 1 Terms of Appointment; Duties of the Bank....... 2
Article 2 Fees and Expenses.............................. 7
Article 3 Representations and Warranties of the Bank..... 8
Article 4 Representations and Warranties of the Fund..... 8
Article 5 Data Access and Proprietary Information........ 9
Article 6 Indemnification................................ 12
Article 7 Standard of Care............................... 15
Article 8 Covenants of the Fund and the Bank............. 15
Article 9 Termination of Agreement....................... 17
Article 10 Additional Funds............................... 18
Article 11 Assignment..................................... 18
Article 12 Amendment...................................... 19
Article 13 Massachusetts Law to Apply..................... 19
Article 14 Force Majeure.................................. 19
Article 15 Consequential Damages.......................... 19
Article 16 Merger of Agreement............................ 20
Article 17 Limitations of Liability of the Trustees and
Shareholders................................... 20
Article 18 Counterparts................................... 20
</TABLE>
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<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 1st day of December, 1994, by and between
The Commerce Funds, a Delaware business trust, having its principal office and
place of business at 4900 Sears Tower, Chicago, IL 60606 (the "Fund"), and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its
principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in eight series, the
Short-Term Government, Bond, Balanced, Growth, Aggressive Growth, International
Equity, National Tax-Free Bond and Missouri Tax-Free Bond Funds (each such
series, together with all other series subsequently established by the Fund and
made subject to this Agreement in accordance with Article 10, being herein
referred to as a "Portfolio," and collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank
as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities, and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
<PAGE>
Article 1 Terms of Appointment; Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest of the Fund representing
interests in each of the respective Portfolios ("Shares"), dividend disbursing
agent, custodian of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of each
of the respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectuses and statement of additional information
("Prospectus") of the Fund on behalf of the applicable Portfolio, including
without limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services in
accordance with the Fund's respective Prospectus:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios, as applicable
and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
thereof to the Custodian of the Fund authorized pursuant to
the Trust Instrument of the Fund (the "Custodian"),
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<PAGE>
and make proper remittance of any sales load received by it to
the persons entitled to the same as instructed by the Fund's
Administration.
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii) In the event any check or other order for the transfer of
money is returned unpaid, take such steps as directed by the
Fund, the Fund's Prospectus or as it may deem appropriate to
protect the Fund and the Bank from financial loss;
(iv) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof
to the Custodian;
(v) In respect to the transactions in items (i), (ii) and (iv)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund who shall thereby be
deemed to be acting on behalf of the Fund;
(vi) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such
monies as
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<PAGE>
instructed by the redeeming Shareholders, their Prospectus or
the Fund;
(vii) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(viii) Prepare and transmit payments (or where appropriate credit a
shareholder account) for dividends and distributions declared
by the Fund on behalf of the applicable Portfolio;
(ix) Issue replacement certificates for those certificates alleged
to have been lost, stolen or destroyed upon receipt by the
Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at its option,
may issue replacement certificates in place of mutilated
stock certificates upon presentation thereof and without such
indemnity;
(x) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(xi) Record the issuance of Shares of the Fund and maintain
pursuant to SEC Rule l7Ad-10(e) a record of the total number
of Shares which are authorized, based upon data provided to
it by the Fund, and issued and outstanding. The Bank
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<PAGE>
shall also provide the Fund on a regular basis with the total
number of Shares which are authorized and issued and
outstanding and shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of such Shares or
to take cognizance of any laws relating to the issue or sale
of such Shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the services
set forth in the above paragraph (a), the Bank shall: (i) perform the customary
services of a transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with accumulation, open-
account or similar plans (including without limitation any periodic investment
plan or periodic withdrawal program), including but not limited to: maintaining
all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
mailing Shareholder reports and prospectuses to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts and
maintaining records with respect to such withholding, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required with respect
to dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and
-5-
<PAGE>
redemptions of Shares and other confirmable transactions in Shareholder
accounts, responding to Shareholder telephone calls and correspondence,
preparing and mailing activity statements for Shareholders, and providing
Shareholder account information and (ii) provide a system which will enable the
Fund to monitor the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for the Fund's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these services in Article
1 may be established from time to time by agreement between the Fund on behalf
of each Portfolio and the Bank per the attached service responsibility schedule.
The Bank may at times perform only a portion of these services and the Fund or
its agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the Fund (i.e.,
escheatment services) which may be agreed upon in writing between the Fund and
the Bank.
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<PAGE>
(f) Upon fees and services to be agreed upon in writing, the Bank shall
provide certain recordkeeping services, more fully described in the TRAC-2000
Procedures Manual provided to the Fund, on behalf of the Fund and the Fund's
Shareholders that establish money purchase pension plans or profit sharing plans
or profit sharing plans with a cash or deferred arrangement under Internal
Revenue Code Section 401(k) offered by the Fund.
Article 2 Fees and Expenses
-----------------
2.01 For performance by the Bank pursuant to this Agreement, the
Fund agrees on behalf of each of the Portfolios to pay the Bank an annual
maintenance fee for each Shareholder account as set out in the initial fee
schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees on behalf of each of the Portfolios to reimburse the Bank for out-of-
pocket expenses, including but not limited to confirmation production, postage,
forms, telephone, microfilm, microfiche, tabulating proxies, records storage or
advances incurred by the Bank for the items set out in the fee schedule attached
hereto. In addition, any other expenses incurred by the Bank at the request or
with the consent of the Fund, will be reimbursed by the Fund on behalf of the
applicable Portfolio.
-7-
<PAGE>
2.03 The Fund agrees on behalf of each of the Portfolios to pay all
fees and reimbursable expenses within thirty days following the receipt of the
respective billing notice. Postage for mailing of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Fund at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
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<PAGE>
4.02 It is empowered under applicable laws and by its Trust
Instrument and By-Laws to enter into and perform this Agreement.
4.03 All trust proceedings required by said Trust Instrument and By-
Laws have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended on behalf of each of the Portfolios is currently effective and will
remain effective, and appropriate state securities law filings have been made
and will continue to be made, with respect to all Shares of the Fund being
offered for sale.
Article 5 Data Access and Proprietary Information
---------------------------------------
5.01 The Fund acknowledges that the data bases, computer programs,
screen format, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank on
data bases under the control and ownership of the Bank or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. It is understood that Customer Data,
which
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<PAGE>
includes data provided to the Bank by or on behalf of the Fund or records
belonging to the Fund pursuant to Section 31 of the Investment Company Act of
1940, as amended (and the Rules thereunder), will not be deemed to be Data
Access Services or Proprietary Information. The Fund agrees to treat all
Proprietary Information (other than any Proprietary Information which are or
become part of the public domain or are legally required to be made available to
the public) as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as may
be provided hereunder. Without limiting the foregoing, the Fund agrees for
itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with
the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any portion of
the Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose
of such information in accordance with the Bank's instructions;
(d) to refrain from causing or allowing third-party data required
hereunder from being retransmitted
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<PAGE>
to any other computer facility or other location, except with
the prior written consent of the Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Article 5. The obligations of this Article shall
survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely manner
to correct such failure. Organizations from which the Bank may obtain certain
data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof, provided that the Bank will comply with all reasonable
requests for assistance from the Fund in resolving any
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<PAGE>
claim or other discrepancy the Fund may have with such third party
organizations. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS
AVAILABLE BASIS (PROVIDED THAT THE BANK SHALL CONTINUE TO BE RESPONSIBLE FOR ANY
DELAY IN OR OTHER FAILURE OF PERFORMANCE THAT ARISES AS A RESULT OF A MATTER
REASONABLY WITHIN THE BANK'S CONTROL). THE BANK EXPRESSLY DISCLAIMS ALL
WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash of Shares or (ii) transmit Shareholder information
or other information (such transactions constituting a "COEFI"), then in such
event the Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as such
instruction is undertaken in conformity with reasonable security procedures
established by the Bank from time to time.
Article 6 Indemnification
---------------
6.01 The Bank shall not be responsible for, and the Fund shall on
behalf of the applicable Portfolio indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, reasonable counsel fees,
payments, expenses and liability arising out of or attributable to:
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<PAGE>
(a) All actions of the Bank or its agent or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The good faith reliance on or use by the Bank or its agents or
subcontractors of written information, records, documents or services which (i)
are received by the Bank or its agents or subcontractors and furnished to it or
performed by or on behalf of the Fund, and (ii) have been prepared, maintained
or performed by the Fund and/or any other authorized person or firm on behalf of
the Fund including but not limited to any previous transfer agent or registrar.
(d) The reasonable reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel
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<PAGE>
with respect to any matter arising in connection with the services to be
performed by the Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the Fund on
behalf of the applicable Portfolio for any action taken or omitted by it in
reasonable reliance upon such instructions or upon the written opinion of such
counsel (provided such counsel is reasonably satisfactory to the Fund). The
Bank, its agents and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or persons,
or upon any instruction, information, data, records or documents provided the
Bank or its agents or subcontractors by machine readable input, telex, CRT data
entry or other similar means authorized by the Fund, and shall not be held to
have notice of any change of authority of any person, until receipt of written
notice thereof from the Fund. The Bank, its agents and subcontractors shall
also be protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures of the
officers of the Fund, and the proper countersignature of any former transfer
agent or former registrar, or of a co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank,
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<PAGE>
the Bank shall promptly notify the Fund of such assertion, and shall keep the
Fund advised with respect to all developments concerning such claim. The Fund
shall have the option to participate with the Bank in the defense of such claim
or to defend against said claim in its own name or in the name of the Bank. The
Bank shall in no case confess any claim or make any compromise in any case in
which the Fund may be required to indemnify the Bank except with the Fund's
prior written consent.
