<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1998
Securities Act File No. 33-80966
Investment Company Act File No. 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. 8 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 9 [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
Drinker Biddle & Reath LLP
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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on February 25, 1999 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.
Title of Securities Being Registered: None
<PAGE>
LOGO
The Growth and Income Fund
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
THE BALANCED FUND
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
March 1, 1999
Service Shares
Prospectus
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
----
OVERVIEW OF EACH FUND...............................................1
GROWTH AND INCOME FUND.........................................1
GROWTH FUND....................................................4
MIDCAP FUND....................................................6
INTERNATIONAL EQUITY FUND......................................9
BALANCED FUND.................................................12
SHORT-TERM GOVERNMENT FUND....................................16
BOND FUND.....................................................19
INVESTMENT SECURITIES AND PRACTICES................................23
ACCOUNT POLICIES AND FEATURES......................................28
BUYING SERVICE SHARES.........................................28
REDEEMING SERVICE SHARES......................................32
GENERAL POLICIES..............................................33
TAX INFORMATION....................................................35
SERVICE PROVIDERS..................................................35
HOW CAN I CONTACT THE COMMERCE FUNDS?.......................BACK PAGE
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds consists of nine investment portfolios, each of which has a
separate pool of assets with separate investment objectives and policies. This
prospectus offers Service Shares of seven of these investment portfolios.
THE GROWTH AND INCOME FUND seeks both capital appreciation and current income.
THE GROWTH FUND seeks capital appreciation and, secondarily, current income and
dividend growth potential.
THE MIDCAP FUND seeks long-term capital appreciation.
THE INTERNATIONAL EQUITY FUND seeks total return with an emphasis on growth of
capital.
THE BALANCED FUND seeks total return through a balance of capital appreciation
and current income consistent with preservation of capital.
THE SHORT-TERM GOVERNMENT FUND seeks current income consistent with preservation
of principal.
THE BOND FUND seeks total return through current income and, secondarily,
capital appreciation.
{Sidebar: What These Funds Are: These Funds are mutual funds. A mutual fund is a
-------
pooled investment that gives you an opportunity to participate in financial
markets. Each Fund is professionally managed. Each Fund has stated goals that it
attempts to reach. However, as with all mutual funds, none of these Funds can
offer guaranteed results. You could lose money in these Funds, but you also have
the potential to make money.}
{What These Funds Are Not: An investment in any of these Funds is not a bank
deposit. Your investment is not insured or guaranteed by the Federal Deposit
Insurance Corporation (FDIC) or any other agency of the government.}
OVERVIEW OF EACH FUND
GROWTH AND INCOME FUND
Investment Objectives
. Seeks capital appreciation and current income.
Primary Investment Strategies
. Invests, under normal market conditions, at least 65% of total assets in
equity securities, primarily common stock.
. Seeks to purchase stocks that represent value relative to their current
price.
. Generally purchases common stock of companies with market capitalizations
over $500 million. The average capitalization of companies whose stocks were
held by the Fund was $__ as of December 31, 1998. This compares to an average
capitalization of $__ for the S&P 500 Index on the same date.
. Anticipates using 60 to 80 stocks to achieve a diversified portfolio.
<PAGE>
. Uses both the Russell 1000 Value Index and the S&P 500 as benchmarks for
comparison. The Russell 1000 is used for comparison on an annual basis and
the S&P 500 is used for comparison over a complete market cycle (typically
57 years).
Primary Risks of Investing in the Fund
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money. The types of stocks held by the Fund
may not perform as well as other types of stocks.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease. The Fund's net asset value may fluctuate with movements in the
equity market.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank, N.A. (Commerce
Bank), and is not insured or guaranteed by the FDIC or any other government
agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Growth and Income Fund and the risks associated with
those practices.
SIDEBAR: John Bartlett, CFA and Portfolio Manager
. Joined Commerce Bank in 1991
. Fund manager since Fund inception
. 21 years of experience
GROWTH AND INCOME FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of broad-based securities
market indices. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ---------------------------------
{chart here}
1998
- ---------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If these charges were
reflected, returns would be less than shown.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
Since Inception
1 Year 3 Years (3/3/97)
<S> <C> <C> <C>
Growth and Income Fund % N/A %
S&P 500 Index* % N/A %
Russell 1000 Value Index** % N/A %
- -----------------------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies.
** The Russell 1000 Value Index measures the performance of the 1,000 largest
U.S. companies based on total market capitalization, with lower price-to-book
ratios and lower forecasted growth values. The Index figures do not reflect
any fees or expenses.
-2-
<PAGE>
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
SERVICE SHARES
--------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of 3.50%
offering price)..........................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1)............ None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................... --%
Distribution (12b-1) Fees(2) --%
Other Expenses(3)......................................................... --%
----
Total Annual Fund Operating Expenses(4)................................... --%
====
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
(3) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(4) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE GROWTH AND INCOME FUND TO MAINTAIN TOTAL ANNUAL OPERATING
EXPENSES OF NOT MORE THAN 1.45% OF AVERAGE DAILY NET ASSETS. THE ADVISER
RESERVES THE RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY TIME.
Example: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
GROWTH AND INCOME FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Shares of this Fund were first offered on March 3, 1997. The total
return figures show how much you would have earned (or lost) on an investment in
the Fund during each time period, assuming you had reinvested all dividends and
distributions. Some of the information reflects financial results for a single
Fund share. The information has been audited by KPMG Peat Marwick LLP, the
Funds' independent accountants. Their report, along with the Fund's financial
statements, is included in the Funds' Statement of Additional Information
(available upon request).
-3-
<PAGE>
<TABLE>
YEAR ENDED
10/31/98 3/3/97(A) THROUGH 10/31/97
---------- --------------------------
SERVICE SERVICE INSTITUTIONAL
---------- --------- ---------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.00 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.12 $ 0.15
Net realized and unrealized gain (loss) on investments(b) $ 3.80 $ 3.80
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $(0.11) $ (0.13)
From net realized gain on investments -- --
NET ASSET VALUE, END OF PERIOD $21.81 $ 21.82
TOTAL RETURN(C) 21.81% 22.00%
NET ASSETS AT END OF PERIOD (IN 000'S) $2,588 $45,173
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.45%(d) 1.20%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.02%(d) 1.30%(d)
RATIOS ASSUMING NO EXPENSE REIMBURSEMENTS:
Ratio of net expenses to average net assets 2.27%(d) 2.02%(d)
Ratio of net investment loss to average net assets 0.20%(d) 0.48%(d)
PORTFOLIO TURNOVER RATE 5% 5%
</TABLE>
- -----------------------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) 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 sales charges were taken into
account.
(d) Annualized.
GROWTH FUND
Investment Objective
. Seeks capital appreciation and, secondarily, current income and dividend
growth potential.
PRIMARY INVESTMENT STRATEGIES
. Invests principally in stocks of companies that have shown and are expected
to show above-average growth in earnings and return on equity.
. Generally purchases common stock of companies with market capitalizations
over $500 million. The average capitalization of companies whose stocks were
held by the Fund as of December 31, 1998 was $__ billion.
. Invests, under normal market conditions, at least 65% of total assets in
equity securities, primarily common stock.
. Anticipates using 45 to 55 stocks to achieve a diversified portfolio.
. Uses the S&P 500 Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money. The types of stocks held by the Fund
may not perform as well as other types of stocks.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Growth Fund and the risks associated with those
practices.
SIDEBAR: Fund Manager: Joseph C. Williams III, CFA and Portfolio Manager
. Joined Commerce Bank in 1975
. Fund manager since Fund inception
. 23 years of experience
-4-
<PAGE>
GROWTH FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- -----------------------------------
{chart here}
1998
- -----------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If these charges were
reflected, returns would be less than shown.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
1 Year 3 Years Since Inception
(1/2/97)
<S> <C> <C> <C>
Growth Fund % N/A %
S&P 500 Index* % N/A %
- -------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies. The Index figures do not reflect any fees or expenses.
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
GROWTH FUND
SERVICE SHARES
--------------------------
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of 3.50%
offering price)..........................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1)............ None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................... 0.__%
Distribution (12b-1) Fees(2).............................................. 0.__%
Other Expenses(3)......................................................... 0.__%
----
Total Annual Fund Operating Expenses(4)................................... __.__%
=========================
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales
charge permitted under the rules of the National Association of Securities
Dealers, Inc. (NASD).
-5-
<PAGE>
(3) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(4) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE GROWTH FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING
EXPENSES OF NOT MORE THAN 1.38% OF AVERAGE DAILY NET ASSETS. THE ADVISER
RESERVES THE RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY TIME.
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
GROWTH FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) Information for periods
prior to January 2, 1997 is that of the Institutional Shares of the Fund. The
total return figures show how much you would have earned (or lost) on an
investment in the Fund during each time period, assuming you had reinvested all
dividends and distributions. Some of the information reflects financial results
for a single Fund share. The information has been audited by KPMG Peat Marwick
LLP, the Funds' independent accountants. Their report, along with the Fund's
financial statements, is included in the Funds' Statement of Additional
Information (available upon request).
<TABLE>
Year Ended 10/31 12/12/94
----------------
(INCEPTION) TO
1998 1997 1997 1996 10/31/95
SERVICE SERVICE(A) INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $28.26 $ 28.95 $ 24.68 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) $ 0.09 $ 0.19 $ 0.19 $ 0.15
Net realized and unrealized gain on investments(b) $ 6.25 $ 7.51 $ 5.40 $ 6.68
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $(0.10) $ (0.19) $ (0.19) $ (0.15)
From net realized gain on investments -- $ (1.92) $ (1.13) --
NET ASSET VALUE, END OF PERIOD $34.50 $ 34.54 $ 28.95 $ 24.68
TOTAL RETURN(C) 22.47% 28.12% 23.43% 38.06%
NET ASSETS AT END OF PERIOD (IN 000'S) $5,758 $343,773 $208,908 $ 141,735
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.36%(d) 1.11% 1.08% 1.11%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 0.35%(d) 0.60% 0.72% 0.81%(d)
PORTFOLIO TURNOVER RATE 32% 32% 36% 33%
</TABLE>
- ----------------------
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) 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 sales charges were taken into
account.
(d) Annualized.
MIDCAP FUND
Investment Objective
. Seeks long-term capital appreciation.
-6-
<PAGE>
Primary Investment Strategies
. Invests in stocks of companies with medium-sized market capitalizations (less
than $10 billion) and the potential for above-average earnings growth.
. Invests, under normal market conditions, at least 65% of its total assets in
equity securities, primarily common stocks.
. Uses the S&P 400 Mid-Cap Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. SMALL COMPANY STOCK RISK: Investing in securities of smaller companies may be
riskier than investing in larger, more established companies. Smaller
companies are more vulnerable to adverse developments because of more limited
product lines, markets or financial resources. Also, smaller company stocks
may trade less often and in limited volume compared to stocks trading on a
national securities exchange. Security prices of small company stocks may be
more volatile than the prices of larger company stocks. As a result, this
Fund's net asset value may be subject to rapid and substantial changes if it
invests in small company stocks.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: FUND MANAGER: Paul D. Cox, CFA and Portfolio Manager
. Joined the Investment Management Group of Commerce Bank in 1989
. Fund manager since Fund inception
. 18 years of experience
SIDEBAR: Please see the table on p.__ for more detailed information about the
investment practices of the MidCap Fund and the risks associated with those
practices.
MIDCAP FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- -------------------------------------
{chart goes here}
1998
- -------------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If sales charges were
reflected, returns would be less than shown.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
Since Inception
1 Year 3 Years (1/2/97)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
MidCap Fund % N/A %
S&P 400 Mid-Cap Index* % N/A %
- -----------------------------------------------------------------------------------
</TABLE>
* The S&P 400 Mid-Cap Index is a capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market. The Index
figures do not reflect any fees or expenses.
-7-
<PAGE>
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
MIDCAP FUND (1)
Service Shares
--------------------------
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of 3.50%
offering price)..........................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(2)............ None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................... 0.__%
Distribution (12b-1) Fees(3).............................................. 0.__%
Other Expenses(4)......................................................... 0.__%
----
Total Annual Fund Operating Expenses...................................... __.__%
=========================
</TABLE>
(1) Formerly the Aggressive Growth Fund.
(2) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(3) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
(4) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
MIDCAP FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) Information for periods
prior to January 2, 1997 is that of the Institutional Shares of the Fund. The
total return figures show how much you would have earned (or lost) on an
investment in the Fund during each time period, assuming you had reinvested all
dividends and distributions. Some of the information reflects financial results
for a single Fund share. The information has been audited by KPMG Peat Marwick
LLP, the Funds' independent accountants. Their report, along with the Fund's
financial statements, is included in the Funds' Statement of Additional
Information (available upon request).
-8-
<PAGE>
<TABLE>
YEAR ENDED 10/31 12/12/94
----------------
1998 1997 1997 1996 (INCEPTION)
SERVICE SERVICE(A) INSTITUTIONAL INSTITUTIONAL TO 10/31/95
------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $28.64 $ 28.06 $ 25.30 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss $(0.11) $ (0.13) $ (0.07) $ (0.04)
Net realized and unrealized gain on investments(b) $ 4.41 $ 5.38 $ 3.51 $ 7.34
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- -- --
From net realized gain on investments -- $ (0.29) $ (0.68) --
NET ASSET VALUE, END OF PERIOD $32.94 $ 33.02 $ 28.06 $ 25.30
TOTAL RETURN(C) 15.01% 18.88% 13.78% 40.56%
NET ASSETS AT END OF PERIOD (IN 000'S) $ 658 $112,442 $74,641 $ 41,665
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.48%(d) 1.23% 1.22% 1.32%(d)
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS (0.95)%(d) (0.61)% (0.37)% (0.29)%(d)
PORTFOLIO TURNOVER RATE 89% 89% 71% 59%
</TABLE>
- ----------------------------
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) 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 sales charges were taken into
account.
(d) Annualized.
INTERNATIONAL EQUITY FUND
Investment Objective
. Seeks total return with an emphasis on capital growth.
Primary Investment Strategies
. Invests at least 65% of total assets in common stock of established companies
that conduct their principal activities or are located outside the United
States and whose securities are traded in foreign markets.
. Invests, under normal market conditions, in equity securities of companies in
at least three different foreign countries. Geographic diversification will
be wide and will include both developed and emerging markets.
. Focuses on purchasing securities of large and, to a lesser extent, medium-
sized companies, although stocks may be purchased without regard to a
company's market capitalization.
. May also invest in other types of securities, including convertibles,
warrants, preferred stocks, corporate and government debt, futures, and
options.
. May invest freely in securities of foreign issuers in the form of sponsored
and unsponsored American Depository Receipts and European Depository
Receipts.
. Uses the Morgan Stanley Capital International Europe, Australia and Far East
(MSCI EAFE) Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money. International funds, in general, have
volatile net asset values. The Fund may not be an appropriate investment if
you cannot bear financially the loss of at least a significant portion of
your investment.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Sub-Adviser may fail to produce the
intended results.
. CURRENCY RISK: Fluctuations in the exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. A decline in the
value of a foreign currency versus the U.S. dollar reduces the dollar value
of securities denominated in that currency.
. FOREIGN RISK: Foreign securities can be riskier and more volatile than U.S.
securities. Adverse political, social and economic developments in foreign
countries or changes in the value of foreign currency can make it harder for
the portfolio to sell its securities and could reduce the value of your
shares. Changes in or the lack of tax, accounting and regulatory standards
and difficulties in obtaining information about foreign companies can
negatively affect investment decisions. Also, the costs of investing abroad
are usually higher than those of investing within the U.S.
-9-
<PAGE>
. EMERGING MARKET RISK: To the extent that the Fund has investments in
emerging-market countries, it will be subject to abrupt and severe price
declines. Investments in these countries are much riskier than those in
mature countries.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: The International Equity Fund is sub-advised by Rowe Price-Fleming
International, Inc. Martin G. Wade manages the Fund on a day-to-day basis. Mr.
Wade has 29 years of experience with Fleming Group in research, client service
and investment management.
SIDEBAR: Please see the table on p.__ for more detailed information about the
investment practices of the International Equity Fund and the risks associated
with those practices.