Article 7 Standard of Care
----------------
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees.
Article 8 Covenants of the Fund and the Bank
----------------------------------
8.01 The Fund shall on behalf of each of the Portfolios promptly
furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of the Bank and the execution and delivery of
this Agreement.
(b) A copy of the Trust Instrument and By-Laws of the Fund and all
amendments thereto.
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<PAGE>
(c) Copies of each vote of the Board of Trustees of the Fund
designating authorized persons to give instructions to the Bank.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable as required
by applicable laws, rules and regulations. To the extent required by Section 31
of the Investment Company Act of 1940, as amended, and the Rules thereunder, the
Bank agrees that all such records prepared or maintained by the Bank relating to
the services to be performed by the Bank hereunder are the property of the Fund
and will be preserved, maintained and made available in accordance with such
Section and Rules, and will be surrendered promptly to the Fund on and in
accordance with its request. Additionally, the Bank will make reasonably
available to the Fund and its authorized representatives records maintained by
the Bank pursuant to this Agreement for reasonable inspection, use and audit,
and will take all reasonable actions to assist the Fund's independent
accountants in rendering their opinions.
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<PAGE>
8.04 The Bank and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law except after prior notification and the written
consent of the non-disclosing party.
8.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person
provided, however, that in connection with such disclosure, the Bank shall
promptly notify the Fund that such disclosure has been made or is to be made.
Article 9 Termination of Agreement
------------------------
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other and may be terminated
immediately by the Fund should the Bank cease to be qualified to act as the
Fund's transfer agent pursuant to applicable law.
9.02 Should the Fund exercise its right to terminate other than as a
result of a default under this Agreement by the Bank, all out-of-pocket expenses
associated with the movement of
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<PAGE>
records and material will be borne by the Fund on behalf of the applicable
Portfolio(s). Additionally, the Bank reserves the right to charge for any other
reasonable expenses associated with such termination.
Article 10 Additional Funds
----------------
10.01 In the event that the Fund establishes one or more series of
Shares in addition to with respect to which it desires to have the Bank render
services as transfer agent under the terms hereof, it shall so notify the Bank
in writing, and if the Bank agrees in writing to provide such services, such
series of Shares shall become a Portfolio hereunder.
Article 11 Assignment
----------
11.01 Except as provided in Section 11.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
11.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
11.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(1)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1) or
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<PAGE>
(iii) a BFDS affiliate duly registered as a transfer agent pursuant to Section
17A(c)(1); provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
Article 12 Amendment
---------
12.01 This Agreement may only be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Fund.
Article 13 Massachusetts Law to Apply
--------------------------
13.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of Massachusetts.
Article 14 Force Majeure
-------------
14.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
Article 15 Consequential Damages
---------------------
15.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
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<PAGE>
Article 16 Merger of Agreement
-------------------
16.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
Article 17 Limitations of Liability of the Trustees and
--------------------------------------------
Shareholders
------------
17.01 A copy of the Trust Instrument of the Fund is on file with the
Secretary of the State of Delaware, and notice is hereby given that this
instrument is executed on behalf of the Board of Trustees of the Fund as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Fund.
Article 18 Counterparts
------------
18.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
THE COMMERCE FUNDS
BY: /s/ Pleasant Voorhees Miller
----------------------------
Name: Pleasant Voorhees Miller
Title: President
ATTEST:
/s/ Mark H. Nicholas
- --------------------
Name: Mark H. Nicholas
Title: Counsel
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Michael J. Tobin
--------------------
Name: Michael J. Tobin
Title: Vice President
ATTEST:
/s/ S. Cesso
- ------------
Name: S. Cesso
Title: Associate Counsel
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<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
l. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
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<PAGE>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Article 1.02 (a),
(b) and (c) of the Agreement.
THE COMMERCE FUNDS
BY:___________________________
Name:
Title:
ATTEST:
____________________________
STATE STREET BANK AND TRUST COMPANY
BY:___________________________
Name:
Title:
ATTEST:
____________________________
Name:
Title:
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<PAGE>
Exhibit 99.B9(a)
THE COMMERCE FUNDS
------------------
4900 Sears Tower
Chicago, IL 60606
November 8, 1994
Goldman Sachs Asset Management,
a division of Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
ADMINISTRATION AGREEMENT
------------------------
Dear Sirs:
The Commerce Funds (the "Trust") has been organized as a Delaware
business trust under the laws of Delaware to engage in the business of an
investment company. The shares of beneficial interest of the Trust ("Shares")
are divided into multiple series ("Series"), including the Commerce 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, a "Fund" and collectively, the "Funds"), as established
pursuant to a written instrument executed by the Trustees of the Trust. Each
Series will represent the interest in a separate portfolio of securities and
other assets. Series may be terminated, and additional Series established, from
time to time by action of the Trustees. The Trust, on behalf of the Funds, has
selected you to act as the administrator for the Funds and to provide certain
services, as more fully set forth below, and you are willing to act as such
administrator and to perform such services under the terms and conditions
hereinafter set forth. Accordingly, the Trust hereby agrees with you as
follows:
I. DUTIES OF ADMINISTRATOR
You will provide the following services:
1. Furnish the Trust with office facilities;
2. Furnish ordinary clerical bookkeeping services at the
Administrator's office facilities
3. Prepare federal and state income tax returns and federal excise
tax returns;
<PAGE>
4. Prepare and file the Funds' Semi-Annual Reports with the SEC on
Form N-SAR;
5. Prepare the Funds' annual and semi-annual Shareholder reports;
6. Assist as requested in the preparation of SEC registration
statements on Form N-1A and other filings relating to the
registration of Shares;
7. Provide supervision of all aspects of the Trust's operations
(other than those provided by Commerce) (the parties giving due
recognition to the fact that certain of such operations to be
supervised are performed by Commerce pursuant to certain Fund
agreements with Commerce);
8. The Administrator shall, to the extent not provided pursuant to
the Fund's agreements with Commerce, provide the Funds with such
personnel as are reasonably necessary for the conduct of the
Fund(s) affairs;
9. Assist in the preparation and updating of the Prospectus and
Statement of Additional Information filed with the Commission;
10. Prepare and file necessary state registration materials and
monitor state sales of securities;
11. Prepare and implement the Fund's expense budgets, accruals and
amortization;
12. Compute each Fund's yield, total return, expense ratio, portfolio
turnover rate and portfolio average dollar-weighted maturity;
13. Prepare monthly financial statements (in accordance with
generally accepted accounting principles) which will include the
following:
(i) Schedule of Investments
(ii) Statements of Assets and Liabilities
(iii) Statement of Operations
(iv) Statement of Changes in Net Assets
(v) Cash Statement
14. Render to the Trustees of the Trust such periodic and special
reports as the Trustees may reasonably request;
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<PAGE>
15. Assist as liaison with the Trust's printer to have prospectuses
printed;
16. Assist in developing responses to SEC comments and inquiries
regarding the Trust's operations and Registration Statement.
The services provided hereunder shall not be primarily intended to result
in the sale of the Trust's shares.
II. ALLOCATION OF CHARGES AND EXPENSES
You will pay all costs incurred by you in connection with the performance
of your duties under paragraph I, including, without limitation, the
compensation and expenses of all personnel of yours and the Trust except
for the fees of Trustees who are not interested persons of your
organization or of the Trust's investment adviser. If requested, you
will make available, without expense to the Trust, the services of such
of your partners, officers and employees as may be duly elected officers
or Trustees of the Trust, subject to their individual consent to serve
and to any limitations imposed by law. You will bear all expenses
incurred in the performance of your duties hereunder and will pay the
Trust's office rent and will provide all necessary office facilities,
equipment and personnel for administering the business affairs of the
Trust. You will not be required to pay any expenses of the Trust
incurred in connection with the operation of the Trust including (but not
limited to), for example: (i) fees and expenses of any investment
adviser; (ii) organization expenses of the Trust; (iii) fees and expenses
incurred by the Trust in connection with membership in investment company
organizations; (iv) brokers' commissions; (v) payment for portfolio
pricing services to a pricing agent, if any; (vi) outside legal, auditing
or accounting expenses; (vii) taxes or governmental fees; (viii) the fees
and expenses of the transfer agent; (ix) the cost of preparing share
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of shares of beneficial interest of the Trust;
(x) the expenses of and fees for registering or qualifying securities for
sale and of maintaining the registration of the Trust and registering the
Trust as a broker or a dealer; (xi) the fees and expenses of Trustees who
are not affiliated with you or the investment adviser; (xii) the cost of
preparing and distributing reports and notices to shareholders, the
Securities and Exchange Commission and other regulatory agencies; (xiii)
the fees or disbursements of custodians of the Trust's assets, including
expenses incurred in the performance of any obligations enumerated by the
Trust
-3-
<PAGE>
Instrument or By-Laws of the Trust insofar as they govern agreements with
any such custodian; or (xiv) litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the
Trust's business. This Agreement does not require you to pay expenses of
activities which are primarily intended to result in sales of shares of
the Funds.
III. COMPENSATION OF THE ADMINISTRATOR
For all services to be rendered and payments made as provided in
paragraphs I and II hereof, the Trust agrees to pay and you agree to
accept as full compensation for services rendered hereunder, an
administrative fee payable on the last day of each month at the annual
rate of 0.15 of 1% of each Fund's average daily net assets.
The "average daily net assets" of the Trust is defined as the average of
the values placed on the net assets as of 4:00 p.m. (New York time), on
each day on which the net asset value of the Trust's portfolios are
determined consistent with the provisions of Rule 22c-1 under the
Investment Company Act of 1940 or, if the Trust lawfully determines the
value of the net assets of its portfolios as of some other time on each
business day, as of such time. The value of net assets of the Trust
shall be determined pursuant to the applicable provisions of the Trust
Instrument. If, pursuant to such provisions, the determination of net
asset value is suspended for any particular business day, then for the
purposes of this paragraph III, the value of the net assets of the Trust
as last determined shall be deemed to be the value of the net assets as
of the close of the New York Stock Exchange, or as of such other time as
the value of the net assets of the Trust's portfolios may lawfully be
determined, on that day. If the determination of the net asset value of
the Shares of the Funds have been suspended pursuant to the Trust
Instrument for a period including such month, your compensation payable
at the end of such month shall be computed on the basis of the value of
the net assets of the Trust as last determined (whether during or prior
to such month). If the Trust determines the value of the net assets of
its portfolios more than once on any day, the last such determination
thereof on that day shall be deemed to be the sole determination thereof
on that day for the purposes of this paragraph III.
In addition to the foregoing, you may from time to time agree not to
impose all or a portion of your fee otherwise payable hereunder (in
advance of the time such fee or portion thereof would otherwise accrue)
and/or undertake to pay or reimburse the Trust for all or a portion of
its
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<PAGE>
expenses not otherwise required to be borne or reimbursed by you. Any
such fee reduction or undertaking may be discontinued or modified by you
at any time.
IV. LIMITATION OF LIABILITY OF ADMINISTRATOR
You shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Trust in connection with the matters to
which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or negligence on your part in the performance of
your duties or from reckless disregard by you of your obligations and
duties under this Agreement. Any person, even though also employed by
you, who may be or become an employee of and paid by the Trust shall be
deemed, when acting within the scope of his employment by the Trust, to
be acting in such employment solely for the Trust and not as your
employee or agent.
V. RECORDS
You shall keep all books and records with respect to the Trust's books of
account. The books and records pertaining to the Trust which are in your
possession shall be the property of the Trust. Such books and records
shall be prepared and maintained as required by the Investment Company
Act of 1940 (the "1940 Act") and other applicable securities laws and
rules and regulations. The Trust, or the Trust's authorized
representatives, shall have access to such books and records at all times
during normal business hours. Upon the reasonable request of the Trust,
you shall provide copies of any such books and records to the Trust or
the Trust's authorized representative at the Trust's expense.
VI. LIAISON WITH ACCOUNTANTS
You shall act as liaison with the Trust's independent public accountants
and shall provide account analyses, fiscal year summaries, and other
audit related schedules. Also, you shall take all reasonable action in
the performance of your obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Trust from
time to time.
VII. CONFIDENTIALITY
You agree on behalf of yourself and your employees to treat
confidentially all records and other information relative to the Trust
and its prior, present or potential
-5-
<PAGE>
shareholders and relative to the investment adviser and its prior,
present or potential customers, except, after prior notification to and
approval in writing by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where you may be exposed to
civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or
when so requested by the Trust.
VIII. EQUIPMENT FAILURES
In the event of equipment failures beyond your control, you shall, at no
additional expense to the Trust, take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto
subject to the provisions of paragraph IV hereof. You shall enter into
and shall maintain in effect with appropriate parties one or more
agreements making reasonable provision for emergency use of electronic
data processing equipment to the extent appropriate equipment is
available.
IX. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS
You undertake to comply with all applicable requirements of the
Securities Act of 1933, the Securities Exchange Act of 1934, the 1940
Act, and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed hereunder.
X. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall remain in force until November 30, 1995 and from
year to year thereafter, but only so long as such continuance is
specifically approved at least annually by the vote of a majority of the
Trustees who are not interested persons of you or of the Trust, cast in
person at a meeting called for the purpose of voting on such approval,
and by vote of the Board of Trustees or of a majority of the outstanding
voting securities of the Trust. This Agreement may, on 60 days' notice,
be terminated at any time without the payment of any penalty, by the
Trust or by you.
XI. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or
termination is sought.
-6-
<PAGE>
XII. LIMITATIONS OF LIABILITY OF TRUSTEES OR OFFICERS, EMPLOYEES, AGENTS AND
SHAREHOLDERS OF THE TRUST
You are expressly put on notice of the limitation of liability as set
forth in the Delaware business trust law and the Trust Instrument that
the obligations assumed by the Trust pursuant to this Agreement shall be
limited in any case to the Trust and its assets and that you shall not
seek satisfaction of any such obligations from the shareholders or the
Trustees, officers, employees or agents of the Trust.
XIII. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF GSAM
The execution and delivery of this Agreement has been duly authorized and
signed by an authorized officer of GSAM, acting as such, and neither such
authorization by the Board nor execution and delivery by such officer
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, and the obligations of
this Agreement are not binding upon any of the partners or officers of
GSAM or any of its affiliates.
XIV. NOTICES
Notices of any kind to be given hereunder shall be in writing (including
facsimile communication) and shall be duly given if delivered to the
Trust and to its investment advisers respectively at the following
addresses:
XV. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
XVI. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and
the same instrument.
If you are in agreement with the foregoing, please sign the form of acceptance
on the accompanying counterpart of this letter and
-7-
<PAGE>
return such counterpart of the Trust, whereupon this letter shall become a
binding contract.
Yours very truly,
The Commerce Funds
Attest: /s/ W. Bruce McConnel, III By /s/ Pleasant Voorhees Miller
---------------------------- ----------------------------
W. Bruce McConnel, III Title: President
---------------------------- ------------------
Secretary of the Trust
The foregoing Agreement is hereby accepted as of the date thereof.
GOLDMAN SACHS ASSET MANAGEMENT,
a division of Goldman, Sachs & Co.
Attest: /s/ Michael J. Richman By /s/ Marcia L. Beck
---------------------------- ----------------------
Michael J. Richman Title: Vice President
---------------------------- ------------------
Secretary of the Trust
-8-
<PAGE>
Exhibit 99.B9(b)
THE COMMERCE FUNDS
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Commerce Bank, N.A. (St. Louis) and
Commerce Bank, N.A. (Kansas City) the Trust's investment advisors (together, the
"Advisor"), any officer of The Commerce Funds (the "Trust") is authorized to
execute and deliver, in the name and on behalf of the Trust, written agreements
in substantially the form attached hereto or in any other form duly approved by
the Board of Trustees ("Servicing Agreements") with institutional shareholders
of record ("Service Organizations") of any of the Trust's portfolios (the
"Funds"). Such Servicing Agreements shall require the Servicing Organization to
provide support services as set forth therein to their clients who beneficially
own shares of beneficial interest in one or more of the Funds ("Fund Shares") in
consideration for a fee, computed daily and paid monthly in the manner set forth
in the Servicing Agreements, at the annual rate of up to 0.25% of the average
daily net asset value of Fund Shares held by the Servicing Organization on
behalf of their clients. All expenses incurred by the Trust in connection with
Servicing Agreements for a particular Fund shall be allocated entirely to that
Fund. The fee allocated to each Fund shall be the several (and not joint or
joint and several) obligation of each such Fund.
Section 2. Goldman Sachs Asset Management ("GSAM"), as administrator,
shall monitor the arrangements pertaining to the Trust's Servicing Agreements
with the Service Organizations in accordance with the terms of their
Administration Agreement with the Trust with respect to the Fund Shares. GSAM
shall not, however, be obliged by this Plan to recommend, and the Trust shall
not be obliged to execute, any Servicing Agreement with any qualifying Service
Organizations.
Section 3. So long as this Plan is in effect, the Service Organization
shall provide to the Trust's Board of Trustees, and the Trustees shall review,
at least quarterly, a written report of the amounts expended pursuant to this
Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective with respect to a particular
Fund upon the approval of the Plan (and the form of Servicing Agreement attached
hereto) by a majority of the Board of Trustees, including a majority of the
Trustees who are not "interested persons" as defined in the Investment Company
Act of 1940 (the "Act") of the Trust and have no direct or
<PAGE>
indirect financial interest in the operation of this Plan or in any Servicing
Agreements or other agreements related to this Plan (the "Disinterested
Trustees"), pursuant to a vote cast in person at a meeting called for the
purpose of voting on the approval of this Plan (and form of Servicing
Agreement); provided however, that such effectiveness shall not occur prior to
the effective date of the Trust's Registration Statement under the Securities
Act of 1933.
Section 5. Unless sooner terminated, this Plan shall continue in effect
for so long as its continuance is approved at least annually in the manner set
forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of Trustees,
provided that any material amendments of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority of
the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and nomination of
those Trustees who are not "interested persons" (as defined in the Act) of the
Trust shall be committed to the discretion of the Disinterested Trustees.