INTERNATIONAL EQUITY FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ---------------------------------------
{chart goes here}
1998
- ---------------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If sales charges were
reflected, returns would be less than shown.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
- ------------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (1/2/97)
<S> <C> <C> <C>
International Equity Fund % N/A %
MSCI EAFE Index* % N/A %
- ------------------------------------------------------------------------------------
</TABLE>
*The MSCI EAFE Index is an unmanaged index composed of a sample of companies
representative of the market structure of 20 European and Pacific Basin
countries. The Index figures do not reflect any fees or expenses.
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
-10-
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
SERVICE SHARES
--------------------------
Shareholder Transaction Expenses (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of 3.50%
offering price)..........................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1)............ None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(2)........................................................ __.__%
Distribution (12b-1) Fees(3).............................................. __.__%
Other Expenses(4)......................................................... 0.__%
Total Annual Fund Operating Expenses(5)................................... __.__%
=========================
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(3) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
(4) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(5) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE INTERNATIONAL EQUITY FUND TO MAINTAIN TOTAL ANNUAL FUND
OPERATING EXPENSES OF NOT MORE THAN 1.97% OF AVERAGE DAILY NET ASSETS. THE
ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE
REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN
THOSE THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE
ADVISORY FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A
RESULT OF THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES"
AND "TOTAL ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES __.__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
-11-
<PAGE>
INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) The total return
figures show how much you would have earned (or lost) on an investment in the
Fund during each time period, assuming you had reinvested all dividends and
distributions. Some of the information reflects financial results for a single
Fund share. The information has been audited by KPMG Peat Marwick LLP, the
Funds' independent accountants. Their report, along with the Fund's financial
statements, is included in the Funds' Statement of Additional Information
(available upon request).
<TABLE>
YEAR ENDED 10/31 12/12/94
----------------
(FUND INCEPTION)
1998 1997 1997 1996 TO 10/31/95
SERVICE SERVICE(A) INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $21.70 $ 20.96 $ 18.64 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.01 $ 0.06 $ 0.11 $ 0.12
Net realized and unrealized gain on investments and $ 0.35 $ 1.42 $ 2.35 $ 0.55
foreign currency related transactions(b)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- $ (0.10) $ (0.07) $ (0.03)
From net realized gain on investments -- $ (0.24) $ (0.07) --
NET ASSET VALUE, END OF PERIOD $22.06 $ 22.10 $ 20.96 $ 18.64
TOTAL RETURN(C) 1.66% 7.15% 13.25% 3.73%
NET ASSETS AT END OF PERIOD (IN 000'S) $ 231 $78,273 $51,589 $ 21,014
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.97%(d) 1.72% 1.72% 1.81%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 0.14%(d) 0.35% 0.74% 1.06%(d)
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES OR
EXPENSE REIMBURSEMENTS:
Ratio of expenses to average net assets 2.48%(d) 2.23% 2.64% 3.50%(d)
Ratio of net investment loss to average net assets (0.37)%(d) (0.16)% (0.18)% (0.63)%(d)
PORTFOLIO TURNOVER RATE 22% 22% 21% 25%
</TABLE>
- -------------------
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of 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 sales charges were taken into
account.
(d) Annualized.
BALANCED FUND
INVESTMENT OBJECTIVE
. Seeks total return through a balance of capital appreciation and current
income, consistent with preservation of capital.
PRIMARY INVESTMENT STRATEGIES
The Fund pursues this objective through investment in stocks, bonds, and cash
equivalents. The actual mix of equity and fixed-income securities will vary;
however, under normal conditions, the Fund intends to invest 60% of its total
assets in stocks and 40% in bonds. Investment in stocks could range as high as
75% of the total assets and as low as 42%.
Equity Investment Strategies
. Normally invests the equity portion in common stocks, preferred stocks, and
securities or bonds that are convertible into common or preferred stocks.
. Normally purchases stocks of companies with market capitalizations of over
$200 million. The average capitalization of companies whose stock were held
by the Fund as of December 31, 1998 was $____.
Fixed-Income Investment Strategies
. Normally invests the fixed-income portion of the Fund in investment-grade
corporate bonds, U.S. Government obligations, mortgage-backed securities and
asset-backed securities. Up to 65% of the fixed-income portfolio may be
invested in mortgage-backed and asset-backed securities.
-12-
<PAGE>
. 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 nationally recognized statistical rating
organization.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities in
the Fund can be expected to go up when interest rates go down and to go down
when interest rates go up. Longer-term bonds and zero coupon bonds are
usually more sensitive to interest rate changes than shorter-term bonds. In
general, the longer the average maturity of bonds in the Fund, the more the
Fund's share price will go up or down in response to interest rate changes.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. The Fund
could lose money in either of these instances.
. ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary.
. MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities may be subject to special risks, including price
volatility, liquidity, and enhanced sensitivity to interest rates.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by a Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, a Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and a
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Fund Managers: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
Joseph C. Williams III, CFA and Portfolio Manager
. Joined Commerce Bank in 1975
. Fund manager since Fund inception
. 23 years of experience
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Balanced Fund and the risks associated with those
practices.
BALANCED FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
-13-
<PAGE>
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ------------------------------------
{chart goes here}
1998
- ------------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If sales charges were
reflected, returns would be less than shown.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
Since Inception
1 Year 3 Years (1/2/97)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund % N/A %
60% S&P 500/40% Lehman Bros. % N/A %
Aggregate Bond Index*
- ------------------------------------------------------------------------------------
</TABLE>
*The 60% S&P 500/40% Lehman Brothers Aggregate Bond Index is a composite of the
Standard & Poor's 500 Index (with income) (weighted at 60%), an unmanaged index
that emphasizes large capitalization companies, and the Lehman Brothers
Aggregate Bond Index (weighted at 40%), a broad market-weighted index comprised
of three major classes of investment grade bonds with maturities greater than
one year. The Index figures do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
BALANCED FUND
SERVICE SHARES
----------------------
Shareholder Transaction Expenses (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of offering 3.50%
price).......................................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions............... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1)................ None
Redemption Fees............................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(2)............................................................ __.__%
Distribution (12b-1) Fees(3).................................................. __.__%
Other Expenses(4)............................................................. 0.__%
Total Annual Fund Operating Expenses(5)....................................... __.__%
=====================
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(3) Due to distribution fees, a long-term SHAREHOLDER in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
(4) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
-14-
<PAGE>
(5) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE BALANCED FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING
EXPENSES OF NOT MORE THAN 1.38% OF AVERAGE DAILY NET ASSETS. THE ADVISER
RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE REIMBURSEMENT
AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN THOSE THAT THE
FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE ADVISORY FEE
WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A RESULT OF THE
EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES" AND "TOTAL
ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES __.__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
BALANCED FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) The total return
figures show how much you would have earned (or lost) on an investment in the
Fund during each time period, assuming you had reinvested all dividends and
distributions. Some of the information reflects financial results for a single
Fund share. The information has been audited by KPMG Peat Marwick LLP, the
Funds' independent accountants. Their report, along with the Fund's financial
statements, is included in the Funds' Statement of Additional Information
(available upon request).
-15-
<PAGE>
<TABLE>
YEAR ENDED 10/31 12/12/94
----------------
FUND INCEPTION
1998 1997 1997 1996 TO 10/31/95
SERVICE SERVICE (a) INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $23.25 $ 24.00 $ 22.10 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.40 $ 0.59 $ 0.54 $ 0.59
Net realized and unrealized gain on investments(b) $ 3.42 $ 3.93 $ 2.56 $ 4.06
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $(0.41) $ (0.59) $ (0.54) $ (0.55)
From net realized gain on investments -- $ (1.26) $ (0.66) --
NET ASSET VALUE, END OF PERIOD $26.66 $ 26.67 $ 24.00 $ 22.10
TOTAL RETURN (C) 16.53% 19.92% 14.45% 26.14%
NET ASSETS AT END OF PERIOD (IN 000'S) $1,219 $105,782 $69,880 $ 48,329
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.38%(d) 1.13% 1.13% 1.13%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.13%(d) 2.44% 2.47% 3.28%(d)
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES OR
EXPENSE REIMBURSEMENTS:
Ratio of expenses to average net assets 1.78%(d) 1.53% 1.45% 1.45%(d)
Ratio of net investment income to average net assets 1.73%(d) 2.04% 2.15% 2.96%(d)
PORTFOLIO TURNOVER RATE 31% 31% 58% 59%
</TABLE>
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and 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 sales charges were taken
into account.
(d) Annualized.
FIXED-INCOME APPROACH
The Commerce Fixed-Income Funds primarily invest in investment-grade securities
managed with the goal of providing you current income. Fixed-income investments
are managed in a diversified manner across all sectors of the bond market. The
Adviser uses three primary strategies to try to increase the value of the Funds:
. Actively managing maturities to take advantage of changes in interest rates.
. Placing more or less emphasis in different sectors of the market (government,
mortgage, corporate and asset-backed) depending on which sectors have the
most attractive-looking relative value.
. Using internal and external models for credit and pre-payment risks to
evaluate specific purchases of securities.
SHORT-TERM GOVERNMENT FUND
Investment Objective: Seeks current income consistent with preservation of
principal.
Primary Investment Strategies
. Invests at least 65% of the Fund's total assets in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
(including U.S. Treasury bills, notes and bonds) and government mortgage-
backed securities (pools of mortgage loans sold to investors by various
governmental agencies) that have average lives or remaining maturities of
five years or less.
. May also purchase other mortgage-backed securities, which are sold to
investors by private issuers.
. The dollar-weighted average maturity of the Fund's investments will not
exceed three years.
. Uses the Salomon Brothers 15 Year Treasury/Government Sponsored Index as a
benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities in
the Fund can be expected to go up when interest rates go down and to go down
when interest rates go up. Longer-term bonds and zero coupon bonds are
usually
-16-
<PAGE>
more sensitive to interest rate changes than shorter-term bonds. In general,
the longer the average maturity of bonds in the Fund, the more the Fund's
share price will go up or down in response to interest rate changes.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. CREDIT RISK: An issuer of fixed-income securities could default on its
obligation to pay interest and repay principal.
. A bond's credit rating could be downgraded. The Fund could lose money in
either of these instances.
. MANAGEMENT RISK: A strategy used by the Adviser could fail to produce the
intended results.
. MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities, especially collateralized mortgage-backed
securities, may be subject to special risks, including price volatility,
liquidity, and enhanced sensitivity to interest rates.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by the Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, the Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
. GOVERNMENT SECURITIES RISK: The U.S. Government may not provide financial
support to U.S. Government agencies, instrumentalities or sponsored
enterprises if it is not obligated to do so.
. MATURITY RISK: The Fund will not necessarily hold its securities to maturity,
which could result in a loss of principal.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other government agency.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Short-Term Government Fund and the risks associated
with those practices.
SHORT-TERM GOVERNMENT FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ------------------------------------ Best Quarter:
Insert chart here Worst Quarter:
Data: These figures do not reflect
1998 any applicable sales charges.
- ------------------------------------ If sales charges were reflected,
returns would be less than shown.
-17-
<PAGE>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
- ------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 3 YEARS (1/2/97)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Government Fund % N/A %
Salomon Brothers 15 Year % N/A %
Treasury/Govt. Sponsored Index *
- ------------------------------------------------------------------------------------
</TABLE>
*The Salomon Brothers 15 Year Treasury/Government Sponsored Index is comprised
of Treasury securities with a minimum principal amount of $1 billion and U.S.
Government securities with a minimum principal amount of $100 million. The
securities range in maturity from one to five years. The Index figures do not
reflect any fees or expenses.
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
SHORT-TERM GOVERNMENT FUND
SERVICE SHARES
------------------------------------
Shareholder Transaction Expenses (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage 2.00%
of offering price)......................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions......... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1).......... None
Redemption Fees......................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(2)...................................................... __.__%
Distribution (12b-1) Fees(3)............................................ __.__%
Other Expenses(4)....................................................... 0.__%
Total Annual Fund Operating Expenses(5)................................. __.__%
===================================
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(3) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
(4) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(5) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE SHORT-TERM GOVERNMENT FUND TO MAINTAIN TOTAL ANNUAL FUND
OPERATING EXPENSES OF NOT MORE THAN .93% OF AVERAGE DAILY NET ASSETS. THE
ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE
REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN
THOSE THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE
ADVISORY FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A
RESULT OF THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES"
AND "TOTAL ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES __.__%
-18-
<PAGE>
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
SHORT-TERM GOVERNMENT FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time periods
stated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) Information for periods
prior to January 2, 1997 is that of the Institutional Shares of the Fund. The
total return figures show how much you would have earned (or lost) on an
investment in the Fund during each time period, assuming you had reinvested all
dividends and distributions. Some of the information reflects financial results
for a single Fund share. The information has been audited by KPMG Peat Marwick
LLP, the Funds' independent accountants. Their report, along with the Fund's
financial statements, is included in the Funds' Statement of Additional
Information (available upon request).
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 10/31
------------------------
12/12/94
1998 1997 1997 1996 (INCEPTION)
SERVICE SERVICE(a) INSTITUTIONAL INSTITUTIONAL THROUGH 10/31/95
------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.37 $ 18.43 $ 18.83 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.92 $ 1.11 $ 1.09 $ 1.06
Net realized and unrealized gain (loss) on $ 0.10 $ 0.04 $ (0.18) $ 0.83
investments(b)
DISTRIBUTION TO SHAREHOLDERS:
From net investment income $(0.92) $ (1.11) $ (1.09) $ (1.06)
From net realized gain on investments -- -- $ (0.22) --
NET ASSET VALUE, END OF PERIOD $18.48 $ 18.47 $ 18.43 $ 18.83
TOTAL RETURN(C) 5.81% 6.45% 5.02% 10.72%
NET ASSETS AT END OF PERIOD $ 450 $48,840 $33,839 $20,211
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 0.93%(d) 0.68% 0.68% 0.68%(d)
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET 5.64%(d) 6.04% 5.90% 6.38%(d)
ASSETS
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES
OR EXPENSE REIMBURSEMENTS
Ratio of expenses to average net assets 1.36%(d) 1.11% 1.11% 1.14%(d)
Ratio of net investment income to average net assets 5.21%(d) 5.61% 5.47% 5.92%(d)
PORTFOLIO TURNOVER RATE 36% 36% 12% 158%
</TABLE>
- --------------------------
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) 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 sales charges were taken
into account.
(d) Annualized.
BOND FUND
Investment Objective
. Seeks total return through current income and, secondarily, capital
appreciation.
Primary Investment Strategies
. Invests at least 65% of its total assets in fixed-income securities (bonds)
rated at the time of purchase A-/AAA or better by one of the four major
ratings services or considered by the Adviser to be of equivalent quality.
-19-
<PAGE>
. May invest up to 65% of its total assets in mortgage-backed and asset-backed
securities.
. The market-weighted average credit rating of the Fund's entire portfolio will
be AA-/Aa3 or better.
. Uses the Lehman Brothers Aggregate Bond Index as a benchmark for comparison.
Although the Fund has no restriction on the maximum or minimum duration of
any individual security it holds, the Fund's average effective duration will
be within 30% of the duration of the Lehman Brothers Aggregate Bond Index.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities
can be expected to go up when interest rates go down and to go down when
interest rates go up.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The
Fund could lose money in either of these instances. The Fund may invest up to
35% of its assets in obligations rated BBB or Baa by certain ratings
services. These obligations are considered to have speculative
characteristics and are riskier than higher-rated obligations.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. MORTGAGE-BACKED RISK: Mortgage-backed securities, especially collateralized
mortgage-backed securities, may be subject to additional risks, including
price volatility, liquidity, and enhanced sensitivity to interest rates.
. ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by the Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, the Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
. MATURITY RISK: The Fund will not necessarily hold its securities to
maturity, which could result in loss of principal.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Bond Fund and the risks associated with those
practices.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
Sidebar: Duration:
"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. 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.
-20-
<PAGE>
BOND FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since inception of the Service
Shares (for each complete year of the Service Shares' existence). The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ------------------------------------
{chart here}
1998
- ------------------------------------
Best Quarter:
Worst Quarter:
These figures do not reflect any applicable sales charges. If sales charges were
reflected, returns would be less than shown.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
- -----------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (1/2/97)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Fund % N/A %
Lehman Bros. Aggregate Bond % N/A %
Index*
- -----------------------------------------------------------------------------------
</TABLE>
*The Lehman Brothers Aggregate Bond Index is a broad market-weighted index
comprised of three major classes of investment-grade bonds with maturities
greater than one year. The Index figures do not reflect any fees or expenses.