Section 9. The Trust has adopted this Shareholder Administrative Services
Plan as of September 28, 1994.
-2-
<PAGE>
The Commerce Funds
SERVICING AGREEMENT
Under Shareholder Administrative Services Plan
Ladies and Gentlemen:
The Commerce Funds (the "Trust") wishes to enter into this Servicing
Agreement with you concerning the provision of administrative support services
to your clients ("Clients") who may from time to time beneficially own shares of
beneficial interest in one or more of the portfolios (the "Funds") which are
offered by the Trust which are listed on Appendix A ("Fund Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide the following support services to Clients
who may from time to time beneficially own Fund Shares: (i) establishing and
maintaining accounts and records relating to Clients that invest in Fund Shares;
(ii) aggregating and processing purchase, redemption and exchange requests for
Fund Shares from Clients and placing net purchase, redemption and exchange
orders with the Trust's distributor; (iii) providing Clients with a service that
invests the assets of their accounts in Fund Shares pursuant to specific or pre-
authorized instructions; (iv) processing dividend and distribution payments from
the Trust on behalf of Clients; (v) providing information periodically to
Clients showing their positions in Fund Shares; (vi) arranging for bank wires;
(vii) responding to routine inquiries from Clients concerning their investments
in Fund Shares; (viii) responding to Client inquiries relating to the services
performed by you; (ix) providing subaccounting with respect to Fund Shares
beneficially owned by Clients or the information to the Trust necessary for
subaccounting; (x) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Clients; and
(xi) assisting Clients in changing dividend options, account designations and
addresses; (xii) providing such other similar services as the Trust may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. You will provide to Clients a schedule of any
fees that you may charge to them relating to the investment of their assets in
Fund Shares.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any
part of the space, equipment and facilities currently used in
<PAGE>
your business, or any personnel employed by you) as may be reasonably necessary
or beneficial in order to provide the aforementioned services to Clients.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning the Trust or Fund Shares
except those contained in the Trust's then current prospectuses for such shares,
copies of which will be supplied by the Trust to you, or in such supplemental
literature or advertising as may be authorized by the Trust in writing.
Section 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for the Trust
in any matter or in any respect. By your written acceptance of this Agreement,
you agree to and do release, indemnify and hold the Trust harmless from and
against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Fund Shares by or on behalf of Clients.
You and your employees will, upon request, be available during normal business
hours to consult with the Trust or its designees concerning the performance of
your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, the Trust will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of up to .25 of 1% of the average daily net
asset value of the Fund Shares held of record by you from time to time on behalf
of Clients (the "Clients' Fund Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this
Section 5, the average daily net asset value of the Clients' Fund Shares will be
computed in the manner specified in the Trust's registration statement (as the
same is in effect from time to time) in connection with the computation of the
net asset value of Fund Shares for purposes of purchases and redemptions. By
your written acceptance of this Agreement, you agree to and do waive such
portion of the fee payable under this Section 5 as is necessary to assure that
the amount of such fee together with any other expenses of the Funds which are
required to be accrued on any day with respect to your Clients does not exceed
the income to be accrued to your Clients' Fund Shares on that day. The fee rate
stated above may be prospectively increased or decreased by the Trust, in its
sole discretion, at any time upon notice to you. Further, the Trust may, in its
discretion and without notice, suspend or withdraw
the sale of Fund Shares, including the sale of such shares to you for the
account of any Client or Clients.
-2-
<PAGE>
Section 6. Any person authorized to direct the disposition of monies paid
or payable by the Trust pursuant to this Agreement will provide to the Trust's
Board of Trustees, and the Trustees will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish the Trust or its designees with such
information as the Trust or they may reasonably request (including, without
limitation, periodic certifications confirming the provision to Clients of the
services described herein), and will otherwise cooperate with the Trust and its
designees (including, without limitation, any auditors designated by the Trust),
in connection with the preparation of reports to the Trust's Board of Trustees
concerning this Agreement and the monies paid or payable by the Trust pursuant
hereto, as well as any other reports or filings that may be required by law.
Section 7. The Trust may enter into other similar Servicing Agreements
with any other person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) in no event will any of the services provided by
you hereunder be primarily intended to result in the sale of any shares issued
by the Trust; (ii) the compensation payable to you hereunder, together with any
other compensation you receive from Clients for services contemplated by this
Agreement, will not be excessive or unreasonable under the laws and instruments
governing your relationships with Clients; and (iii) in the event an issue
pertaining to the Trust's Shareholder Administrative Services Plan is submitted
for shareholder approval, you will vote any shares held for your own account in
the same proportion as the vote of those shares held for your Client's accounts.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by the Trust or its designee.
Unless sooner terminated, this Agreement will continue until September 28, 1995,
and thereafter will continue automatically for successive annual periods ending
on September 28, provided such continuance is specifically approved at least
annually by the Trust in the manner described in Section 13 hereof. This
Agreement is terminable, without penalty, at any time by the Trust (which
termination may be by vote of a majority of the Trust's Disinterested Trustees
as defined in Section 13 hereof) or by you upon notice to the other party
hereto.
Section 10. All notices and other communications to either you or the
Trust will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device to the appropriate address shown above.
-3-
<PAGE>
Section 11. This Agreement will be construed in accordance with the laws
of the State of Delaware and is non-assignable by the parties hereto.
Section 12. This Agreement has been approved by vote of a majority of (i)
the Trust's Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Trust and
have no direct or indirect financial interest in the operation of the
Shareholder Administrative Services Plan adopted by the Trust regarding the
provision of support services to the beneficial owners of Fund Shares or in any
agreements related thereto ("Disinterested Trustees"), cast in person at a
meeting called for the purpose of voting on such approval.
Section 13. The Trust Instrument establishing the Trust, dated February 7,
1994 a copy of which is on file in the office of the Secretary of the State of
Delaware, provides that the term "Trustees of The Commerce Funds" refers to the
individual Trustees in their capacity as Trustees under the Trust Instrument and
no Trustee, when acting in such capacity, shall be personally liable to any
person other than the Trust or a beneficial owner for any act, omission or
obligation of the Trust or any Trustee. All persons extending credit to,
contracting with or having any claim against the Trust or the Trustees may
satisfy or enforce any debt, liability, obligation or expense incurred,
contracted for or otherwise existing with respect to the Trust from the assets
of the Trust only; and neither the shareholders nor Trustees nor any of their
agents, whether past, present or future, shall be personally liable for any
claim against the Trust or its Trustees.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated
-4-
<PAGE>
below and promptly return it to W. Bruce McConnel, III, Secretary of The
Commerce Funds, Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, PA 19107.
Very truly yours,
THE COMMERCE FUNDS
Date:____________________ By:______________________________
Authorized Officer
Accepted and Agreed to:
__________________________________
Commerce Brokerage, Inc.
Date:____________________ By:______________________________
Authorized Officer
This Agreement is effective ___________________, 1994.
-5-
<PAGE>
APPENDIX A
----------
Please check the appropriate boxes to indicate the Series of The
Commerce Funds for which you wish to act as a Service Organization.
[_] 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
-6-
<PAGE>
Exhibit 99.B11(a)
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information that is
included in this Registration Statement on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940, as amended, of The Commerce Funds.
This consent does not constitute a consent under section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ DRINKER BIDDLE & REATH
--------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
June 30, 1995
<PAGE>
Exhibit 99.B.11(b)
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
The Commerce Funds:
We consent to the use of our report dated September 6, 1994 included herein and
to the reference to our Firm under the heading "INDEPENDENT AUDITORS" in Part B
of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Kansas City, Missouri
June 29, 1995
<PAGE>
Exhibit 99.B13(a)
PURCHASE AGREEMENT
------------------
The Commerce Funds (the "Trust"), a Delaware business trust, and Roberta
Sampson ("Ms. Sampson"), the Initial Trustee of the Trust, hereby agree with
each other as follows:
1. The Trust hereby offers Ms. Sampson and Ms. Sampson hereby purchases 1
unit of Series A shares representing an interest in the Trust (such beneficial
interest in The Commerce Funds, a Delaware business trust, being hereinafter
known as a ("Share") at a purchase price of US $1.00 per Share. Ms. Sampson
hereby acknowledges purchase of the Share and the Trust hereby acknowledges
receipt from Ms. Sampson of funds in the amount of US $1.00 in full payment of
the Share.
2. The Share offered and purchased in this agreement is hereby being made
in a private offering.
3. Ms. Sampson represents and warrants to the Trust that the Share
purchased in this agreement is being acquired for investment purposes and not
with a view to the distribution thereof.
4. Costs incurred by the Trust in connection with its organization,
registration and the initial public offering of Shares have been deferred and
will be amortized on a straight-
<PAGE>
line basis over a period of five years from the date upon which the Trust
commences its investment activities. If the original Share purchased by Ms.
Sampson hereunder is redeemed by any holder thereof prior to the end of such
period, the redemption proceeds will be reduced by the pro rata share of the
unamortized expenses as of the date of redemption. The pro rata share by which
the proceeds are reduced will be derived by dividing the number of original
Shares of the Fund being redeemed by the total number of original Shares
outstanding at the time of redemption. If, for any reason, said reduction of
redemption proceeds is not in fact made by the Trust in the event of such a
redemption, Ms. Sampson agrees to reimburse the Trust immediately for any
unamortized organizational expenses in the proportion stated above.
<PAGE>
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed the Agreement as of August 9, 1994.