Fees and Expenses
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
BOND FUND
SERVICE SHARES
--------------------------
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of 3.50%
offering price)...........................................................
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions(1)............ None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................... 0.__%
Distribution (12b-1) Fees(2).............................................. 0.__%
Other Expenses(3)......................................................... 0.__%
----
Total Annual Fund Operating Expenses(4)................................... __.__%
=========================
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) Due to distribution fees, a long-term shareholder in the Fund may pay over
time more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers,
Inc. (NASD).
-21-
<PAGE>
(3) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(4) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE BOND FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING EXPENSES
OF NOT MORE THAN 1.13% OF AVERAGE DAILY NET ASSETS. THE ADVISER RESERVES THE
RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY TIME.
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
BOND FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the periods
indicated. Information for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Fund.
(Service Shares were first offered on January 2, 1997.) Information for periods
prior to January 2, 1997 is that of the Institutional Shares of the Fund. The
total return figures show how much you would have earned (or lost) on an
investment in the Fund during each time period, assuming you had reinvested all
dividends and distributions. Some of the information reflects financial results
for a single Fund share. The information has been audited by KPMG Peat Marwick
LLP, the Funds' independent accountants. Their report, along with the Fund's
financial statements, is included in the Funds' Statement of Additional
Information (available upon request).
<TABLE>
Year Ended 10/31 12/112/94
---------------- (FUND INCEPTION)
1998 1997 1997 1996 THROUGH 10/31/95
Service Service (A) Institutional Institutional Institutional
------- ------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.00 $ 19.07 $ 19.61 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.94 $ 1.17 $ 1.16 $ 1.12
Net realized and unrealized gain (loss) on $ 0.43 $ 0.39 $ (0.28) $ 1.61
investments(b)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $(0.94) $ (1.18) $ (1.16) $ (1.12)
From net realized gain on investments -- $ (0.02) $ (0.26) --
NET ASSET VALUE, END OF PERIOD $19.43 $ 19.43 $ 19.07 $ 19.61
TOTAL RETURN(C) 7.48% 8.50% 4.71% 15.59%
NET ASSETS AT END OF PERIOD (IN 000S) $ 739 $217,803 $151,205 $98,504
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.10%(d) 0.85% 0.84% 0.88%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.67%(d) 6.14% 6.10% 6.64%(d)
PORTFOLIO TURNOVER RATE 19% 19% 31% 58%
</TABLE>
- ----------------------
(a) Service Shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) 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 sales charges were taken into
account.
(d) Annualized.
-22-
<PAGE>
INVESTMENT SECURITIES AND PRACTICES
This table shows some of the investment methods and securities that the Funds
may use. The Funds' Statement of Additional Information (available on request)
contains a more complete discussion of the securities and practices each Fund
may use, and the risks involved. The Funds' Annual Report shows the securities
and practices each Fund is currently using. We encourage you to obtain and read
a copy of the Statement of Additional Information and the Annual Report should
you have any questions about the Funds' investment policies.
<TABLE>
<S> <C>
Key:
#t = percent of total assets the Fund may invest x = not permitted
#n = percent of net assets the Fund may invest e = equity portion of the Fund
a = no specific asset limitation on usage f = fixed-income portion of the Fund
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INTERNATIONAL SHORT-TERM
INCOME GROWTH MIDCAP EQUITY BALANCED GOVERNMENT BOND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES
American Depository Receipts 10t/2/ 10t/2/ 10t/2/ a 10e/1/ x x
Asset-Backed Securities x x x x 65f/1/ x 65t/4/
Convertible Securities a a a a ae x a
Corporate Debt Obligations x x x a af1 x a
Emerging Market Securities x x x a x x x
Equity Securities a a a a ae x x
European Depository Receipts x x x a x x x
Foreign Equity Securities 10t/2/ 10t/2/ 10t/2/ a 10e/1/ x x
Foreign Debt and Foreign
Government Securities x x x a 20f/1/ x 20t
Hybrids x x x 10t x x x
Mortgage-Related Securities x x x x 65f/1/ a/3/ 65t/4/
Municipal Obligations x x x x 20f/2/ x 20t
Stripped Securities x x x x af x a
U.S. Government Obligations a a a a af a/3/ a
Variable and Floating Rate
Instruments a a a a a a a
Zero Coupon Bonds a a a a af a a
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
- -----------------------------------------------------------------------------------------------------------------------------------
Cross Hedging of Currencies x x x a x x x
Foreign Currency Exchange Contracts x x x a x x x
Futures Contracts & Related Options a a a a af x a
Interest Rate Swaps, Mortgage Swaps, x x x x af a a
Caps and Floors
Mortgage Dollar Rolls x x x x af a a
Options on Foreign Currencies x x x a x x x
Options on Securities and
Securities Indices Indices 25t 25t 25t 5t 5t 5t 5t
Repurchase Agreements 33 1/3t 33 1/3t 33 1/3t 33 1/3t 33 1/3t 33 1/3t 33 1/3t
When-Issued and Forward Commitments a a a a af a a
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
RISKS The following chart summarizes the types of risks from which loss may result. More information about
risks associated with the Funds provided on the following pages and in the Funds' Statement of Additional
Information, which is available on request.
- --------------------------------------------------------------------------------------------------------------
GROWTH INTERNATIONAL SHORT-TERM
AND GROWTH MIDCAP EQUITY BALANCED GOVERNMENT BOND
INCOME
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset-Backed Risk X X
Call Risk X X X
Credit Risk X X X
Currency Risk X
Emerging Market Risk X
Extension Risk X X X
Euro Risk X
Foreign Risk X X
Government Securities Risk X
Interest Rate Risk X X X
Investment Risk X X X X X X X
Management Risk X X X X X X X
Market Risk X X X X X X X
Maturity Risk X X
Mortgage-Backed Risk X X X
Prepayment Risk X X X
Small Company Stock Risk X
Year 2000 Risk X X X X X X X
- --------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ The Balanced Fund may invest up to 65% of the fixed income portion of its
portfolio in asset-backed and/or mortgage-backed securities, up to 20% of
its fixed income portion in municipal obligations, and up to 20% of its
fixed income portion in debt obligations of foreign issuers. The Fund may
invest up to 10% of its equity portion in securities issued by foreign
issuers, including ADRs.
/2/ The Growth and Income, Growth and MidCap Funds may invest up to 10% of their
total assets in foreign securities, including ADRs.
/3/ At least 65% of the Short-Term Government Fund's investments will be in U.S.
Government issued or guaranteed securities (including mortgage-related
securities issued or guaranteed by the U.S. Government) that have average
lives or remaining maturities of five years or less.
/4/ The Bond Fund may invest up to 65% of its total assets in asset-backed
and/or mortgage-related securities.
-24-
<PAGE>
ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary. Ultimately, asset-backed securities are dependent upon
payment of the underlying consumer loans or receivables by individuals, and the
certificate holder frequently has not 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.
CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by a Fund (such as a mortgage-backed or asset-backed security) earlier than
expected. This may happen when interest rates decline. Under these
circumstances, a Fund may be unable to recoup all of its initial investment and
will also suffer from having to reinvest in lower yielding securities.
CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. A Fund could
lose money in either of these instances. The Bond Fund may invest up to 35% of
its assets in obligations rated BBB or Baa by certain ratings services. These
obligations are considered to have speculative characteristics and are riskier
than higher rated obligations.
CURRENCY RISK: Fluctuations in the exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. A decline in the value
of a foreign currency versus the U.S. dollar reduces the dollar value of
securities denominated in that currency. Exchange rate movements can be large
and unpredictable and can last for extended periods. 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 a
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.
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 foreign governments or central
banks, or by currency controls or political development 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 would have if it did not maintain the currency
positions. The Funds investing in foreign securities are all subject to the
possible imposition of exchange control regulations or freezes on convertibility
of currency.
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. 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. 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
-25-
<PAGE>
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 currencies.
EMERGING MARKET RISK: To the extent that a Fund has investments in emerging
market countries, it will be subject to abrupt and severe price declines. Many
of the economic and political structures of these countries do not compare
favorably with the United States in terms of wealth and stability, and their
financial markets may lack liquidity. Investments in these countries are much
riskier than those in mature countries. 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
these 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 of investing in foreign securities, including the risks of nationalization
and expropriation may be heightened. In addition, unanticipated political or
social developments may affect the value of the 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 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 most Western European 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.
EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage-backed or asset-backed security)
later than expected. This may happen when interest rates rise. Under these
circumstances, the value of the obligation will decrease and a Fund will also
suffer from the inability to invest in higher-yielding securities.
EURO RISK: Many European countries adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European Central
Bank was created to manage the monetary policy of the new unified region. On
that same date, the exchange rates were irrevocably fixed between EMU member
countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002. This change could
still significantly impact the European capital markets in which the Funds
invest and may result in a Fund facing risks that are different than the risks
it ordinarily faces in pursuing its investment objectives. These risks, which
include, but are not limited to, uncertainty as to the proper tax treatment of
the currency conversion, volatility of currency exchange rates as a result of
the conversion, uncertainty as to capital market reaction, conversion costs that
may affect issuer profitability and creditworthiness, and lack of participation
by some European countries, may increase the volatility of the Funds' NAV per
share.
FOREIGN RISK: Foreign securities can be riskier and more volatile than U.S.
securities. Adverse political, social and economic developments in foreign
countries (including, the possible seizure or nationalization of foreign
holdings, the possible establishment of exchange controls or the adoption of
other governmental restrictions) or changes in the value of foreign currency can
make it harder for the portfolio to sell its securities and could reduce the
value of your shares. Changes in or the lack of tax, accounting, and regulatory
standards and difficulties in obtaining information about foreign companies can
negatively affect investment decisions. Also, the costs attributable to
investing abroad are usually higher than those of investing in the U.S. These
costs include 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 market liquidity,
more market volatility and political and economic instability. Additionally
foreign banks and foreign branches of domestic banks are subject to less
stringent reserve requirements and to different accounting, auditing and
recordkeeping requirements.
Countries in which the International Equity 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 Bond and Balanced Funds may invest in foreign debt and 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 U.S. entities or citizens.
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<PAGE>
The Balanced, Growth and Income, Growth, MidCap 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.
GOVERNMENT SECURITIES RISK: The U.S. Government may not provide financial
support to U.S. Government agencies, instrumentalities or sponsored enterprises
if it is not obligated to do so by law.
INTEREST RATE RISK: Generally, the market value of fixed-income securities in a
Fund can be expected to go up when interest rates go down and to go down when
interest rates go up. Longer-term bonds and zero coupon bonds are usually more
sensitive to interest rate changes than shorter-term bonds. In general, the
longer the average maturity of bonds in a Fund, the more a Fund's share price
will go up or down in response to interest rate changes.
INVESTMENT RISK: The value of your investment in a Fund may go up or down,
which means that you could lose money.
MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results. The Adviser's assessment of companies whose securities are
held by a Fund may prove incorrect, resulting in losses or poor performance,
even under favorable market and interest rate conditions.
MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in a Fund to increase or
decrease. A Fund's NAV may fluctuate with movements in the equity markets.
MATURITY RISK: A Fund will not necessarily hold its securities to maturity,
which could result in loss of principal.
MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities may be subject to special risks, including price
volatility, liquidity, and enhanced sensitivity to interest rates.
Collateralized mortgage-backed securities (CMOs) may exhibit even more price
volatility and interest rate risk than other mortgage-backed securities. They
may lose liquidity as CMO market makers may choose not to repurchase, or may
offer prices, based on current market conditions, that are unacceptable to the
Fund based on the Adviser's analysis of the market value of the security. The
Bond and Balanced Funds may purchase "stripped" mortgage-backed securities
(SMBS) and other types of "stripped" securities. SMBS, in particular, are more
volatile and sensitive to interest rate changes than ordinary debt securities,
and there is a greater risk that a Fund's initial investment in these securities
may not be fully recouped.
PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return.
SMALL COMPANY STOCK RISK: Investing in securities of smaller companies may be
riskier than investing in securities of larger, more established companies.
Smaller companies are more vulnerable to adverse developments because of more
limited product lines, markets or financial resources. They often depend on a
smaller, less experienced management group. Also, smaller company stocks may
trade less often and in limited volume compared to stocks trading on a national
securities exchange. Security prices of small company stocks may be more
volatile than the prices of larger company stocks. As a result, a Fund's NAV
may be subject to rapid and substantial changes if it invests in small company
stocks.
YEAR 2000 RISKS: Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Adviser and the Funds' other
service providers do not properly process and calculate date-related information
and dates from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Adviser is taking steps to address the Year 2000 Problem
with respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Funds' other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Funds as a result of the Year 2000
Problem. The Year 2000 Problem would also adversely impact a Fund's portfolio
holdings and the markets in which they invest, causing their shares prices to go
down.
RISKS OF SHORT-TERM INVESTING: At times, the Adviser may decide to suspend the
normal investment activities of a Fund by investing up to 100% of its assets in
cash and cash equivalent short-term obligations, including money market
instruments, a term that includes bank obligations, commercial paper, U.S.
Government obligations, foreign government securities (if permitted) and
repurchase agreements. Bank obligations include obligations of foreign banks or
foreign branches of U.S. banks. The Adviser may temporarily adopt a defensive
position to reduce changes in the value of the Fund's shares that may
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<PAGE>
result from adverse market, economic, political or other conditions. When the
Adviser pursues a defensive strategy, the Funds may not be following their
stated objectives and may not profit from favorable developments that they would
have otherwise profited from if they were pursuing their normal investment
strategies.
PORTFOLIO TURNOVER: The Funds may buy and sell investments relatively often.
Such a strategy often involves higher expenses, including brokerage commissions,
and may increase the amount of capital gains (and, in particular, short-term
gains) realized by a portfolio. Shareowners must pay tax on such capital gains.
ACCOUNT POLICIES AND FEATURES
THE FOLLOWING INFORMATION IS INTENDED TO HELP YOU UNDERSTAND HOW TO PURCHASE AND
REDEEM SHARES OF THE COMMERCE FUNDS. IT WILL ALSO EXPLAIN THE FEATURES YOU CAN
USE TO CUSTOMIZE YOUR COMMERCE FUNDS ACCOUNT TO MEET YOUR NEEDS.
BUYING SERVICE SHARES
HOW ARE SERVICE SHARES PRICED?
You pay a sales charge (load) to invest in these Funds. Service Shares of the
Funds are purchased at their public offering price (POP), which is a Fund's net
asset value (NAV) per share plus a front-end sales charge. The NAV is generally
calculated as of the close of trading (usually 4:00 p.m. Eastern Time) on the
New York Stock Exchange (NYSE) every day the NYSE is open. Your order will be
priced as the NAV next calculated after your order is accepted by The Commerce
Funds' Transfer Agent plus any applicable sales charge. Therefore, to receive
the NAV of any given day, The Commerce Funds must accept your order by the close
of regular trading on the NYSE that day. If The Commerce Funds receives and
accepts your order after the NYSE closes, you will receive the NAV that is
calculated on the close of trading on the following day. The Commerce Funds are
open for business on the same days as the NYSE. Each Fund's investments are
valued based on market value, or where market quotations are not readily
available, based on fair value as determined in good faith by the Funds' Board
of Trustees. Certain short-term securities may be valued at amortized cost,
which approximates fair value.
Trading in foreign securities is generally completed before the end of regular
trading on the NYSE and may occur on weekends and U.S. holidays and at other
times when the NYSE is closed. As a result, there may be delays in reflecting
changes in the market values of foreign securities in the calculation of the NAV
for any Fund invested in foreign securities. You may not be able to redeem or
purchase shares of an affected Fund during these times.
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<PAGE>
SIDEBAR: HOW TO CALCULATE NAV
NAV = (VALUE OF ASSETS ATTRIBUTABLE TO THE CLASS) -- (LIABILITIES ATTRIBUTABLE
------------------------------------------------------------------------------
TO THE CLASS)
-------------
NUMBER OF OUTSTANDING SHARES OF THE CLASS
SALES CHARGE. The maximum front-end sales charge is 3.50% for each Fund (except
the Short-Term Government Fund, which is 2.00%) and may be less based on the
amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
All Funds Except the Short-Term Government Fund: Maximum Dealer's
As a % of As a % of Reallowance as a %
offering price net asset value of 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** 1.00**
</TABLE>
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
Service Shares; however, a contingent deferred sales charge (CDSC) of 1.00%
will be imposed on the lesser of the POP or the NAV of the shares on the
redemption date for shares redeemed within 18 months after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the POP
on purchases of Service Shares of $1,000,000 or more.
<TABLE>
<CAPTION>
Short-Term Government Fund: Maximum Dealer's
As a % of As a % of Reallowance
offering price net asset value as a % of
price value offering price
Amount of Purchase per share per share per share*
- ------------------ ------------- --------------- ----------------
<S> <C> <C> <C>
Less than $500,000 2.00** 2.04** 1.80***
$500,00 but less than $1,000,000 1.00** 1.01** 0.90***
$1,000,000 or more 0.00** 0.00** 1.00***
</TABLE>
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
Service Shares; however, a CDSC of 1.00% will be imposed on the lesser of
the POP or the NAV of the shares on the redemption date for shares redeemed
within 18 months after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the POP
on Service Shares purchases of $1,000,000 or more.
WHEN THERE IS NO SALES CHARGE: There is no sales charge on Service Shares
purchased by the following types of investors or transactions:
. automatic reinvestments and cross reinvestments of dividends and capital gain
distributions;
. the Exchange Privilege described below;
. the Redemption Reinvestment Privilege described below;
. non-profit organizations, foundations and endowments qualified under Section
501(c)(3) of the Internal Revenue Code (excluding individual tax sheltered
annuities);
. 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;
. registered representatives of dealers who have entered into dealer agreements
with Goldman, Sachs & Co. to the extent permitted by such firms and for their
customers;
. financial planners and their clients; or
. customers of Commerce Bank's Investment Management Group (IMG) who purchase
shares for an account that is outside the IMG relationship.
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<PAGE>
WHAT IS THE MINIMUM INVESTMENT FOR THE FUNDS?
<TABLE>
<CAPTION>
INITIAL Additional
INVESTMENT Investments
---------- -----------
<S> <C> <C>
REGULAR ACCOUNT............................................................ $1,000 $250
AUTOMATIC INVESTMENT ACCOUNT........................................................... $ 500 $50/month
INDIVIDUAL RETIREMENT ACCOUNTS (except SEP & SIMPLE IRAs), Keogh Plans, corporate
retirement plans, public employer deferred plans, profit sharing plans and 401(k) $1,000 $250
plans...
SEP AND SIMPLE IRAS......................................................... $ 50 $50/month
</TABLE>
How Do I Buy Service Shares?
The following section describes features and gives specific instructions on how
to purchase Service Shares directly from The Commerce Funds. The Commerce Funds
has authorized certain dealers to purchase shares of Funds on behalf of their
clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
1. CONSIDER THE FOLLOWING FEATURES TO CUSTOMIZE YOUR ACCOUNT:
. MAKING AUTOMATIC INVESTMENTS: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check
with your financial institution to determine eligibility.
. USING DOLLAR COST AVERAGING: Dollar cost averaging involves investing a
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.
Since dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through dollar cost averaging on your own or through the Automatic Investment
feature described above.
. USING RIGHTS OF ACCUMULATION: When you buy Service Shares of The Commerce
Funds, your current total investment determines the sales charge (loads) you
pay. Since larger investments receive a discounted sales charge, the sales
charge (load) you pay may subsequently be reduced as you build your
investment.
To buy Service Shares at a reduced sales charge under Rights of Accumulation,
you must indicate at the time of purchase that a quantity discount is
applicable. (See section __ of the application.) 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 Service Shares with a current total value of $90,000
that can be traced back to the purchase of the shares with a sales charge. If
you subsequently invest $10,000 in any Fund within The Commerce Funds family
(except the Short-Term Government Fund), you will pay a reduced sales charge
of 2.50% of the POP on the additional purchase.
. USING LETTERS OF INTENT: You may also buy Service 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. Service 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
Service Shares 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.
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<PAGE>
Things to consider when completing a Letter of Intent:
. The Letter of Intent does not bind you to buy or sell shares of the full
amount at the sales charge indicated--you must complete the intended purchase
to obtain the reduced sales charge.
. When you sign a Letter of Intent, The Commerce Funds will hold 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.
. 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. Please reference
on the account application the accounts that are to be combined for this
purpose.
2. CONTACT THE COMMERCE FUNDS TO OPEN YOUR ACCOUNT.
By Mail:
- -------
Complete an account application. Mail the completed application and a check
payable to The Commerce Funds to:
The Commerce Funds
c/o Shareholder Services
P.O. Box 419525
Kansas City, MO 64141-6525
In Person
- ---------
You are welcome to stop by a Commerce Bank office location, where a registered
investment representative can assist you in opening an account.
HOW DO I ADD TO MY COMMERCE FUNDS ACCOUNT?
To add to your original investment, you may either mail your additional
investment to the address above or you may use Electronic Funds Transfer. To
use Electronic Funds Transfer, have your bank send your investment to:
Investors Fiduciary Trust Company, with these instructions:
ABA #101003621
Account #756-044-3
Your name and address
Your social security or tax ID number
Name of the Fund
Class of shares
Your new account number
. 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 must be
drawn only on U.S. banks.
WHAT ARE MY OPTIONS FOR CHANGING MY INVESTMENT WITHIN THE COMMERCE FUNDS?
. CHANGING SHARES FROM FUND TO FUND: As a shareholder, you have the privilege
of exchanging your shares for Service Shares of any other Commerce Fund.
. Exchanges may also be made with the Goldman Sachs Institutional Liquid Assets
Prime Obligations Portfolio ("Money Market Fund"). Goldman Sachs Asset
Management, a separate operating division of Goldman, Sachs & Co., serves as
investment adviser for the Money Market Fund. Service Shares being exchanged
are subject to the minimum initial and subsequent investment requirements as
described above. 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 shareholders except where notice is not
required
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<PAGE>
under the regulations of the Securities and Exchange Commission (SEC). Before
exchanging your shares, you should consider carefully the investment
objectives, policies, risks and expenses of the Fund you are acquiring.
. MAKING AUTOMATIC EXCHANGES: You may request on your account application that
a specified dollar amount of Service Shares be automatically exchanged for
Service Shares of any other Commerce Fund or Institutional Shares of the
Commerce National Tax-Free Intermediate Bond Fund or the Commerce Missouri
Tax-Free Intermediate Bond Fund. These automatic exchanges may be made on any
one day of each month and are subject to the following conditions: 1) the
minimum dollar amount for automatic exchanges must be at least $250 per
month; 2) the value of the account in the originating Fund must be at least
$1,000 after the exchange; 3) the value of the account in the acquired Fund
must equal or exceed the acquired Fund's minimum initial investment
requirement; and 4) the names, addresses and taxpayer identification number
for the shareholder accounts of the exchanged and acquired Funds must be
identical.
. CROSS REINVESTING OF DISTRIBUTIONS: You may invest dividend or capital gain
distributions from one Fund of the Service Class to another Fund of the
Service Class or to a tax-free Fund of the Institutional Class as mentioned
above. If you elect to reinvest the distributions paid by one Fund in shares
of another Fund of The Commerce Funds, the dividends or distributions will be
treated as received by you for tax purposes. Cross reinvestment privileges do
not apply to the Money Market Fund described under "Changing Shares From Fund
to Fund."
REDEEMING SERVICE SHARES
YOU MAY SELL SHARES AT ANY TIME: Your shares will be sold at the NAV next
calculated after your order is accepted by The Commerce Funds' Transfer Agent.
Your order will be processed promptly and you will generally receive the
proceeds within a week. PLEASE NOTE: If the Fund has not yet collected payment
for the shares you are selling, it may delay sending the proceeds for up to 15
business days.
RECEIPT OF PROCEEDS FROM A SALE: Ordinarily, sale proceeds will be disbursed the
next business day following receipt by the Transfer Agent of a properly
completed order. Payment by check will ordinarily be made within seven calendar
days following redemption or you can have your proceeds sent by federal wire to
your financial institution account. Proceeds will normally be wired the business
day after your request to redeem shares is received in good order by the
Transfer Agent. Your request to wire proceeds is subject to the financial
institution's wire charges.
Written requests to sell Service Shares must be signed by each shareholder,
including each joint owner. Certain types of redemption requests will need to
include a SIGNATURE GUARANTEE. You may obtain a SIGNATURE GUARANTEE from most
banks or securities dealers. Guarantees from notaries public will not be
accepted.
HOW DO I REDEEM SHARES FROM MY COMMERCE FUNDS ACCOUNT?
The following section describes how to redeem shares directly through The
Commerce Funds. The Commerce Funds has authorized certain dealers to redeem
shares of Funds on behalf of their clients. Some of the account features and
instructions described in this section may not be applicable to clients of these
dealers.
1. CONSIDER USING AN AUTOMATED REDEMPTION:
. MAKING AUTOMATIC WITHDRAWALS: If you are a shareholder 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
on either the 1st or 15th day of the month; quarterly, semi-annual and annual
withdrawals will be made on either the 1st or 15th day of the month(s)
selected. To participate in this feature, supply the necessary information on
the account application or in a subsequent written request. This feature may
be suspended should the value of your account fall below $500.
2. CONTACT THE COMMERCE FUNDS TO REDEEM SHARES FROM YOUR ACCOUNT.
By Mail:
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<PAGE>
Write a letter to us that gives the following information:
. names of all account owners
. your account number
. the name of the Fund
. the dollar amount you want to redeem
. what we should do with the proceeds
Each owner, including each joint owner should sign the letter. Mail your
request to:
The Commerce Funds
c/o Shareholder Services
P. O. Box 419525
Kansas City, MO 64141-6525
By Telephone--Requesting Proceeds Be Wired:
Call The Commerce Funds with your request. Please see "What Are The Important
Things To Consider When Contacting The Commerce Funds by Telephone" below for
specific instructions. When requesting a redemption by wire you must be
redeeming shares in the amount of $1,000 or more. Also, the Fund must have
your financial institution account information already on file. Proceeds will
be wired directly to this designated account.
By Telephone--Requesting Proceeds Be Sent By Check:
Call The Commerce Funds at 1-800-995-6365 (8am4pm CST) with your request.
Please see "What Are The Important Things to Consider When Contacting The
Commerce Funds by Telephone" below for specific instructions. The check will
be made payable to the shareholder(s) of record and sent to the address listed
on your account.
In Person:
You are welcome to stop by a Commerce Bank office location, where a registered
investment representative can assist you in redeeming shares from your
account.
WHAT ARE THE IMPORTANT THINGS TO CONSIDER WHEN CONTACTING THE COMMERCE FUNDS BY
TELEPHONE?
You may call us at 1-800-995-6365 (8 a.m.4 p.m. CST) to explain what you want to
do. To make additions by phone or request electronic transfers or request
redemptions, we need your prior written authorization. If you did not check
the box in Section 8 of your original account application, you must send us a
letter that gives us this authorization.
Telephone purchases will be made at the NAV next determined after the Transfer
Agent receives payment for the transaction. If you should experience
difficulty in redeeming your shares by telephone (e.g., because of unusual
market activity), we urge you to consider redeeming your shares by mail.
You should note that the Transfer Agent may act on a telephone purchase or
redemption request from any person representing himself 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 on telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine,
The Commerce Funds will use all procedures considered reasonable; the Funds
may be liable for any losses if they fail to do so.
GENERAL POLICIES
. DIVIDENDS AND DISTRIBUTIONS POLICY: As a Fund shareholder, you are entitled
to any dividends and distributions from net investment income and net
realized capital gains. You can choose one of the following distribution
options for dividends and capital gains:
(1) reinvest all dividend and capital gain distributions in additional
Service Shares,
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Service Shares,
(3) receive all dividend and capital gain distributions in cash, or
(4) have all dividend and capital gain distributions deposited directly
into your designated account at a financial institution.
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<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional Service Shares of the same
Fund. For your protection, if you elect to have distributions mailed to you
and these cannot be delivered, they will be reinvested in additional Service
Shares of the same Fund. To change your distribution option, contact The
Commerce Funds at 1-800-995-6365 (8 a.m. to 4 p.m. CST). The change will
become effective after it is received and processed by the Transfer Agent.
<TABLE>
<CAPTION>
MONTHLY QUARTERLY ANNUAL NET REALIZED CAPITAL
FUND DIVIDENDS* DIVIDENDS** DIVIDENDS*** GAINS ****
- -------------------------- ---------- ----------- ------------ --------------------
<S> <C> <C> <C> <C>
Growth and Income Fund X X
Growth Fund X X
MidCap Fund X X
International Equity Fund X X
Balanced Fund X X
Short-Term Government Fund
X X
Bond Fund X X
</TABLE>
*Monthly dividends are declared daily but are only distributed on or about the
last business day of the month.
**Quarterly dividends are both declared and paid on the calendar quarter months.
***Annual dividends are both declared and paid in December.
****Each Fund declares and distributes net realized capital gains annually
(December).
THE COMMERCE FUNDS RESERVES THE RIGHT TO:
. Redeem your account involuntarily if, after 60 days' written notice, your
account's value remains below a $500 minimum balance. We will not redeem your
account involuntarily if the value falls below the minimum balance solely as
a result of market conditions. Retirement accounts and certain other accounts
will not be subject to automatic liquidation.
. Suspend or delay the payment of redemption proceeds when the NYSE is closed
(other than for customary weekend and holiday closings), during periods when
trading on the NYSE is restricted as determined by the SE C, during any
emergency as determined by the Securities and Exchange Commission (SEC) or
during other periods of unusual market conditions.
. Without notice, stop offering shares of a Fund, reject any purchase order
(including exchanges), or bar an investor who is engaging in excessive
trading from purchasing or exchanging shares of a Fund.
ARRANGEMENTS WITH CERTAIN INSTITUTIONS
Financial institutions or their designees that have entered into agreements with
The Commerce Funds or its agent may enter confirmed purchase orders on behalf of
clients and customers, with payment to follow no later than a Fund's pricing on
the following business day. If payment is not received by the Fund's Transfer
Agent by such time, the financial institution could be held liable for resulting
fees or losses. The Commerce Funds may be deemed to have received a purchase or
redemption order when a financial institution or its designee accepts the order.
Orders received by the Fund in proper form will be priced at the Fund's NAV next
computed after they are accepted by the financial institution or its designee.
Financial institutions are responsible for their customers and The Commerce
Funds for timely transmission of all subscription and redemption requests,
investment information, documentation and money.
BUSINESS OF THE COMMERCE FUNDS
SHAREHOLDER SERVICING
The Commerce Funds have adopted a distribution plan under Rule 12b-1 that
permits each Fund to pay up to 0.25% annually of their average daily net assets
attributable to the Service Class Shares. The Funds also have adopted a
Shareholder Administrative Services Plan that permits each Fund to pay up to
0.25% of average daily net assets to third parties for providing shareholder
services to Commerce Fund shareholders. Because these fees are paid out of each
Fund's assets, over time they will increase the cost of your investment and may
cost you more than paying other types of sales charges.
Certain financial institutions may charge their customers account fees for
purchasing or redeeming shares of The Commerce Funds. These institutions may
provide shareholder services to their clients that are not available to a
shareholder dealing directly with The Commerce Funds. Each institution is
responsible for notifying its customers regarding its fees and additional or
changed purchase or redemption terms. You should contact your financial
institution for this information.
The Distributor and its affiliates may, out of its administration fee or other
resources, pay a fee of up to 0.25% of the amount invested or additional
incentives to dealers who initiate and are responsible for purchases of shares
of The Commerce Funds. In
-34-
<PAGE>
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. Subject to NASD regulation, 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.
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 of purchases and
redemptions.
TAX INFORMATION
The following is a brief summary of the federal income tax consequences of
investing in The Commerce Funds. You may also have to pay state and local taxes
on your investment, and you should always consult with your tax adviser for
specific guidance on your investment in The Commerce Funds.