Attest: THE COMMERCE FUNDS
/s/ Mark H. Nicholas By: /s/ Roberta Sampson
- ------------------------ ------------------------
Title: President
------------------------
Attest: ROBERTA SAMPSON
/s/ Mark H. Nicholas By: /s/ Roberta Sampson
- ------------------------- ------------------------
Title: Sole Shareholder
------------------------
<PAGE>
Exhibit 99.B13(b)
PURCHASE AGREEMENT
------------------
The Commerce Funds (the "Trust"), a Delaware business trust, and Goldman,
Sachs & Co. ("Goldman"), a New York General Partnership, hereby agree with each
other as follows:
1. The Trust hereby offers Goldman and Goldman hereby purchases 125 shares
of each of Series A, B, C, D, E, F, G, and H shares representing interests in
the Commerce 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 Funds, respectively, (such beneficial interests in
The Commerce Funds, a Delaware business trust, being hereinafter known as
"Shares") at a purchase price of US $100.00 per Share. Goldman hereby
acknowledges purchase of the Shares and the Trust hereby acknowledges receipt
from Goldman of funds in the amount of US $100,000 in full payment of the
Shares.
2. All Shares offered and purchased in this agreement are hereby being
made in a private offering.
3. Goldman represents and warrants to the Trust that all Shares purchased
in this agreement are being acquired for investment purposes and not with a view
to the distribution thereof.
<PAGE>
4. Costs incurred by the Trust in connection with its organization,
registration and the initial public offering of Shares have been deferred and
will be amortized on a straight-line basis over a period of five years from the
date upon which the Trust commences its investment activities. If any of the
original Shares purchased by Goldman hereunder are redeemed by any holder
thereof prior to the end of such period, the redemption proceeds will be reduced
by the pro rata share of the unamortized expenses as of the date of redemption.
The pro rata share by which the proceeds are reduced will be derived by dividing
the number of original Shares of the Fund being redeemed by the total number of
original Shares outstanding at the time of redemption. If, for any reason, said
reduction of redemption proceeds is not in fact made by the Trust in the event
of such a redemption, Goldman agrees to reimburse the Trust immediately for any
unamortized organizational expenses in the proportion stated above.
<PAGE>
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed the Agreement as of December 2, 19994.
Attest: THE COMMERCE FUNDS
/s/ Mark H. Nicholas By: /s/ Pleasant Voorhees Miller
- -------------------- ----------------------------
Title: President
------------------------
Attest: GOLDMAN, SACHS & CO.
/s/ Howard B. Surloff By: /s/ Marcia L. Beck
- --------------------- -------------------------
Vice President Title: Vice President
-------------------------
<PAGE>
Exhibit 99.B13(c)
PURCHASE AGREEMENT
------------------
COMMERCE EMPLOYEE BENEFIT SHORT MATURITY
BOND FUND, BOND FUND, BALANCED FUND, STOCK FUND AND
MID-CAP EQUITY FUND
This Agreement is dated as of December 7, 1994 by and between The Commerce
Funds, a Delaware business trust, and Commerce Bank, N.A. (Kansas City), a
banking institution chartered under the laws of Missouri (the "Commerce Bank"),
acting as trustee, investment advisor and/or custodian of the participating
trusts (the "Participating Trusts") invested in the Commerce Employee Benefit
Short Maturity Bond Fund, Bond Fund, Balanced Fund, Stock Fund and Mid-Cap
Equity Fund (the "Funds") and as trustee of said Funds.
BACKGROUND
----------
1. The Commerce Funds is an open-end management investment company
registered under the Investment Company Act of 1940, consisting of eight
investment portfolios, including the Short-Term Government Fund, Bond Fund,
Balanced Fund, Growth Fund, Aggressive Growth Fund, International Equity Fund,
National Tax-Free Bond and Missouri Tax-Free Bond Fund (the "Portfolios").
2. Commerce Bank is trustee of the Funds, and serves, with Commerce Bank,
N.A. (St. Louis), as investment adviser to the Portfolios. The Funds are
collective investment funds established for the benefit of the Participating
Trusts.
3. Commerce Bank is also trustee, investment advisor and/or custodian for
the Participating Trusts.
4. Commerce Bank believes that it is in the interests of the Participating
Trusts to transfer their investments from the Funds to the Portfolios. Commerce
Bank has decided to distribute in liquidation the assets held by the Funds (the
"Assets") in kind to the Participating Trusts and, in the exercise of its
discretion as the trustee or investment advisor of the Participating Trusts with
approval from an independent Participating Trust fiduciary or pursuant to
directions from an independent Participating Trust fiduciary, to transfer to the
Portfolios, on behalf of the Participating Trusts, such Assets as consideration
for the Participating Trust's purchase of shares of the Portfolios. The Bank
believes that the foregoing procedure for transferring the Assets from the Funds
to the Portfolios will be beneficial to the Participating Trusts, and will
minimize
<PAGE>
brokerage and other costs associated with the transfer of the Assets and the
operations of the Portfolios.
5. The parties intend that the transactions described herein will be
exempt from the prohibited transaction rules of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of
1986, as amended (the "Code"), pursuant to Prohibited Transaction Class
Exemptions 77-3 and 77-4, Section 408(b)(2) of ERISA and Section 4975(d)(2) of
the Code.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto, intending to be legally bound, agree as
follows:
1. LIQUIDATION OF THE FUNDS. Prior to the Purchase Time, as defined
below, Commerce Bank will cause each of the Funds to liquidate, distributing the
Assets to the Participating Trusts in exchange for the Participating Trusts'
interests in the Funds.
2. PURCHASE OF PORTFOLIO SHARES. Effective as of 5:00 p.m. on December 9,
1994 (the "Purchase Time"), Commerce Bank as trustee, investment advisor and/or
custodian of the Participating Trusts shall purchase and The Commerce Funds
shall issue to Commerce Bank, as such trustee, investment advisor and/or
custodian, shares of the Portfolios with an aggregate net asset value equal to
the aggregate market value of the Assets transferred by the Participating Trusts
determined in accordance with Sections 3 and 4 hereof; provided that all the
Assets so transferred shall constitute permissible investments under the
Portfolios' investment policies and limitations as set forth in The Commerce
Funds' registration statement. No brokerage commissions, fees or other
remuneration will be paid by The Commerce Funds, the Funds or the Participating
Trusts in connection with the transactions contemplated hereby.
3. PURCHASE PRICE.
(a) Subject to the terms and conditions hereof and on the basis of and
in reliance upon the covenants, agreements, and representations and warranties
set forth herein, The Commerce Funds shall issue to Commerce Bank, as trustee or
investment agent of the Participating Trusts that were invested in the Commerce
Employee Benefit Short Maturity Bond Fund, shares of beneficial interest in the
Short-Term Government Fund with an aggregate net asset value as of the Purchase
Time equal to the aggregate market value of the Assets purchased by the Short-
Term Government Fund, determined in accordance with Section 4 hereof.
-2-
<PAGE>
(b) Subject to the terms and conditions hereof and on the basis of and
in reliance upon the covenants, agreements, and representations and warranties
set forth herein, The Commerce Funds shall issue to Commerce Bank, as trustee or
custodian of the Participating Trusts that were invested in the Commerce
Employee Benefit Bond Fund, shares of beneficial interest in the Bond Fund with
an aggregate net asset value as of the Purchase Time, equal to the aggregate
market value of the Assets purchased by the Bond Fund, determined in accordance
with Section 4 hereof.
(c) Subject to the terms and conditions hereof and on the basis of and
in reliance upon the covenants, agreements, and representations and warranties
set forth herein, The Commerce Funds shall issue to Commerce Bank, as trustee or
custodian of the Participating Trusts that were invested in the Commerce
Employee Benefit Balanced Fund, shares of beneficial interest in the Balanced
Fund with an aggregate net asset value as of the Purchase Time, equal to the
aggregate market value of the Assets purchased by the Balanced Fund, determined
in accordance with Section 4 hereof.
(d) Subject to the terms and conditions hereof and on the basis of and
in reliance upon the covenants, agreements, and representations and warranties
set forth herein, The Commerce Funds shall issue to Commerce Bank, as trustee or
custodian of the Participating Trusts that were invested in the Commerce
Employee Benefit Stock Fund, shares of beneficial interest in the Growth Fund
with an aggregate net asset value as of the Purchase Time, equal to the
aggregate market value of the Assets purchased by the Growth Fund determined in
accordance with Section 4 hereof.
(e) Subject to the terms and conditions hereof and on the basis of and
in reliance upon the covenants, agreements, and representations and warranties
set forth herein, The Commerce Funds shall issue to Commerce Bank, as trustee or
custodian of the Participating Trusts that were invested in the Commerce
Employee Benefit Mid-Cap Equity Fund, shares of beneficial interest in the
Aggressive Growth Fund with an aggregate net asset value as of the Purchase
Time, equal to the aggregate market value of the Assets purchased by the
Aggressive Growth Fund, determined in accordance with Section 4 hereof.