TAXES ON DISTRIBUTIONS
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Fund held the relevant assets). You will be subject to
income tax on these distributions regardless of whether they are paid in cash or
reinvested in additional shares. Once a year, The Commerce Funds will send you
a statement showing the types and total amount of distributions you received
during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received, even
though, as an economic matter, the distribution simply constitutes a return of
your capital. This is known as "buying into a dividend."
TAXES ON EXCHANGES AND REDEMPTIONS
When you redeem or exchange shares in any Fund, you may recognize a gain or loss
for income tax purposes. This gain or loss will be based on the difference
between your tax basis in the shares and the amount you receive for them. To
aid in computing your tax basis, you generally should retain your account
statements for the periods during which you held shares. Any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends that were received with respect to
the shares. The one major exception to these tax rules is that distributions
on, and sales, exchanges and redemptions of, shares held in an IRA (or other tax
qualified plan) will not be currently taxable.
BACKUP WITHHOLDING
By law, The Commerce Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
INTERNATIONAL EQUITY FUND
It is expected that the International Equity Fund will be subject to foreign
withholding taxes with respect to dividends or interest received from sources in
foreign countries. The International Equity Fund may elect to treat a
proportionate amount of such taxes as constituting a distribution to each
shareholder, which would allow each shareholder either (1) to credit such
proportionate amount of taxes against U.S. federal income tax liability or (2)
to take such amount as an itemized deduction.
SERVICE PROVIDERS
-----------------
INVESTMENT ADVISER: COMMERCE BANK, N.A. (THE "ADVISER")
Commerce Bank, N.A. serves as Adviser for the Funds, selecting investments and
making purchases and sale orders for securities in each Fund's portfolio.
Commerce Bank with offices at 8000 Forsyth Boulevard, St. Louis, Missouri 63105
and 922 Walnut Street, Kansas City, Missouri 64106, is a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank has
provided investment management services to The Commerce Funds since 1994, to
private and public pension funds, endowments and foundations since 1946 and to
individuals since 1906. As of December 31, 1998, the Adviser and its affiliates
had approximately $________ billion in assets under management.
-35-
<PAGE>
The Adviser receives a fee for the advisory services provided and expenses
assumed under the Advisory Agreement. During the last fiscal year, the Funds
paid the Adviser the following fees, calculated as a percentage of the Funds'
average daily net assets:
<TABLE>
<CAPTION>
CONTRACTUAL ANNUAL RATE ACTUAL RATE PAID IN
------------------------ FISCAL YEAR 1998
------------------------
<S> <C> <C>
Growth and Income Fund.................................................... 0.75% 0.75%
Growth Fund............................................................... 0.75% 0.75%
MidCap Fund............................................................... 0.75% 0.75%
International Equity Fund................................................. 1.50% 0.99%
Balanced Fund............................................................. 1.00% 0.50%
Short-Term Government Fund................................................ 0.50% 0.30%
Bond Fund................................................................. 0.50% 0.50%
</TABLE>
Any difference between the contractual fees and the actual fees paid by the
Funds reflects that the Adviser did not charge the full amount of the fees to
which it would have been entitled. The Adviser may discontinue or modify its
voluntary waiver in the future at its discretion.
FUND MANAGERS:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PERSON FUND(S) EXPERIENCE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John Bartlett, CFA, Vice President Growth and Income Joined Commerce Bank in 1991
Fund manager since inception
- ------------------------------------------------------------------------------------------------------------------------
Scott M. Colbert, CFA, Vice President Short-Term Government, Bond, Fixed- Joined Commerce Bank in 1993
Income portion of Balanced Fund manager since inception
12 years of experience
- ------------------------------------------------------------------------------------------------------------------------
Paul D. Cox, CFA, Vice President MidCap Joined Commerce Bank in 1989
18 years of experience
Fund manager since inception
- ------------------------------------------------------------------------------------------------------------------------
Joseph C. Williams III, CFA, Vice Growth, equity portion of Balanced Joined Commerce Bank in 1975
President Fund manager since inception
23 years of experience
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUB-ADVISER: ROWE PRICE-FLEMING INTERNATIONAL, INC. ("PRICE-FLEMING" OR THE
"SUB-ADVISER")
Rowe Price-Fleming International, Inc., a joint venture established in 1979
between T. Rowe Price Associates and the London-based Fleming Group, serves as
Sub-Adviser to the International Equity Fund. Price-Fleming's U.S. office is
located at 100 East Pratt Street, Baltimore, Maryland 21202. As of December 31,
1998, Price-Fleming managed approximately $___ billion in investments for
individual and institutional accounts.
Martin G. Wade manages the Fund day-to-day and has been chairman of its
Investment Advisory Committee since the Fund's inception. He joined Price-
Fleming in 1979.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Adviser will pay the Sub-Adviser a monthly management fee at an
annual rate of 0.75% of the first $20 million of the Fund's 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. When the Fund's assets reach $200
million, the Sub-Adviser has agreed to waive fees in excess of 0.50%, on an
annualized basis, on the average daily net assets of the Fund. For the fiscal
year ended October 31, 1998, Price-Fleming received advisory fees at the
effective annual rate of 0.__% of the International Equity Fund's average daily
net assets.
-36-
<PAGE>
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 10004. GSAM is a separate operating division of
Goldman, Sachs & Co., the Distributor of the Funds.
DISTRIBUTOR: GOLDMAN, SACHS & CO. ("GOLDMAN" OR THE "DISTRIBUTOR")
Shares of each Fund are sold on a continuous basis by Goldman as Distributor.
Goldman is located at 85 Broad Street, New York, New York 10004.
TRANSFER AGENT: STATE STREET BANK AND TRUST COMPANY ("State Street" or THE
"TRANSFER AGENT")
State Street has delegated its responsibilities as Transfer Agent to its
indirect subsidiary, National Financial Data Services, Inc. ("NFDS"). State
Street is located at 225 Franklin Street, Boston, Massachusetts 02110. NFDS is
located at 1004 Baltimore Street, Kansas City, Missouri 64105.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY (THE "CUSTODIAN")
State Street also serves as the Custodian of each of the Funds.
-37-
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
If you would like more information about The Commerce Funds, you may request
the following documents:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains additional information
about the Funds and is incorporated by reference into this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports contain additional information about
the Funds' investments. The annual report also discusses market conditions and
investment strategies that significantly affected the Funds' performance during
their last fiscal year.
To make shareholder inquiries or to receive free copies of the SAI and the
annual and semi-annual reports, contact The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525
(toll-free) 1-800-995-6365
You may also receive information about The Commerce Funds by:
Contacting a registered investment representative at selected
broker/dealers or Commerce Bank locations (call 1-800-995-6365 if you
need assistance in contacting your representative); or
Calling The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
Accessing The Commerce Funds' Website at WWW.COMMERCEFUNDS.COM. The
Commerce Funds' website contains performance information about each of
the Funds as of the most recent calendar quarter. It also contains daily
NAV prices for the Funds and occasionally will have financial market
commentary from the Investment Adviser. We invite you to visit the site
frequently to get the latest information on The Commerce Funds.
You can review, for a fee, the reports of the Funds and the SAI by writing to
the SEC's Public Reference Section, Washington, D.C. 20459-6009, or by calling
the SEC at 1-900-SEC-0330. You can get copies of this information for free on
the SEC's Internet site at http://www.sec.gov.
The Funds' investment company registration number is 811-8598.
-38-
<PAGE>
LOGO
THE GROWTH AND INCOME FUND
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
THE BALANCED FUND
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE NATIONAL TAX-FREE INTERMEDIATE BOND FUND
THE MISSOURI TAX-FREE INTERMEDIATE BOND FUND
March 1, 1999
Institutional Shares
Prospectus
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
<PAGE>
TABLE OF CONTENTS
PAGE
OVERVIEW OF EACH FUND.......................................... 2
GROWTH AND INCOME FUND.................................... 2
GROWTH FUND............................................... 4
MIDCAP FUND............................................... 7
INTERNATIONAL EQUITY FUND................................. 9
BALANCED FUND............................................. 13
SHORT-TERM GOVERNMENT FUND................................ 16
BOND FUND................................................. 20
NATIONAL TAX-FREE INTERMEDIATE BOND FUND.................. 23
MISSOURI TAX-FREE INTERMEDIATE BOND FUND.................. 27
INVESTMENT SECURITIES AND PRACTICES............................ 31
ACCOUNT POLICIES AND FEATURES.................................. 39
BUYING INSTITUTIONAL SHARES............................... 39
REDEEMING INSTITUTIONAL SHARES............................ 41
GENERAL POLICIES.......................................... 43
TAX INFORMATION................................................ 45
SERVICE PROVIDERS.............................................. 46
HOW CAN I CONTACT THE COMMERCE FUNDS?.......................... 49
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds consists of nine investment portfolios, each of which has a
separate pool of assets with separate investment objectives and policies. This
prospectus offers Institutional Shares of all nine investment portfolios.
THE GROWTH AND INCOME FUND seeks both capital appreciation and current income.
THE GROWTH FUND seeks capital appreciation and, secondarily, current income and
dividend growth potential.
THE MIDCAP FUND seeks long-term capital appreciation.
THE INTERNATIONAL EQUITY FUND seeks total return with an emphasis on growth of
capital.
THE BALANCED FUND seeks total return through a balance of capital appreciation
and current income consistent with preservation of capital.
THE SHORT-TERM GOVERNMENT FUND seeks current income consistent with preservation
of principal.
THE BOND FUND seeks total return through current income and, secondarily,
capital appreciation.
THE NATIONAL TAX-FREE INTERMEDIATE BOND FUND seeks current income exempt from
federal income tax as is consistent with the preservation of capital.
THE MISSOURI TAX-FREE INTERMEDIATE BOND FUND seeks current income exempt from
federal and, to the extent possible, from Missouri income taxes, as is
consistent with the preservation of capital.
{Sidebar: What These Funds Are: These Funds are mutual funds. A mutual fund is a
-------
pooled investment that gives you an opportunity to participate in financial
markets. Each Fund is professionally managed. Each Fund has stated goals that it
attempts to reach. However, as with all mutual funds, none of these Funds can
offer guaranteed results. You could lose money in these Funds, but you also have
the potential to make money.}
{What These Funds Are Not: An investment in any of these Funds is not a bank
deposit. Your investment is not insured or guaranteed by the Federal Deposit
Insurance Corporation (FDIC) or any other agency of the government.}
<PAGE>
OVERVIEW OF EACH FUND
GROWTH AND INCOME FUND
INVESTMENT OBJECTIVES
. Seeks capital appreciation and current income.
PRIMARY INVESTMENT STRATEGIES
. Invests, under normal market conditions, at least 65% of total assets in
equity securities, primarily common stock.
. Seeks to purchase stocks that represent value relative to their current
price.
. Generally purchases common stock of companies with market capitalizations
over $500 million. The average capitalization of companies whose stocks
were held by the Fund was $__ as of December 31, 1998. This compares to an
average capitalization of $__ for the S&P 500 Index on the same date.
. Anticipates using 60 to 80 stocks to achieve a diversified portfolio.
. Uses both the Russell 1000 Value Index and the S&P 500 as benchmarks for
comparison. The Russell 1000 is used for comparison on an annual basis and
the S&P 500 is used for comparison over a complete market cycle (typically
5-7 years).
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or
down, which means that you could lose money. The types of stocks held by
the Fund may not perform as well as other types of stocks.
. MARKET RISK: General economic conditions and/or the activities of
individual companies may cause the value of the securities in the Fund to
increase or decrease. The Fund's net asset value may fluctuate with
movements in the equity market.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank, N.A. (Commerce
Bank), and is not insured or guaranteed by the FDIC or any other government
agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Growth and Income Fund and the risks associated with
those practices.
SIDEBAR: John Bartlett, CFA and Portfolio Manager
. Joined Commerce Bank in 1991
. Fund manager since Fund inception
. 21 years of experience
GROWTH AND INCOME FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception (for each
complete calendar year of the Fund's existence). The table compares the Fund's
performance over time to that of broad-based securities market indices. Both
charts assume reinvestment of dividends and distributions. As with all mutual
funds, how this Fund performed in the past is not a prediction of how it will
perform in the future. The Fund's performance reflects expense limitations in
effect. If expense limitations were not in place, the Fund's performance would
have been reduced.
-2-
<PAGE>
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ---------------------------------
{chart here}
1998:
- ---------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- ------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (3/3/97)
- ------------------------------------------------------------------------------
Growth and Income Fund % N/A %
S&P 500 Index* % N/A %
Russell 1000 Value Index**
- ------------------------------------------------------------------------------
*The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies.
**The Russell 1000 Value Index measures the performance of the 1,000 largest
U.S. companies based on total market capitalization, with lower price-to-book
ratios and lower forecasted growth values. The Index figures do not reflect any
fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
INSTITUTIONAL SHARES
--------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT) NONE
Maximum Sales Charge (load) Imposed on Purchases (as a percentage
of offering price)..................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions........ None
Maximum Deferred Sales Charge (load) Imposed on Redemptions............ None
Redemption Fees........................................................ None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................ 0.__%
Other Expenses(1)...................................................... 0. %
Total Annual Fund Operating Expenses(2)................................. ====%
</TABLE>
(1) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(2) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE GROWTH AND INCOME FUND TO MAINTAIN TOTAL ANNUAL FUND
OPERATING EXPENSES OF NOT MORE THAN 1.20% OF AVERAGE DAILY NET ASSETS. THE
ADVISER RESERVES THE RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY
TIME.
-3-
<PAGE>
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
GROWTH AND INCOME FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the time
periods stated. Shares of this Fund were first offered on March 3, 1997. The
total return figures show how much you would have earned (or lost) on an
investment in the Fund during each time period, assuming you had reinvested all
dividends and distributions. Some of the information reflects financial results
for a single Fund share. The information has been audited by KPMG Peat Marwick
LLP, the Funds' independent accountants. Their report, along with the Fund's
financial statements, is included in the Funds' Statement of Additional
Information (available upon request).
<TABLE>
<CAPTION>
3/3/97(a)
YEAR ENDED THROUGH
INSTITUTIONAL SHARES 10/31/98 10/31/97
-------------------- ---------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.15
Net realized and unrealized gain(loss) on investments(b) $ 3.80
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (0.13)
From net realized gain on investments $ --
NET ASSET VALUE, END OF PERIOD $ 21.82
TOTAL RETURN(c) 22%
NET ASSETS AT END OF PERIOD (IN 000'S) $45,173
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.20%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.30%(d)
RATIOS ASSUMING NO EXPENSE REIMBURSEMENTS:
Ratio of net expenses to average net assets 2.02%(d)
Ratio of net investment loss to average net assets 0.48%(d)
PORTFOLIO TURNOVER RATE 5%
</TABLE>
- ----------------------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of the
investment at the net asset value at the end of the period.
(d) Annualized.
GROWTH FUND
INVESTMENT OBJECTIVE
. Seeks capital appreciation and, secondarily, current income and dividend
growth potential.
PRIMARY INVESTMENT STRATEGIES
. Invests principally in stocks of companies that have shown and are expected
to show above-average growth in earnings and return on equity.
. Generally purchases common stock of companies with market capitalizations
over $500 million. The average capitalization of companies whose stocks were
held by the Fund as of December 31, 1998 was $__ billion.
-4-
<PAGE>
. Invests, under normal market conditions, at least 65% of total assets in
equity securities, primarily common stock.
. Anticipates using 45 to 55 stocks to achieve a diversified portfolio.
. Uses the S&P 500 Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or
down, which means that you could lose money. The types of stocks held by the
Fund may not perform as well as other types of stocks.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR Please see the table on p.__ for more detailed information about the
investment practices of the Growth Fund and the risks associated with those
practices.
Sidebar: Fund Manager: Joseph C. Williams III, CFA and Portfolio Manager
. Joined Commerce Bank in 1975
. Fund manager since Fund inception
. 23 years of experience
GROWTH FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception. The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- --------------------------------
{chart here}
1998
1997
1996
1995
- --------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- ----------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- ----------------------------------------------------------------------------
Growth Fund % % %
S&P 500 Index* % % %
- ----------------------------------------------------------------------------
*The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies. The Index figures do not reflect any fees or expenses.
-5-
<PAGE>
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
GROWTH FUND
INSTITUTIONAL SHARES
--------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)............................................................ None
Maximum Sales Charge (load) Imposed on Reinvested Distributions............ None
Maximum Deferred Sales Charge (load) Imposed on Redemptions................ None
Redemption Fees ........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees............................................................ 0.___%
Other Expenses(1).......................................................... 0. %
-----
Total Annual Fund Operating Expenses(2)................................... %
=====
</TABLE>
(1) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(2) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE GROWTH FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING
EXPENSES OF NOT MORE THAN 1.13% OF AVERAGE DAILY NET ASSETS. THE ADVISER
RESERVES THE RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY TIME.
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
GROWTH FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
-6-
<PAGE>
<TABLE>
<CAPTION>
Year Ended 10/31 12/12/94
---------------- (Inception)
Institutional Shares 1998 1997 1996 TO 10/31/95
-------------------- ---- ---- ---- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 28.95 $ 24.68 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.19 $ 0.19 $ 0.15
Net realized and unrealized gain on investments(a) $ 7.51 $ 5.40 $ 6.68
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (0.19) $ (0.19) $ (0.15)
From net realized gain on investments $ (1.92) $ (1.13) --
NET ASSET VALUE, END OF PERIOD $ 34.54 $ 28.95 $ 24.68
TOTAL RETURN(b) 28.12% 23.43% 38.06%
NET ASSETS AT END OF PERIOD (IN 000'S) $343,773 $208,908 $141,735
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.11% 1.08% 1.11%(C)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 0.60% 0.72% 0.81%(C)
PORTFOLIO TURNOVER RATE 32% 36% 33%
</TABLE>
- -----------------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
MIDCAP FUND
INVESTMENT OBJECTIVE
. Seeks long-term capital appreciation.
PRIMARY INVESTMENT STRATEGIES
. Invests in stocks of companies with medium-sized market capitalizations (less
than $10 billion) and the potential for above-average earnings growth.
. Invests, under normal market conditions, at least 65% of its total assets in
equity securities, primarily common stocks.
. Uses the S&P 400 Mid-Cap Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. SMALL COMPANY STOCK RISK: Investing in securities of smaller companies may be
riskier than investing in larger, more established companies. Smaller
companies are more vulnerable to adverse developments because of more limited
product lines, markets or financial resources. Also, smaller company stocks
may trade less often and in limited volume compared to stocks trading on a
national securities exchange. Security prices of small company stocks may be
more volatile than the prices of larger company stocks. As a result, this
Fund's net asset value may be subject to rapid and substantial changes if it
invests in small company stocks.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: FUND MANAGER: Paul D. Cox, CFA and Portfolio Manager
. Joined the Investment Management Group of Commerce Bank in 1989
. Fund manager since Fund inception
. 18 years of experience
-7-
<PAGE>
SIDEBAR: Please see the table on p.__ for more detailed information about the
investment practices of the MidCap Fund and the risks associated with those
practices.
MIDCAP FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception. The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- -----------------------------------
{chart goes here}
1998
1997
1996
1995
- -----------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- --------------------------------------------------------------------------------
MidCap Fund % % %
S&P 400 Mid-Cap Index* % % %
- --------------------------------------------------------------------------------
*The S&P 400 Mid-Cap Index is a capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market. The Index figures
do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
MidCap Fund (1)
Institutional Shares
--------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)........................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions............... None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees........................................................... 0.__%
Other Expenses(2)......................................................... 0. %
-----
Total Annual Fund Operating Expenses...................................... %
=====
</TABLE>
(1) Formerly the Aggressive Growth Fund.
(2) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
-8-
<PAGE>
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
MIDCAP FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
<TABLE>
<CAPTION>
12/12/94
YEAR ENDED 10/31 (INCEPTION)
INSTITUTIONAL SHARES 1998 1997 1996 TO 10/31/95
-------------------- ---- ---- ---- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 28.06 $ 25.30 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income loss $ (0.13) $ (0.07) $ (0.04)
Net realized and unrealized gain on investments(a) $ 5.38 $ 3.51 $ 7.34
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- --
From net realized gain on investments $ (0.29) $ (0.68) --
NET ASSET VALUE, END OF PERIOD $ 33.02 $ 28.06 $ 25.30
TOTAL RETURN(b) 18.88% 13.78% 40.56%
NET ASSETS AT END OF PERIOD (IN 000'S) $112,442 $74,641 $ 41,665
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.23% 1.22% 1.32%(c)
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS (0.61)% (0.37)% (0.29)%(c)
PORTFOLIO TURNOVER RATE 89% 71% 59%
</TABLE>
- ------------------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE
. Seeks total return with an emphasis on capital growth.
PRIMARY INVESTMENT STRATEGIES
. Invests at least 65% of total assets in common stocks of established
companies that conduct their principal activities or are located outside the
United States and whose securities are traded in foreign markets.
. Invests, under normal market conditions, in equity securities of companies
in at least three different foreign countries. Geographic diversification
will be wide and will include both developed and emerging markets.
. Focuses on purchasing securities of large and, to a lesser extent, medium-
sized companies, although stocks may be purchased without regard to a
company's market capitalization.
-9-
<PAGE>
. May also invest in other types of securities, including convertibles,
warrants, preferred stocks, corporate and government debt, futures, and
options.
. May invest freely in securities of foreign issuers in the form of sponsored
and unsponsored American Depository Receipts and European Depository
Receipts.
. Uses the Morgan Stanley Capital International Europe, Australia and Far East
(MSCI EAFE) Index as a benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or
down, which means that you could lose money. International funds, in
general, have volatile net asset values. The Fund may not be an appropriate
investment if you cannot bear financially the loss of at least a significant
portion of your investment.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. MANAGEMENT RISK: A strategy used by the Sub-Adviser may fail to produce the
intended results.
. CURRENCY RISK: Fluctuations in the exchange rates between the U.S. dollar
and foreign currencies may negatively affect an investment. A decline in the
value of a foreign currency versus the U.S. dollar reduces the dollar value
of securities denominated in that currency.
. FOREIGN RISK: Foreign securities can be riskier and more volatile than U.S.
securities. Adverse political, social and economic developments in foreign
countries or changes in the value of foreign currency can make it harder for
the portfolio to sell its securities and could reduce the value of your
shares. Changes in or the lack of tax, accounting and regulatory standards
and difficulties in obtaining information about foreign companies can
negatively affect investment decisions. Also, the costs of investing abroad
are usually higher than those of investing within the U.S.
. EMERGING MARKET RISK: To the extent that the Fund has investments in
emerging-market countries, it will be more subject to abrupt and severe
price declines. Investments in these countries are much riskier than those
in mature countries.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: The International Equity Fund is sub-advised by Rowe Price-Fleming
International, Inc. Martin G. Wade manages the Fund on a day-to-day basis. Mr.
Wade has 29 years of experience with Fleming Group in research, client service
and investment management.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the International Equity Fund and the risks associated
with those practices.
INTERNATIONAL EQUITY FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception. The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ---------------------------------
{chart goes here}
1998
1997
1996
1995
- ---------------------------------
-10-
<PAGE>
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- -------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- -------------------------------------------------------------------------------
International Equity Fund % % %
MSCI EAFE Index* % % %
- -------------------------------------------------------------------------------
*The MSCI EAFE Index is an unmanaged index composed of a sample of companies
representative of the market structure of 20 European and Pacific Basin
countries. The Index figures do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
INSTITUTIONAL SHARES
-------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)........................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions............... None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(1)........................................................ .__%
Other Expenses(2)......................................................... 0.__%
Total Annual Fund Operating Expenses(3)................................... .__%
----
====
</TABLE>
(1) The Adviser has voluntarily agreed to reduce its management fees by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(2) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(3) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE INTERNATIONAL EQUITY FUND TO MAINTAIN TOTAL ANNUAL FUND
OPERATING EXPENSES OF NOT MORE THAN 1.72% OF AVERAGE DAILY NET ASSETS. THE
ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE
REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN
THOSE THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE
ADVISORY FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A
RESULT OF THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES"
AND "TOTAL ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES .__%
-11-
<PAGE>
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
<TABLE>
<CAPTION>
Year Ended 10/31 12/12/94
---------------- (INCEPTION)
Institutional Shares 1998 1997 1996 TO 10/31/95
-------------------- ---- ---- ----- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.96 $ 18.64 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.06 $ 0.11 $ 0.12
Net realized and unrealized gain (loss) on investments $ 1.42 $ 2.35 $ 0.55
and foreign currency related
transactions(a)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (0.10) $ (0.07) $ (0.03)
From net realized gain on investments $ (0.24) $ (0.07) --
NET ASSET VALUE, END OF PERIOD $ 22.10 $ 20.96 $ 18.64
TOTAL RETURN(b) 7.15% 13.25% 3.73%
NET ASSETS AT END OF PERIOD (IN 000'S) $78,273 $51,589 $21,014
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.72% 1.72% 1.81%(C)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 0.35% 0.74% 1.06%(C)
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES OR
EXPENSE REIMBURSEMENTS:
Ratio of expenses to average net assets 2.23% 2.64% 3.50%(c)
Ratio of net investment income (loss) to average (0.16)% (0.18)% (0.63)%(c)
net assets
Portfolio turnover rate 22% 21% 25%
</TABLE>
- -------------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions and a complete redemption of
the investment at the net asset value at the end of the period.
(c) Annualized.
BALANCED FUND
INVESTMENT OBJECTIVE
. Seek total return through a balance of capital appreciation and current
income, consistent with perservation of capital.
-12-
<PAGE>
PRIMARY INVESTMENT STRATEGIES
The Fund pursues this objective through investment in stocks, bonds, and cash
equivalents. The actual mix of equity and fixed-income securities will vary;
however, under normal conditions, the Fund intends to invest 60% of its total
assets in stocks and 40% in bonds. Investment in stocks could range as high as
75% of the total assets and as low as 42%.
Equity Investment Strategies
. Normally invests the equity portion in common stocks, preferred stocks, and
securities or bonds that are convertible into common or preferred stocks.
. Normally purchases stocks of companies with market capitalizations of over
$200 million. The average capitalization of companies whose stock were held
by the Fund as of December 31, 1998 was $__.
Fixed-Income Investment Strategies
. Normally invests the fixed-income portion of the Fund in investment-grade
corporate bonds, U.S. Government obligations, mortgage-backed securities and
asset-backed securities. Up to 65% of the fixed-income portfolio may be
invested in mortgage-backed and asset-backed securities.
. 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 nationally recognized statistical rating
organization.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities in
the Fund can be expected to go up when interest rates go down and to go down
when interest rates go up. Longer-term bonds and zero coupon bonds are
usually more sensitive to interest rate changes than shorter-term bonds. In
general, the longer the average maturity of bonds in the Fund, the more the
Fund's share price will go up or down in response to interest rate changes.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. The Fund
could lose money in either of these instances.
. ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary.
. MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities may be subject to special risks, including price
volatility, liquidity, and enhanced sensitivity to interest rates.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by a Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, a Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and a
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Fund Managers: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
-13-
<PAGE>
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
Joseph C. Williams III, CFA and Portfolio Manager
. Joined Commerce Bank in 1975
. Fund manager since Fund inception
. 23 years of experience
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Balanced Fund and the risks associated with those
practices.
BALANCED FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception. The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- --------------------------------
{chart goes here}
1998
1997
1996
1995
- --------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- -------------------------------------------------------------------------------
Balanced Fund % % %
60% S&P 500/40% Lehman Bros. % % %
Aggregate Bond Index*
- --------------------------------------------------------------------------------
*The 60% S&P 500/40% Lehman Brothers Aggregate Bond Index is a composite of the
Standard & Poor's 500 Index (with income) (weighted at 60%), an unmanaged index
that emphasizes large capitalization companies, and the Lehman Brothers
Aggregate Bond Index (weighted at 40%), a broad market-weighted index comprised
of three major classes of investment-grade bonds with maturities greater than
one year. The Index figures do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
-14-
<PAGE>
<TABLE>
<CAPTION>
BALANCED FUND
INSTITUTIONAL SHARES
------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)............................................................. None
Maximum Sales Charge (load) Imposed on Reinvested Distributions............. None
Maximum Deferred Sales Charge (load) Imposed on Redemptions................. None
Redemption Fees............................................................. None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(1).......................................................... .__%
Other Expenses(2)........................................................... 0.__%
----
Total Annual Fund Operating Expenses(3)..................................... .__%
====
</TABLE>
(1) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(2) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(3) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE BALANCED FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING
EXPENSES OF NOT MORE THAN 1.13% OF AVERAGE DAILY NET ASSETS. THE ADVISER
RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE REIMBURSEMENT
AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN THOSE THAT THE FUND
WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE ADVISORY FEE WAIVER AND
EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A RESULT OF THE EXPENSE
LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES" AND "TOTAL ANNUAL FUND
OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES .__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
BALANCED FUND FINANCIAL HIGHLIGHTS
`The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
-15-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED 10/31 12/12/94
---------------- (INCEPTION)
INSTITUTIONAL SHARES 1998 1997 1996 TO 10/31/95
-------------------- ---- ---- ---- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 24.00 $ 22.10 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.59 0.54 0.59
Net realized and unrealized gain on investments(a) 3.93 2.56 4.06
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.59) (0.54) (0.55)
From net realized gain on investments (1.26) (0.66) --
NET ASSET VALUE, END OF PERIOD $ 26.67 $ 24.00 $ 22.10
TOTAL RETURN(b) 19.92% 14.45% 26.14%
NET ASSETS AT END OF PERIOD (IN 000'S) $105,782 $69,880 $48,329
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 1.13% 1.13% 1.13%(c)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.44% 2.47% 3.28%(c)
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES OR
EXPENSE REIMBURSEMENTS:
Ratio of expenses to average net assets 1.53% 1.45% 1.45%(c)
Ratio of net investment income to average net assets 2.04% 2.15% 2.96%(c)
PORTFOLIO TURNOVER RATE 31% 58% 59%
</TABLE>
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Annualized.
FIXED-INCOME APPROACH
The Commerce Fixed-Income Funds primarily invest in investment-grade securities
managed with the goal of providing you current income. Except for the Missouri
Tax-Free Intermediate Bond Fund, fixed-income investments are managed in a
diversified manner across all sectors of the bond market. The Adviser uses three
primary strategies to try to increase the value of the Funds:
. Actively managing maturities to take advantage of changes in interest rates.
. Placing more or less emphasis in different sectors of the market (government,
mortgage, corporate and asset-backed) depending on which sectors have the
most attractive-looking relative value.
. Using internal and external models for credit and pre-payment risks to
evaluate specific purchases of securities.
SHORT-TERM GOVERNMENT FUND
INVESTMENT OBJECTIVE: Seeks current income consistent with preservation of
principal.
PRIMARY INVESTMENT STRATEGIES
. Invests at least 65% of the Fund's total assets in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(including U.S. Treasury bills, notes and bonds) and government mortgage-
backed securities (pools of mortgage loans sold to investors by various
governmental agencies), that have average lives or remaining maturities of
five years or less.
. May also purchase other mortgage-backed securities, which are sold to
investors by private issuers.
. The dollar-weighted average maturity of the Fund's investments will not
exceed three years.
. Uses the Salomon Brothers 1-5 Year Treasury/Government Sponsored Index as a
benchmark for comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities in
the Fund can be expected to go up when interest rates go down and to go down
when interest rates go up. Longer-term bonds and zero coupon
-16-
<PAGE>
bonds are usually more sensitive to interest rate changes than shorter-term
bonds. In general, the longer the average maturity of bonds in the Fund, the
more the Fund's share price will go up or down in response to interest rate
changes.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. CREDIT RISK: An issuer of fixed-income securities could default on its
obligation to pay interest and repay principal. A bond's credit rating could
be downgraded. A Fund could lose money in either of these instances.
. MANAGEMENT RISK: A strategy used by the Adviser could fail to produce the
intended results.
. MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities, especially collateralized mortgage-backed
securities, may be subject to special risks, including price volatility,
liquidity, and enhanced sensitivity to interest rates.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by the Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, the Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
. GOVERNMENT SECURITIES RISK: The U.S. Government may not provide financial
support to U.S. Government agencies, instrumentalities or sponsored
enterprises if it is not obligated to do so.