4. DETERMINATION OF MARKET VALUE. The aggregate market value of the
Assets comprising investment securities shall be the sum of the current market
price of each security being acquired by the Portfolios hereunder as of the
Purchase Time. For the purposes of this Agreement, the "current market price"
shall be:
(a) If the security is a "reported security" (as defined in the
Securities Exchange Act of 1934) traded on a recognized stock exchange, then the
last sale price with respect
-3-
<PAGE>
to such security reported on the consolidated transaction reporting system or
the average of the highest current independent bid and lowest current
independent offer for such security if there are no reported transactions in the
consolidated transaction reporting system that day;
(b) If the security is not a reported security, and the principal
market for such security is an exchange, then the last sale on such exchange or
the average of the highest current independent bid and lowest current
independent offer on such exchange if there are no reported transactions on such
exchange that day;
(c) If the security is not a reported security and is quoted in the
NASDAQ System, then the average of the highest current independent bid and
lowest current independent offer reported on Level 1 of NASDAQ;
(d) If the security is an asset not described above, then the average
of the values determined by reasonable inquiry with three independent pricing
services, each using bid quotations, if available; an additional value, if
available from another independent pricing service, may be used to calculate the
average in place of any initial value that is aberrant when compared with the
other initial values.
5. REPRESENTATIONS OF COMMERCE BANK. Commerce Bank hereby represents and
warrants as follows:
(a) Commerce Bank is entering into this Agreement as trustee,
investment advisor and/or custodian of the Participating Trusts and the Funds.
The execution and delivery of this Agreement by Commerce Bank has been duly
authorized by all requisite action and (assuming the due authorization,
execution and delivery hereof by The Commerce Funds) constitutes the valid and
binding obligation of Commerce Bank, as trustee, investment advisor and/or
custodian, enforceable in accordance with its terms.
(b) Upon transfer of the Assets from the Participating Trusts to the
Portfolios, the Portfolios will acquire good title to the Assets, free and clear
of all mortgages, security interests, liens, charges, pledges and encumbrances
whatsoever.
6. REPRESENTATIONS OF THE COMMERCE FUNDS. The Commerce Funds hereby
represents and warrants as follows:
(a) The Commerce Funds is entering into this Agreement on behalf of
the Portfolios. The execution and delivery of this Agreement by The Commerce
Funds has been duly authorized by all requisite action and (assuming the due
authorization, execution and delivery hereof by Commerce Bank) constitutes the
valid and
-4-
<PAGE>
binding obligation of The Commerce Funds, enforceable in accordance with its
terms.
(b) The issuance, sale and delivery of the shares of the Portfolios in
accordance with the terms of this Agreement have been duly authorized by all
necessary corporate action and such shares, when so issued, sold and delivered
against payment therefor in accordance with the provisions hereof, will be duly
and validly issued, fully paid and nonassessable by The Commerce Funds.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers designated below as of the day and
year first above written.
The Commerce Funds
/s/ Pleasant V. Miller
------------------
President
Attest:
/s/ W. Bruce McConnel, III
- --------------------------
Secretary
Commerce Bank, N.A., (Kansas
City), acting as trustee or
custodian as described above
/s/ George Reichman
---------------------
Senior Vice President
Attest:
/s/ J. Daniel Stinnett
- ----------------------
Title: Assistant Secretary
-5-
<PAGE>
Exhibit 99.B16
EXHIBIT (16A-1) FOR THE COMMERCE FUNDS - 30-DAY SEC YIELD (At maximum public
- ----------------------------------------------------------------------------
offering price per share) For the Period Ending April 30, 1995
- --------------------------------------------------------------
Formula used in calculating SEC 30-day yield for the Commerce Fixed
Income Funds:
a - b
'YIELD = 2*[(------- + 1)to the power of 6 - 1]
c * d
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period
c = the average daily number of shares outstanding during
April 1 - 30, 1995
d = the maximum offering price per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variables for each
Fund were as follows:
1) Short-Term Government Fund:
a = 99,896.74
b = 9,905.69
c = 958,527.861
d = 19.09
---------
Thus, the 30-Day Yield computed to 5.97%
---------
2) Bond Fund:
a = 540,184.43
b = 61,624.41
c = 4,534,528.798
d = 19.30
---------
Thus, the 30-Day Yield computed to 6.65%
---------
3) National Tax-Free Bond Fund:
a = 23,565.76
b = 3,768.94
c = 298,814.017
d = 18.60
---------
Thus, the 30-Day Yield computed to 4.31%
---------
4) Missouri Tax-Free Bond Fund:
a = 17,142.50
b = 2,106.32
c = 218,003.845
d = 18.66
---------
Thus, the 30-Day Yield computed to 4.48%
---------
<PAGE>
EXHIBIT (16A-1) FOR THE COMMERCE FUNDS - 30-DAY SEC YIELD (At maximum public
- ----------------------------------------------------------------------------
offering price per share) For the Period Ending April 30, 1995
- --------------------------------------------------------------
ASSUMING NO WAIVERS AND REIMBURSEMENTS
- --------------------------------------
Formula used in calculating SEC 30-day yield for the Commerce Fixed
Income Funds:
a - b
'YIELD = 2 * [ (------- + 1)to the power of 6 - 1 ]
c * d
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period
c = the average daily number of shares outstanding during
April 1 - 30, 1995
d = the maximum offering price per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variables for each
Fund were as follows:
1) Short-Term Government Fund:
a = 99,896.74
b = 14,719.53
c = 958,527.861
d = 19.09
---------
Thus, the 30-Day Yield computed to 5.65%
---------
2) National Tax-Free Bond Fund:
a = 23,565.76
b = 7,870.94
c = 298,814.017
d = 18.60
---------
Thus, the 30-Day Yield computed to 3.41%
---------
3) Missouri Tax-Free Bond Fund:
a = 17,142.50
b = 6,824.45
c = 218,003.845
d = 18.66
---------
Thus, the 30-Day Yield computed to 3.06%
---------
<PAGE>
EXHIBIT (16A-2) FOR THE COMMERCE FUNDS - 30-DAY Distribution Rate (Assuming
- ---------------------------------------------------------------------------
the maximum sales load) For the Period Ending April 30, 1995
- ------------------------------------------------------------
Formula used in calculating 30-day distribution rate for Commerce
Fixed Income Funds:
Rate: (a / b) x (365 / 30 days)
Where:
a= total distributions per share for the 30-day period ended
April 30, 1995
b= the maximum offering price per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variables were as
follows:
1) Short-Term Government Fund:
a = 0.101259741
b = 19.09
---------
Thus, the 30-Day Distribution Rate computed to 6.45%
---------
2) Bond Fund:
a = 0.103597024
b = 19.30
---------
Thus, the 30-Day Distribution Rate computed to 6.53%
---------
3) National Tax-Free Bond Fund:
a = 0.068500154
b = 18.60
---------
Thus, the 30-Day Distribution Rate computed to 4.48%
---------
4) Missouri Tax-Free Bond Fund:
a = 0.069521933
b = 18.66
---------
Thus, the 30-Day Distribution Rate computed to 4.53%
---------
<PAGE>
EXHIBIT (16A-2) FOR THE COMMERCE FUNDS - 30-DAY Distribution Rate (Assuming no
- ------------------------------------------------------------------------------
sales load) For the Period Ending April 30, 1995
- ------------------------------------------------
Formula used in calculating 30-day distribution rate for Commerce Fixed
Income Funds:
Rate: (a / b) x (365 / 30 days)
Where:
a= total distributions per share for the 30-day period ended
April 30, 1995
b= the net asset value per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variable were as
follows:
1) Short-Term Government Fund:
a = 0.101259741
b = 18.42
--------
Thus, the 30-Day Distribution Rate computed to 6.69%
--------
2) Bond Fund:
a = 0.103597024
b = 18.62
--------
Thus, the 30-Day Distribution Rate computed to 6.77%
--------
3) National Tax-Free Bond Fund:
a = 0.068500154
b = 17.95
--------
Thus, the 30-Day Distribution Rate computed to 4.64%
--------
4) Missouri Tax-Free Bond Fund:
a = 0.069521933
b = 18.01
--------
Thus, the 30-Day Distribution Rate computed to 4.70%
--------
<PAGE>
EXHIBIT (16A-2) FOR THE COMMERCE FUNDS - 30-DAY Distribution Rate (Assuming
- ---------------------------------------------------------------------------
the maximum sales load) For the Period Ending April 30, 1995
- ------------------------------------------------------------
ASSUMING NO WAIVERS AND REIMBURSEMENTS
- --------------------------------------
Formula used in calculating 30-day distribution rate for
Commerce Fixed Income Funds:
Rate: (a / b) x (365 / 30 days)
Where:
a= total distributions per share for the 30-day period
ended April 30, 1995
b= the net asset value per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variable
were as follows:
1) Short-Term Government Fund:
a = 0.0962351
b = 19.09
--------
Thus, the 30-Day Distribution Rate computed to 6.13%
--------
2) National Tax-Free Bond Fund:
a = 0.0547582
b = 18.60
--------
Thus, the 30-Day Distribution Rate computed to 3.58%
--------
3) Missouri Tax-Free Bond Fund:
a = 0.0478654
b = 18.66
--------
Thus, the 30-Day Distribution Rate computed to 3.12%
--------
<PAGE>
EXHIBIT (16A-2) FOR THE COMMERCE FUNDS - 30-DAY Distribution Rate (Assuming no
- ------------------------------------------------------------------------------
sales load) For the Period Ending April 30, 1995
- ------------------------------------------------
ASSUMING NO WAIVERS AND REIMBURSEMENTS
- --------------------------------------
Formula used in calculating 30-day distribution rate for Commerce Fixed
Income Funds:
Rate: (a / b) x (365 / 30 days)
Where:
a= total distributions per share for the 30-day period ended
April 30, 1995
b= the net asset value per share on April 30, 1995
For the 30-day period ending April 30, 1995, these variable were as
follows:
1) Short-Term Government Fund:
a = 0.0962351
b = 18.42
--------
Thus, the 30-Day Distribution Rate computed to 6.36%
3) National Tax-Free Bond Fund: --------
a = 0.0547582
b = 17.95
--------
Thus, the 30-Day Distribution Rate computed to 3.71%
--------
4) Missouri Tax-Free Bond Fund:
a = 0.0478654
b = 18.01
--------
Thus, the 30-Day Distribution Rate computed to 3.23%
--------
<PAGE>
EXHIBIT (16A-3) FOR THE COMMERCE FUNDS - CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------
Year Ending April 30, 1995 (Assuming the Maximum Sales Load)
- ------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
ERV
Formula: T= ( ------- ) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
Dec. 12, 1994 *(Tax-Free Funds Feb. 21, 1995)
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period assuming the maximum
sales load of 3.5%
P = $1,000
1) SHORT-TERM GOVERNMENT FUND : 5) AGGRESSIVE GROWTH FUND:
ERV = $1,012.62 ERV = $1,157.64
CUMULATIVE TOTAL RETURN = 1.26% CUMULATIVE TOTAL RETURN = 15.76%
----- ------
2) BOND FUND : 6) INTERNATIONAL EQUITY FUND:
ERV = $1,026.68 ERV = $969.43
CUMULATIVE TOTAL RETURN = 2.67% CUMULATIVE TOTAL RETURN = -3.06%
----- ------
3) BALANCED FUND: * 7) NATIONAL TAX-FREE BOND FUND:
ERV = $1,073.24 ERV = $970.79
CUMULATIVE TOTAL RETURN = 7.32% CUMULATIVE TOTAL RETURN = -2.92%
----- ------
4) GROWTH FUND: * 8) MISSOURI TAX-FREE BOND FUND:
ERV = $1,128.79 ERV = $974.63
CUMULATIVE TOTAL RETURN = 12.88% CUMULATIVE TOTAL RETURN = -2.54%
------ ------
<PAGE>
EXHIBIT (16A-3) FOR THE COMMERCE FUNDS - CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------
Year Ending April 30, 1995 (Assuming no Sales Load)
- ---------------------------------------------------
CUMULATIVE TOTAL RETURNS
ERV
Formula: T= ( ------- ) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
Dec. 12, 1994 *(Tax-Free Funds Feb. 21, 1995)
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period
P = $1,000
1) SHORT-TERM GOVERNMENT FUND: 5) AGGRESSIVE GROWTH FUND:
ERV = $1,049.18 ERV = $1,199.44
CUMULATIVE TOTAL RETURN = 4.92% CUMULATIVE TOTAL RETURN = 19.94%
----- ------
2) BOND FUND: 6) INTERNATIONAL EQUITY FUND:
ERV = $1,063.75 ERV = $1,004.43
CUMULATIVE TOTAL RETURN = 6.38% CUMULATIVE TOTAL RETURN = 0.44%
----- -----
3) BALANCED FUND: * 7) NATIONAL TAX-FREE BOND FUND:
ERV = $1,111.94 ERV = $1,005.85
CUMULATIVE TOTAL RETURN = 11.19% CUMULATIVE TOTAL RETURN = 0.58%
------ -----
4) GROWTH FUND: * 8) MISSOURI TAX-FREE BOND FUND:
ERV = $1,169.54 ERV = $1,009.82
CUMULATIVE TOTAL RETURN = 16.95% CUMULATIVE TOTAL RETURN = 0.98%
------ -----
<PAGE>
EXHIBIT (16A-3) FOR THE COMMERCE FUNDS - CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------
Year Ending April 30, 1995 (Assuming the Maximum Sales Load)
- ------------------------------------------------------------
ASSUMING NO WAIVERS AND REIMBURSEMENTS
- --------------------------------------
CUMULATIVE TOTAL RETURNS
ERV
Formula: T= ( ------- ) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
Dec. 12, 1994 *(Tax-Free Funds Feb. 21, 1995)
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period assuming the maximum
sales load of 3.5%
P = $1,000
1) SHORT-TERM GOVERNMENT FUND : 5) INTERNATIONAL EQUITY FUND:
ERV = $1,010.66 ERV = $966.60
CUMULATIVE TOTAL RETURN = 1.07% CUMULATIVE TOTAL RETURN = -3.34%
----- ------
2) BOND FUND : * 6) NATIONAL TAX-FREE BOND FUND:
ERV = $1,026.31 ERV = $966.86
CUMULATIVE TOTAL RETURN = 2.63% CUMULATIVE TOTAL RETURN = -3.31%
----- ------
3) BALANCED FUND: * 7) MISSOURI TAX-FREE BOND FUND:
ERV = $1,072.37 ERV = $969.03
CUMULATIVE TOTAL RETURN = 7.24% CUMULATIVE TOTAL RETURN = -3.10%
----- ------
4) GROWTH FUND:
ERV = $1,128.62
CUMULATIVE TOTAL RETURN = 12.86%
------
<PAGE>
EXHIBIT (16A-3) FOR THE COMMERCE FUNDS - CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------
Year Ending April 30, 1995 (Assuming no Sales Load)
- ---------------------------------------------------
ASSUMING NO WAIVERS AND REIMBURSEMENTS
- --------------------------------------
CUMULATIVE TOTAL RETURNS
ERV
Formula: T= ( ------- ) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
Dec. 12, 1994 *(Tax-Free Funds Feb. 21, 1995)
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period
P = $1,000
1) SHORT-TERM GOVERNMENT FUND: 5) INTERNATIONAL EQUITY FUND:
ERV = $1,047.16 ERV = $1,001.51
CUMULATIVE TOTAL RETURN = 4.72% CUMULATIVE TOTAL RETURN = 0.15%
----- -----
2) BOND FUND: * 6) NATIONAL TAX-FREE BOND FUND:
ERV = $1,063.37 ERV = $1,001.78
CUMULATIVE TOTAL RETURN = 6.34% CUMULATIVE TOTAL RETURN = 0.18%
----- -----
3) BALANCED FUND: * 7) MISSOURI TAX-FREE BOND FUND:
ERV = $1,111.04 ERV = $1,004.03
CUMULATIVE TOTAL RETURN = 11.10% CUMULATIVE TOTAL RETURN = 0.40%
------ -----
4) GROWTH FUND:
ERV = $1,169.38
CUMULATIVE TOTAL RETURN = 16.94%
------
<PAGE>
EXHIBIT (16A-4) FOR THE COMMERCE FUNDS - NATIONAL TAX-FREE BOND FUND
- --------------------------------------------------------------------
(FEE WAIVERS/REIMBURSEMENTS & TAX EQUIVALENTS)
- ----------------------------------------------
Tax-Equivalent Yield
--------------------
National Tax-Free Bond Fund
- ---------------------------
Assuming a Federal income tax rate of 39.6% for the thirty day period ended
April 30, 1995, the tax equivalent yield of the Commerce National Tax-Free Bond
Fund was 7.14% Had there been no reduction of fees, the tax equivalent yield of
the Commerce National Tax-Free Bond Fund would have been 5.65% for the thirty
day period ended April 30, 1995.
See calculations below:
WITH FEE WAIVERS ASSUMING NO FEE WAIVERS
Formula: Formula:
Y Y
Tax Equivalent Yield = -------- Tax Equivalent Yield = --------
(1 - F) (1 - F)
Where:
Y = SEC 30-Day yield Y = SEC 30-Day yield (no fee waiver)
F = Federal income tax rate of 39.6% F = Federal income tax rate of 39.6%
Y = 4.31% Y = 3.41%
F = 39.60% T = 39.60%
-------- --------
Tax Equivalent Yield = 7.14% Tax Equivalent Yield = 5.65%
-------- --------
(ASSUMING NO FEE WAIVER)
<PAGE>
EXHIBIT (16A-4) FOR THE COMMERCE FUNDS -MISSOURI TAX-FREE BOND FUND
- -------------------------------------------------------------------
(FEE WAIVERS/REIMBURSEMENTS & TAX EQUIVALENTS)
- ----------------------------------------------
Tax-Equivalent Yield
--------------------
Missouri Tax-Free Bond Fund
- ---------------------------
Assuming a Federal income tax rate of 39.6% an a Missouri income tax rate of
6.0% for the thirty day period ended April 30, 1995, the tax equivalent yield of
the Commerce Missouri Tax-Free Bond Fund was 7.89%. Had there been no reduction
of fees, the tax equivalent yield of the Commerce Missouri Tax-Free Bond Fund
would have been 5.39% for the thirty day period ended April 30, 1995.