. MATURITY RISK: The Fund will not necessarily hold its securities to
maturity, which could result in a loss of principal.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other government agency.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Short-Term Government Fund and the risks associated
with those practices.
SHORT-TERM GOVERNMENT FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to calendar year since its inception. The table
compares the Fund's performance over time to that of a broad-based securities
market index. Both charts assume reinvestment of dividends and distributions.
As with all mutual funds, how this Fund performed in the past is not a
prediction of how it will perform in the future. The Fund's performance
reflects expense limitations in effect. If expense limitations were not in
place, the Fund's performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
-17-
<PAGE>
- ---------------------------------------
Insert chart here
Data: 1995
1996 Best Quarter:
1997 Worst Quarter:
1998
- ---------------------------------------
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- --------------------------------------------------------------------------------
Short-Term Government Fund % % %
Salomon Brothers 15 Year % % %
Treasury/Gov't Index*
- --------------------------------------------------------------------------------
*The Salomon Brothers 1-5 Year Treasury/Government Sponsored Index is comprised
of Treasury securities with a minimum principal amount of $1 billion and U.S.
Government securities with a minimum principal amount of $100 million. The
securities range in maturity from one to five years. The Index figures do not
reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
-18-
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM GOVERNMENT FUND
INSTITUTIONAL SHARES
------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR
INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)...................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions...... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions.......... None
Redemption Fees...................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(1)................................................... .__%
Other Expenses(2).................................................... 0.__%
----
Total Annual Fund Operating Expenses(3).............................. .__%
====
</TABLE>
(1) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(2) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(3) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE SHORT-TERM GOVERNMENT FUND TO MAINTAIN TOTAL ANNUAL FUND
OPERATING EXPENSES OF NOT MORE THAN .68% OF AVERAGE DAILY NET ASSETS. THE
ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND EXPENSE
REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER THAN THOSE
THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE ADVISORY
FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A RESULT OF
THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES" AND "TOTAL
ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES .__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
SHORT-TERM GOVERNMENT FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share.
-19-
<PAGE>
The information has been audited by KPMG Peat Marwick LLP, the Funds'
independent accountants. Their report, along with the Fund's financial
statements, is included in the Funds' Statement of Additional Information
(available upon request).
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES Year Ended 10/31 12/12/94
-------------------- ---------------- (INCEPTION)
1998 1997 1996 THROUGH 10/31/95
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.43 $ 18.83 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 1.11 $ 1.09 $ 1.06
Net realized and unrealized gain (loss) on investments(a) $ 0.04 $ (0.18) $ 0.83
DISTRIBUTION TO SHAREHOLDERS:
From net investment income $ (1.11) $ (1.09) $ (1.06)
From net realized gain on investments -- $ (0.22) --
NET ASSET VALUE, END OF PERIOD $ 18.47 $ 18.43 $ 18.83
TOTAL RETURN(b) 6.45% 5.02% 10.72%
NET ASSETS AT END OF PERIOD $48,840 $33,839 $ 20,211
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 0.68% 0.68% 0.68%(c)
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS 6.04% 5.90% 6.38%(c)
RATIOS ASSUMING NO WAIVER OF INVESTMENT ADVISORY FEES OR
EXPENSE REIMBURSEMENTS
Ratio of expenses to average net assets 1.11% 1.11% 1.14%(c)
Ratio of net investment income to average net assets 5.61% 5.47% 5.92%(c)
PORTFOLIO TURNOVER RATE 36% 12% 158%
</TABLE>
- -------------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Annualized.
BOND FUND
INVESTMENT OBJECTIVE
. Seeks total return through current income and, secondarily, capital
appreciation.
PRIMARY INVESTMENT STRATEGIES
. Invests at least 65% of its total assets in fixed-income securities (bonds)
rated at the time of purchase A-/AAA or better by one of the four major
ratings services or considered by the Adviser to be of equivalent quality.
. May invest up to 65% of its total assets in mortgage-backed and asset-backed
securities.
. The market-weighted average credit rating of the Fund's entire portfolio will
be AA-/Aa3 or better.
. Uses the Lehman Brothers Aggregate Bond Index as a benchmark for comparison.
Although the Fund has no restriction on the maximum or minimum duration of
any individual security it holds, the Fund's average effective duration will
be within 30% of the duration of the Lehman Brothers Aggregate Bond Index.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities
can be expected to go up when interest rates go down and to go down when
interest rates go up.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The
Fund could lose money in either of these instances. The Fund
-20-
<PAGE>
may invest up to 35% of its assets in obligations rated BBB or Baa by certain
ratings services. These obligations are considered to have speculative
characteristics and are riskier than higher-rated obligations.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. MORTGAGE-BACKED RISK: Mortgage-backed securities, especially collateralized
mortgage-backed securities, may be subject to additional risks, including
price volatility, liquidity, and enhanced sensitivity to interest rates.
. ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary.
. CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by the Fund (such as a mortgage-backed or asset-backed security) earlier
than expected. This may happen when interest rates decline. Under these
circumstances, the Fund may be unable to recoup all of its initial investment
and will also suffer from having to reinvest in lower yielding securities.
. EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by the Fund (such as a mortgage-backed or asset-backed
security) later than expected. This may happen when interest rates rise.
Under these circumstances, the value of the obligation will decrease and the
Fund will also suffer from the inability to invest in higher-yielding
securities.
. PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return and a
decline in value of the securities.
. MATURITY RISK: The Fund will not necessarily hold its securities to
maturity, which could result in loss of principal.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Bond Fund and the risks associated with those
practices.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
Sidebar: Duration:"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. 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.
BOND FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to year since its inception. The table compares
the Fund's performance over time to that of a broad-based securities market
index. Both charts assume reinvestment of dividends and distributions. As with
all mutual funds, how this Fund performed in the past is not a prediction of how
it will perform in the future
-21-
<PAGE>
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- ---------------------------------
{chart here}
1998
1997
1996
1995
- ---------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- -------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (12/12/94)
- -------------------------------------------------------------------------------
Bond Fund % % %
Lehman Bros. Aggregate Bond % % %
Index*
- -------------------------------------------------------------------------------
*The Lehman Brothers Aggregate Bond Index is a broad market-weighted index
comprised of three major classes of investment-grade bonds with maturities
greater than one year. The Index figures do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
BOND FUND
INSTITUTIONAL SHARES
------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)............................................................. None
Maximum Sales Charge (load) Imposed on Reinvested Distributions............. None
Maximum Deferred Sales Charge (load) Imposed on Redemptions................. None
Redemption Fees............................................................. None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees............................................................. 0.__%
Other Expenses(1)........................................................... 0.__%
----
Total Annual Fund Operating Expenses(2)..................................... .__%
=====
</TABLE>
(1) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(2) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE BOND FUND TO MAINTAIN TOTAL ANNUAL FUND OPERATING EXPENSES
OF NOT MORE THAN 0.88% OF AVERAGE DAILY NET ASSETS. THE ADVISER RESERVES
THE RIGHT TO DISCONTINUE THE EXPENSE REIMBURSEMENT AT ANY TIME.
-22-
<PAGE>
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual
funds. It makes the following assumptions: you invest $10,000 in the
Fund for the time periods indicated, your investment has a 5% return
each year, and the Fund's expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
BOND FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the periods
indicated. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
<TABLE>
<CAPTION>
YEAR ENDED 10/31 12/12/94
---------------- (INCEPTION)
INSTITUTIONAL SHARES 1998 1997 1996 THROUGH 10/31/95
-------------------- ---- ---- ----- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.07 $ 19.61 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 1.17 $ 1.16 $ 1.12
Net realized and unrealized gain (loss) on $ 0.39 $ (0.28) $ 1.61
investments(a)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (1.18) $ (1.16) $ (1.12)
From net realized gain on investments $ (0.02) $ (0.26) --
NET ASSET VALUE, END OF PERIOD $ 19.43 $ 19.07 $ 19.61
TOTAL RETURN(b) 8.50% 4.71% 15.59%
NET ASSETS AT END OF PERIOD (IN 000S) $217,803 $151,205 $98,504
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 0.85% 0.84% 0.88%(c)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.14% 6.10% 6.64%(c)
PORTFOLIO TURNOVER RATE 19% 31% 58%
</TABLE>
- ------------------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
(c) Annualized.
NATIONAL TAX-FREE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
. Seeks current income exempt from federal income tax consistent with the
perservation of capital.
PRIMARY INVESTMENT STRATEGIES:
. Intends to invest primarily (at least 80%) in investment-grade municipal
bonds 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, in the opinion of bond counsel, is exempt from regular federal income
and federal alternative minimum taxes.
. Up to 20% of the Fund's net assets may be invested in municipal obligations
that are not exempt from regular federal income tax.
. The market-weighted average credit rating of the Fund's entire portfolio will
be AA or better.
. The average weighted effective maturity of the Fund's portfolio securities
will be three to ten years, under normal market conditions.
-23-
<PAGE>
. The average effective duration of the Fund will be within 30% of the duration
of the Merrill Lynch Municipal Intermediate Index, although the Fund has no
restriction as to the maximum or minimum duration of any individual security
it holds.
. Strives to minimize net realized capital gains.
. Uses the Merrill Lynch Municipal Intermediate Index as a benchmark for
comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities
can be expected to go up when interest rates go down and to go down when
interest rates go up.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The
Fund could lose money in either of these instances.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. MUNICIPAL OBLIGATION RISK: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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.
. TAX RISK: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the National Tax-Free Intermediate Bond Fund and the
risks associated with those practices.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
. 12 years of experience
NATIONAL TAX-FREE INTERMEDIATE BOND FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to year since its inception. The table compares
the Fund's performance over time to that of a broad-based securities market
index. Both charts assume reinvestment of dividends and distributions. As with
all mutual funds, how this Fund performed in the past is not a prediction of how
it will perform in the future. The Fund's performance reflects expense
limitations in effect. If expense limitations were not in place, the Fund's
performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- --------------------------------
{chart here}
1996
1997
1998
- ---------------------------------
Best Quarter:
Worst Quarter:
-24-
<PAGE>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- -------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (2/21/95)
- -------------------------------------------------------------------------------
National Tax-Free Intermediate Bond % % %
Fund
Merrill Lynch Municipal Intermediate % % %
Index*
- -------------------------------------------------------------------------------
*The Merrill Lynch Municipal Intermediate Index is comprised of investment grade
municipal securities ranging from 1 to 12 years in maturity. The Index figures
do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
<TABLE>
<CAPTION>
NATIONAL TAX-FREE
INTERMEDIATE BOND FUND
INSTITUTIONAL SHARES
-------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)........................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions............... None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(1)........................................................ .__%
Other Expenses(2)......................................................... 0.__%
----
Total Annual Fund Operating Expenses(3)................................... .__%
====
</TABLE>
(1) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(3) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(4) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE NATIONAL TAX-FREE INTERMEDIATE BOND FUND TO MAINTAIN TOTAL
ANNUAL FUND OPERATING EXPENSES OF NOT MORE THAN 0.70% OF AVERAGE DAILY NET
ASSETS. THE ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND
EXPENSE REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER
THAN THOSE THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE
ADVISORY FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A
RESULT OF THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES"
AND "TOTAL ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
-25-
<PAGE>
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES .__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
NATIONAL TAX-FREE INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance since its
inception. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
<TABLE>
<CAPTION>
Year Ended 10/31
---------------- 2/21/95(a) THROUGH
Institutional Shares 1998 1997 1996 10/31/95
-------------------- ----- ---- ---- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.46 $ 18.54 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and unrealized gain $ 0.72 $ 0.73 $ 0.54
(loss) on investments(b) $ 0.39 $ (0.07) $ 0.54
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (0.72) $ (0.73) $ (0.54)
From net realized gain on investments -- $ (0.01) --
NET ASSET VALUE, END OF PERIOD $ 18.85 $ 18.46 $ 18.54
TOTAL RETURN(c) 6.16% 3.60% 6.06%
NET ASSETS AT END OF PERIOD (IN 000S) $25,281 17,613 $10,721
RATIO OF NET EXPENSES TO AVERAGE NET
ASSETS 0.85% 0.85% 0.85%(d)
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.89% 3.93% 4.19%(d)
RATIOS ASSUMING NO EXPENSE
REIMBURSEMENTS:
Ratio of expenses to average net 1.15% 1.55% 1.90%(d)
assets
Ratio of net investment income to 3.59% 3.23% 3.14%(d)
average net assets
PORTFOLIO TURNOVER RATE 6% 34% 19%
</TABLE>
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, and a complete redemption of the investment
at the net asset value at the end of the period.
(d) Annualized.
MISSOURI TAX-FREE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
. Seeks current income exempt from federal and, to the extent possible, from
Missouri income taxes, as is consistent with the preservation of capital.
-26-
<PAGE>
PRIMARY INVESTMENT STRATEGIES
. Normally invests at least 80% of its total assets in municipal obligations,
65% of which are issued by the State of Missouri and its political
subdivisions, as well as certain other governmental issuers.
. Seeks to maximize the proportion of its dividends that are exempt from both
federal and Missouri income tax.
. Strives to minimize net realized capital gains.
. Under normal market conditions, the average weighted maturity of the Fund's
portfolio securities will be three to ten years.
. Uses the Merrill Lynch Municipal Intermediate Index as a benchmark for
comparison.
PRIMARY RISKS OF INVESTING IN THE FUND
. INVESTMENT RISK: The value of your investment in this Fund may go up or down,
which means that you could lose money.
. MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
. INTEREST RATE RISK: Generally, the market value of fixed-income securities
can be expected to go up when interest rates go down and to go down when
interest rates go up. Longer-term bonds and zero coupon bonds are usually
more sensitive to interest rate changes than shorter-term bonds. In general,
the longer the average maturity of bonds in the Fund, the more the Fund's
share price will go up or down in response to interest rate changes.
. CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The
Fund could lose money in either of these instances.
. MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results.
. STATE-SPECIFIC RISK: The Fund invests its assets predominantly in Missouri
Obligations. The actual payment of principal and interest on these
obligations is dependent on the Missouri General Assembly allotting money
each fiscal year for these payments. You should also be aware that provisions
of the Missouri Constitution and other laws could result in certain adverse
consequences affecting Missouri Obligations.
. NON-DIVERSIFIED RISK: The Missouri Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. 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. When a Fund's
assets are concentrated in obligations payable from revenues of similar
projects issued by issuers located in the same state, or in industrial
development bonds, the Fund 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.
. TAX RISK: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds. Dividends
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Missouri income tax.
. MUNICIPAL OBLIGATION RISK: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
SIDEBAR: Please see the table on p. __ for more detailed information about the
investment practices of the Missouri Tax-Free Intermediate Bond Fund and the
risks associated with those practices.
SIDEBAR: Fund Manager: Scott M. Colbert, CFA and Portfolio Manager
. Joined Commerce Bank in 1993
. Fund manager since Fund inception
. Director of Fixed-Income Investments for Commerce Bank's Investment
Management Group
-27-
<PAGE>
. 12 years of experience
MISSOURI TAX-FREE INTERMEDIATE BOND FUND PAST PERFORMANCE
The chart and table below show the variability of the Fund's returns by showing
its annual returns and long-term performance. The bar chart shows the Fund's
performance from calendar year to year since its inception. The table compares
the Fund's performance over time to that of a broad-based securities market
index. Both charts assume reinvestment of dividends and distributions. As with
all mutual funds, how this Fund performed in the past is not a prediction of how
it will perform in the future. The Fund's performance reflects expense
limitations in effect. If expense limitations were not in place, the Fund's
performance would have been reduced.
YEAR-BY-YEAR TOTAL RETURN CHART
as of 12/31 each year
- -------------------------------
{chart goes here}
1998
1997
1996
- -------------------------------
Best Quarter:
Worst Quarter:
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
- --------------------------------------------------------------------------------
Since Inception
1 Year 3 Years (2/21/95)
- --------------------------------------------------------------------------------
Missouri Tax-Free Intermediate
Bond Fund % % %
Merrill Lynch Municipal
Intermediate Index* % % %
- --------------------------------------------------------------------------------
*The Merrill Lynch Municipal Intermediate Index is comprised of investment grade
municipal securities ranging from 1 to 12 years in maturity. The Index figures
do not reflect any fees or expenses.