See calculations below:
WITH FEE WAIVERS ASSUMING NO FEE WAIVERS
Formula: Formula:
Y Y
Tax Equivalent Yield = -------------- Tax Equivalent Yield = --------------
(1 - F)(1-S) (1 - F)(1-S)
Where:
Y = SEC 30-Day yield Y = SEC 30-Day yield (no fee waiver)
F = Federal income tax rate of 39.6% F = Federal income tax rate of 39.6%
S = State income tax rate of 6% S = State income tax rate of 6%
Y = 4.48% Y = 3.06%
F = 39.60% T = 39.60%
S = 6.00% S = 6.00%
-------- --------
Tax Equivalent Yield = 7.89% Tax Equivalent Yield = 5.39%
-------- (ASSUMING NO FEE WAIVER) --------
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEMI-
ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> THE SHORT-TERM GOVERNMENT FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 16,002,540
<INVESTMENTS-AT-VALUE> 16,326,120
<RECEIVABLES> 365,354
<ASSETS-OTHER> 49,357
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,740,831
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 151,429
<TOTAL-LIABILITIES> 151,429
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,171,211
<SHARES-COMMON-STOCK> 900,530
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94,611
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 323,580
<NET-ASSETS> 16,589,402
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 489,239
<OTHER-INCOME> 0
<EXPENSES-NET> (46,600)
<NET-INVESTMENT-INCOME> 442,639
<REALIZED-GAINS-CURRENT> 94,611
<APPREC-INCREASE-CURRENT> 323,580
<NET-CHANGE-FROM-OPS> 860,830
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (442,639)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,132,090
<NUMBER-OF-SHARES-REDEEMED> (255,139)
<SHARES-REINVESTED> 23,579
<NET-CHANGE-IN-ASSETS> 16,589,402
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 34,264
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 80,784
<AVERAGE-NET-ASSETS> 17,614,596
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 0.42
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.42
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEMI-
ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> THE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 83,102,452
<INVESTMENTS-AT-VALUE> 85,563,066
<RECEIVABLES> 1,267,040
<ASSETS-OTHER> 48,823
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 86,878,929
<PAYABLE-FOR-SECURITIES> 988,313
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,218,742
<TOTAL-LIABILITIES> 2,207,055
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,980,939
<SHARES-COMMON-STOCK> 4,548,251
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 230,321
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,460,614
<NET-ASSETS> 84,671,874
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,528,934
<OTHER-INCOME> 0
<EXPENSES-NET> (274,454)
<NET-INVESTMENT-INCOME> 2,254,480
<REALIZED-GAINS-CURRENT> 230,321
<APPREC-INCREASE-CURRENT> 2,460,614
<NET-CHANGE-FROM-OPS> 4,945,415
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,254,480)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,112,486
<NUMBER-OF-SHARES-REDEEMED> (685,731)
<SHARES-REINVESTED> 121,496
<NET-CHANGE-IN-ASSETS> 84,671,874
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,940
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 295,892
<AVERAGE-NET-ASSETS> 80,166,101
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.62
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.62
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEMI-
ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> THE BALANCED FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 34,309,259
<INVESTMENTS-AT-VALUE> 37,423,710
<RECEIVABLES> 2,351,418
<ASSETS-OTHER> 48,646
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,823,774
<PAYABLE-FOR-SECURITIES> 2,497,642
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75,188
<TOTAL-LIABILITIES> 2,572,830
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,803,262
<SHARES-COMMON-STOCK> 1,885,451
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 104,338
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 228,893
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,114,451
<NET-ASSETS> 37,250,944
<DIVIDEND-INCOME> 90,816
<INTEREST-INCOME> 670,674
<OTHER-INCOME> 0
<EXPENSES-NET> (163,243)
<NET-INVESTMENT-INCOME> 598,247
<REALIZED-GAINS-CURRENT> 228,893
<APPREC-INCREASE-CURRENT> 3,114,451
<NET-CHANGE-FROM-OPS> 3,941,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (493,909)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,263,461
<NUMBER-OF-SHARES-REDEEMED> (403,816)
<SHARES-REINVESTED> 25,806
<NET-CHANGE-IN-ASSETS> 37,250,944
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 144,463
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 219,013
<AVERAGE-NET-ASSETS> 37,133,146
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 1.70
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.76
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> THE GROWTH FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 99,612,271
<INVESTMENTS-AT-VALUE> 114,804,363
<RECEIVABLES> 3,046,329
<ASSETS-OTHER> 52,597
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 117,903,289
<PAYABLE-FOR-SECURITIES> 3,737,447
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 328,872
<TOTAL-LIABILITIES> 4,066,319
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97,991,118
<SHARES-COMMON-STOCK> 5,425,572
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 33,564
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 620,196
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,192,092
<NET-ASSETS> 113,836,970
<DIVIDEND-INCOME> 207,295
<INTEREST-INCOME> 648,902
<OTHER-INCOME> 0
<EXPENSES-NET> (456,284)
<NET-INVESTMENT-INCOME> 399,913
<REALIZED-GAINS-CURRENT> 620,196
<APPREC-INCREASE-CURRENT> 15,192,092
<NET-CHANGE-FROM-OPS> 16,212,201
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (366,349)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,069,721
<NUMBER-OF-SHARES-REDEEMED> (662,435)
<SHARES-REINVESTED> 18,286
<NET-CHANGE-IN-ASSETS> 113,836,970
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 302,844
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 475,922
<AVERAGE-NET-ASSETS> 103,791,546
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 2.97
<PER-SHARE-DIVIDEND> (0.07)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.98
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> THE AGGRESSIVE GROWTH FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 20,117,509
<INVESTMENTS-AT-VALUE> 22,499,320
<RECEIVABLES> 901,916
<ASSETS-OTHER> 47,405
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,448,641
<PAYABLE-FOR-SECURITIES> 2,302,313
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47,685
<TOTAL-LIABILITIES> 2,349,998
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,316,122
<SHARES-COMMON-STOCK> 977,204
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (21,883)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 422,593
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,381,811
<NET-ASSETS> 21,098,643
<DIVIDEND-INCOME> 47,361
<INTEREST-INCOME> 26,626
<OTHER-INCOME> 0
<EXPENSES-NET> (95,870)
<NET-INVESTMENT-INCOME> (21,883)
<REALIZED-GAINS-CURRENT> 422,593
<APPREC-INCREASE-CURRENT> 2,381,811
<NET-CHANGE-FROM-OPS> 2,782,521
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,049,919
<NUMBER-OF-SHARES-REDEEMED> (72,715)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 21,098,643
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 46,098
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95,870
<AVERAGE-NET-ASSETS> 15,798,986
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 3.61
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.59
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> THE INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 13,550,117
<INVESTMENTS-AT-VALUE> 13,725,808
<RECEIVABLES> 189,103
<ASSETS-OTHER> 78,029
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,992,940
<PAYABLE-FOR-SECURITIES> 2,764,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,132
<TOTAL-LIABILITIES> 2,825,631
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,998,450
<SHARES-COMMON-STOCK> 618,570
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 16,094
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33,524)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 186,289
<NET-ASSETS> 11,167,309
<DIVIDEND-INCOME> 31,035
<INTEREST-INCOME> 33,290
<OTHER-INCOME> 0
<EXPENSES-NET> (40,398)
<NET-INVESTMENT-INCOME> 23,927
<REALIZED-GAINS-CURRENT> (33,524)
<APPREC-INCREASE-CURRENT> 186,289
<NET-CHANGE-FROM-OPS> 176,692
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7833)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 739,479
<NUMBER-OF-SHARES-REDEEMED> (121,344)
<SHARES-REINVESTED> 435
<NET-CHANGE-IN-ASSETS> 11,167,309
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,308
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 86,314
<AVERAGE-NET-ASSETS> 5,364,911
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.02
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.05
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> THE NATIONAL TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> FEB-21-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 5,823,096
<INVESTMENTS-AT-VALUE> 5,802,603
<RECEIVABLES> 73,154
<ASSETS-OTHER> 55,514
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,931,271
<PAYABLE-FOR-SECURITIES> 256,799
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,714
<TOTAL-LIABILITIES> 301,513
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,650,251
<SHARES-COMMON-STOCK> 313,699
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (20,493)
<NET-ASSETS> 5,629,758
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 50,592
<OTHER-INCOME> 0
<EXPENSES-NET> (7,956)
<NET-INVESTMENT-INCOME> 42,636
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (20,493)
<NET-CHANGE-FROM-OPS> 22,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42,636)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 328,296
<NUMBER-OF-SHARES-REDEEMED> (14,676)
<SHARES-REINVESTED> 79
<NET-CHANGE-IN-ASSETS> 5,629,758
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4680
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 27,166
<AVERAGE-NET-ASSETS> 4,951,202
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.95
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> THE MISSOURI TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> FEB-21-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 4,026,711
<INVESTMENTS-AT-VALUE> 4,026,640
<RECEIVABLES> 151,694
<ASSETS-OTHER> 56,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,234,352
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 36,945
<TOTAL-LIABILITIES> 36,945
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,198,469
<SHARES-COMMON-STOCK> 233,091
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (991)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (71)
<NET-ASSETS> 4,197,407
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 38,033
<OTHER-INCOME> 0
<EXPENSES-NET> (4,474)
<NET-INVESTMENT-INCOME> 33,559
<REALIZED-GAINS-CURRENT> (991)
<APPREC-INCREASE-CURRENT> (71)
<NET-CHANGE-FROM-OPS> 32,497
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (33,559)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 246,326
<NUMBER-OF-SHARES-REDEEMED> (13,349)
<SHARES-REINVESTED> 114
<NET-CHANGE-IN-ASSETS> 4,197,407
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,442
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,792
<AVERAGE-NET-ASSETS> 3,641,174
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.01
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