FEES AND EXPENSES
- -----------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. SHAREHOLDER TRANSACTION EXPENSES are
paid directly from your account. TOTAL ANNUAL FUND OPERATING EXPENSES are
deducted from the Fund's assets, not from your account, so they affect the share
price of the Fund.
-28-
<PAGE>
<TABLE>
<CAPTION>
MISSOURI TAX-FREE
INTERMEDIATE BOND FUND
INSTITUTIONAL SHARES
-------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (load) Imposed on Purchases (as a percentage of
offering price)........................................................... None
Maximum Sales Charge (load) Imposed on Reinvested Distributions........... None
Maximum Deferred Sales Charge (load) Imposed on Redemptions............... None
Redemption Fees........................................................... None
ANNUAL FUND OPERATING EXPENSES(2) (EXPENSES DEDUCTED FROM FUND ASSETS)
Management Fees(1)........................................................ .__%
Other Expenses(2)......................................................... 0.__%
----
Total Annual Fund Operating Expenses(3)................................... .__%
====
</TABLE>
(1) The Adviser has voluntarily agreed to reduce the management fee by .__% of
average daily net assets of the Fund. AS A RESULT OF THIS FEE WAIVER, THE
CURRENT MANAGEMENT FEES FOR THE FUND ARE .__% OF AVERAGE DAILY NET ASSETS.
THE WAIVER MAY BE TERMINATED AT ANY TIME AT THE OPTION OF THE ADVISER.
(3) "Other Expenses" include shareholder servicing fees of up to .25%,
annualized, of the average daily net assets of the participants in the
Shareholder Administrative Services Plan.
(4) THE ADVISER INTENDS TO VOLUNTARILY REIMBURSE EXPENSES, EXCLUDING INTEREST,
TAXES AND EXTRAORDINARY EXPENSES, DURING THE CURRENT YEAR TO THE EXTENT
NECESSARY FOR THE MISSOURI TAX-FREE INTERMEDIATE BOND FUND TO MAINTAIN TOTAL
ANNUAL FUND OPERATING EXPENSES OF NOT MORE THAN 0.70% OF AVERAGE DAILY NET
ASSETS. THE ADVISER RESERVES THE RIGHT TO DISCONTINUE THE FEE WAIVER AND
EXPENSE REIMBURSEMENT AT ANY TIME. THE EXPENSES IN THE TABLES ARE HIGHER
THAN THOSE THAT THE FUND WILL ACTUALLY INCUR BECAUSE THEY DO NOT REFLECT THE
ADVISORY FEE WAIVER AND EXPENSE REIMBURSEMENTS MADE BY THE ADVISER. AS A
RESULT OF THE EXPENSE LIMITATIONS, THE "MANAGEMENT FEES," "OTHER EXPENSES"
AND "TOTAL ANNUAL FUND OPERATING EXPENSES" OF THE FUND ARE AS FOLLOWS:
MANAGEMENT FEES .__%
OTHER EXPENSES .__%
TOTAL ANNUAL FUND OPERATING EXPENSES .__%
EXAMPLE: The following example is intended to help you compare the cost of
investing in this Fund (WITHOUT THE EXPENSE LIMITATIONS) with the cost
of investing in other mutual funds. It makes the following
assumptions: you invest $10,000 in the Fund for the time periods
indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
-29-
<PAGE>
MISSOURI TAX-FREE INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS
The following table describes the Fund's performance for the periods
indicated. The total return figures show how much you would have earned (or
lost) on an investment in the Fund during each time period, assuming you had
reinvested all dividends and distributions. Some of the information reflects
financial results for a single Fund share. The information has been audited by
KPMG Peat Marwick LLP, the Funds' independent accountants. Their report, along
with the Fund's financial statements, is included in the Funds' Statement of
Additional Information (available upon request).
<TABLE>
<CAPTION>
YEAR ENDED 10/31 2/21/95(A)
---------------- THROUGH
INSTITUTIONAL SHARES 1998 1997 1996 10/31/95
-------------------- ---- ---- ---- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.26 $ 18.40 $ 18.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ 0.76 $ 0.76 $ 0.57
Net realized and unrealized gain (loss) on
investments(b) $ 0.37 $ (0.14) $ 0.40
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income $ (0.76) $ (0.76) $ (0.57)
From net realized gain on investments $ (0.02) -- --
NET ASSET VALUE, END OF PERIOD $ 18.61 $ 18.26 $ 18.40
TOTAL RETURN(c) 6.31% 3.43% 5.45%
NET ASSETS AT END OF PERIOD (IN 000S) $24,434 $17,034 $ 8,889
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS 0.65% 0.65% 0.65%(d)
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 4.14% 4.14% 4.41%(d)
RATIOS ASSUMING NO EXPENSE REIMBURSEMENTS:
Ratio of expenses to average net assets 1.21% 1.58% 2.12%(d)
Ratio of net investment income to average net assets 3.58% 3.21% 2.94%(d)
PORTFOLIO TURNOVER RATE 13% 49% 52%
</TABLE>
- ----------------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions and a complete redemption of the investment
at the net asset value at the end of the period.
(d) Annualized.
-30-
<PAGE>
INVESTMENT SECURITIES AND PRACTICES
This table shows some of the investment methods and securities that the Funds
may use. The Funds' Statement of Additional Information (available on request)
contains a more complete discussion of the securities and practices each Fund
may use, and the risks involved. The Funds' Annual Report shows the securities
and practices each Fund is currently using. We encourage you to obtain and read
a copy of the Statement of Additional Information and the Annual Report should
you have any questions about the Funds' investment policies.
<TABLE>
<S> <C>
Key:
#t = percent of total assets the Fund may invest x = not permitted
#n = percent of net assets the Fund may invest e = equity portion of the Fund
a = no specific asset limitation on usage f = fixed-income portion of the Fund
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
GROWTH AND INTERNATIONAL
INCOME GROWTH MIDCAP EQUITY BALANCED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES
American Depository Receipts 10t(2) 10t(2) 10t(2) a 10e(1)
Asset-Backed Securities x x x x 65f(1)
Convertible Securities a a a a ae
Corporate Debt Obligations x x x a af(1)
Emerging Market Securities x x x a x
Equity Securities a a a a ae
European Depository Receipts x x x a x
Foreign Equity Securities 10t(2) 10t(2) 10t(2) a 10e(1)
Foreign Debt and Foreign
Government Securities x x x a 20f(1)
Hybrids x x x 10t x
Mortgage-Related Securities x x x x 65f(1)
Municipal Obligations x x x x 20f(2)
Stripped Securities x x x x af
U.S. Government Obligations a a a a af
Variable and Floating Rate
Instruments a a a a a
Zero Coupon Bonds a a a a af
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ----------------------------------------------------------------------------------------------------------------------------
Cross Hedging of Currencies x x x a x
Foreign Currency Exchange Contracts x x x a x
Futures Contracts & Related Options a a a a af
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------
SHORT-TERM NATIONAL MISSOURI
GOVERNMENT BOND TAX-FREE TAX-FREE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
American Depository Receipts x x x x
Asset-Backed Securities x 65t(4) x x
Convertible Securities x a x x
Corporate Debt Obligations x a x x
Emerging Market Securities x x x x
Equity Securities x x x x
European Depository Receipts x x x x
Foreign Equity Securities x x x x
Foreign Debt and Foreign
Government Securities x 20t x x
Hybrids x x x x
Mortgage-Related Securities a(3) 65t(4) x x
Municipal Obligations x 20t a a
Stripped Securities x a x x
U.S. Government Obligations a(3) a a a
Variable and Floating Rate
Instruments a a a a
Zero Coupon Bonds a a a a
- -------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES
- -------------------------------------------------------------------------------------------------------
Cross Hedging of Currencies x x x x
Foreign Currency Exchange Contracts x x x x
Futures Contracts & Related Options x a a a
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
GROWTH AND INTERNATIONAL
INCOME GROWTH MIDCAP EQUITY BALANCED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps, Mortgage
Swaps, Caps and Floors x x x x af
Mortgage Dollar Rolls x x x x af
Options on Foreign Currencies x x x a x
Options on Securities and
Securities Indices 25t 25t 25t 5t 5t
Repurchase Agreements 331/3t 331/3t 331/3t 331/3t 331/3t
Standby Commitments x x x x x
When-Issued and Forward Commitments a a a a af
- --------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------
SHORT-TERM NATIONAL MISSOURI
GOVERNMENT BOND TAX-FREE TAX-FREE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Swaps, Mortgage
Swaps, Caps and Floors a a a a
Mortgage Dollar Rolls a a x x
Options on Foreign Currencies x x x x
Options on Securities and
Securities Indices 5t 5t 5t5 5t(5)
Repurchase Agreements 331/3t 331/3t 331/3t 331/3t
Standby Commitments x x a a
When-Issued and Forward
Commitments a a 25t 25t
- --------------------------------------------------------------------------------------------
</TABLE>
RISKS: The following chart summarizes the types of risks from which loss may
result. More information about risks associated with the Funds is
provided on the following pages and in the Funds' Statement of
Additional Information, which is available on request.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
GROWTH AND INTERNATIONAL
INCOME GROWTH MIDCAP EQUITY BALANCED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset-Backed Risk X
Call Risk X
Credit Risk X
Currency Risk X
Emerging Market Risk X
Extension Risk X
Euro Risk X
Foreign Risk X
Government Securities Risk
Interest Rate Risk X
Investment Risk X X X X X
Management Risk X X X X X
Market Risk X X X X X
Maturity Risk
Mortgage-Backed Risk X
Municipal Obligation Risk
Non-Diversified Risk
Prepayment Risk X
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------
SHORT-TERM NATIONAL MISSOURI
GOVERNMENT BOND TAX-FREE TAX-FREE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Risk X
Call Risk X X
Credit Risk X X X X
Currency Risk
Emerging Market Risk
Extension Risk X X
Euro Risk
Foreign Risk
Government Securities Risk X
Interest Rate Risk X X X X
Investment Risk X X X X
Management Risk X X X X
Market Risk X X X X
Maturity Risk X X
Mortgage-Backed Risk X X
Municipal Obligation Risk X X
Non-Diversified Risk X
Prepayment Risk X X
- ---------------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
GROWTH AND INTERNATIONAL
INCOME GROWTH MIDCAP EQUITY BALANCED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Company Stock Risk X
State-Specific Risk
Tax Risk
Year 2000 Risk X X X X X
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------
SHORT-TERM NATIONAL MISSOURI
GOVERNMENT BOND TAX-FREE TAX-FREE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Company Stock Risk
State-Specific Risk X
Tax Risk X X
Year 2000 Risk X X X X
- ---------------------------------------------------------------------------------------------
</TABLE>
1 The Balanced Fund may invest up to 65% of the fixed income portion of its
portfolio in asset-backed and/or mortgage-backed securities, up to 20% of its
fixed income portion in municipal obligations, and up to 20% of its fixed
income portion in debt obligations of foreign issuers. The Fund may invest up
to 10% of its equity portion in securities issued by foreign issuers,
including ADRs.
2 The Growth and Income, Growth and MidCap Funds may invest up to 10% of their
total assets in foreign securities, including ADRs.
3 At least 65% of the Short-Term Government Fund's investments will be in U.S.
Government issued or guaranteed securities (including mortgage-related
securities issued or guaranteed by the U.S. Government) that have average
lives or remaining maturities of five years or less.
4 The Bond Fund may invest up to 65% of its total assets in asset-backed and/or
mortgage-related securities.
5 The National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate
Bond Funds may not purchase put and call options or write covered call and
put options on securities related to foreign currencies.
-33-
<PAGE>
ASSET-BACKED RISK: Asset-backed securities may involve certain risks not
presented by other securities. These risks include a greater risk of default
during periods of economic downturn than other securities. Also, asset-backed
securities may be less liquid and therefore more difficult to value and
liquidate, if necessary. Ultimately, asset-backed securities are dependent upon
payment of the underlying 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.
CALL RISK: An issuer may exercise its right to pay principal on an obligation
held by a Fund (such as a mortgage-backed or asset-backed security) earlier than
expected. This may happen when interest rates decline. Under these
circumstances, a Fund may be unable to recoup all of its initial investment and
will also suffer from having to reinvest in lower yielding securities.
CREDIT RISK: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. A Fund could
lose money in either of these instances. The Bond Fund may invest up to 35% of
its assets in obligations rated BBB or Baa by certain ratings services. These
obligations are considered to have speculative characteristics and are riskier
than higher rated obligations.
CURRENCY RISK: Fluctuations in the exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. A decline in the value
of a foreign currency versus the U.S. dollar reduces the dollar value of
securities denominated in that currency. Exchange rate movements can be large
and unpredictable and can last for extended periods. 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 a
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.
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 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 would have if it did not maintain the currency
positions. The Funds investing in foreign securities are all subject to the
possible imposition of exchange control regulations or freezes on convertibility
of currency.
-34-
<PAGE>
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. 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. 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.
EMERGING MARKET RISK: To the extent that a Fund has investments in emerging
market countries, it will be subject to abrupt and severe price declines. Many
of the economic and political structures of these countries do not compare
favorably with the United States in terms of wealth and stability, and their
financial markets may lack liquidity. Investments in these countries are much
riskier than those in mature countries. 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
these 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 of investing in foreign securities, including the risks of nationalization
and expropriation may be heightened. In addition, unanticipated political or
social developments may affect the value of the 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 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 most Western European 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.
EXTENSION RISK: An issuer may exercise its right to pay principal on an
obligation held by a Fund (such as a mortgage-backed or asset-backed security)
later than expected. This may happen when interest rates rise. Under these
circumstances, the value of the obligation will decrease and a Fund will also
suffer from the inability to invest in higher-yielding securities.
EURO RISK: Many European countries adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European
Central Bank was created to manage the monetary policy of the new unified
region. On that same date, the exchange rates were irrevocably fixed between
EMU member countries. National currencies will continue to circulate until they
are replaced by euro coins and bank notes by the middle of 2002. This change
could still significantly impact the European capital markets in which the Funds
invest and may result in a Fund facing risks that are different than the risks
it ordinarily faces in pursuing its investment objectives. These risks, which
include, but are not limited to, uncertainty as to the proper tax treatment of
the currency conversion, volatility of currency exchange rates as a result of
the conversion, uncertainty as to capital market reaction, conversion costs that
may affect issuer profitability and creditworthiness, and lack of participation
by some European countries, may increase the volatility of the Funds' NAV per
share.
FOREIGN RISK: Foreign securities can be riskier and more volatile than U.S.
securities. Adverse political, social and economic developments in foreign
countries (including, the possible seizure or nationalization of foreign
holdings, the possible establishment of exchange controls or the adoption of
other governmental restrictions) or changes in the value of foreign currency can
make it harder for the portfolio to sell its securities and could reduce the
value of your shares. Changes in or the lack of tax, accounting, and regulatory
standards and difficulties in obtaining information
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<PAGE>
about foreign companies can negatively affect investment decisions. Also, the
costs attributable to investing abroad are usually higher than those of
investing in the U.S. These costs include 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 market liquidity, more market volatility and political and economic
instability. Additionally foreign banks and foreign branches of domestic banks
are subject to less stringent reserve requirements and to different accounting,
auditing and recordkeeping requirements.
Countries in which the International Equity 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 Bond and Balanced Funds may invest in foreign debt and 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 U.S. entities or citizens.
The Balanced, Growth and Income, Growth, MidCap 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.
GOVERNMENT SECURITIES RISK: The U.S. Government may not provide financial
support to U.S. Government agencies, instrumentalities or sponsored enterprises
if it is not obligated to do so by law.
INTEREST RATE RISK: Generally, the market value of fixed-income securities in a
Fund can be expected to go up when interest rates go down and to go down when
interest rates go up. Longer-term bonds and zero coupon bonds are usually more
sensitive to interest rate changes than shorter-term bonds. In general, the
longer the average maturity of bonds in a Fund, the more a Fund's share price
will go up or down in response to interest rate changes.
INVESTMENT RISK: The value of your investment in a Fund may go up or down,
which means that you could lose money.
MANAGEMENT RISK: A strategy used by the Adviser may fail to produce the
intended results. The Adviser's assessment of companies whose securities are
held by a Fund may prove incorrect, resulting in losses or poor performance,
even under favorable market and interest rate conditions.
MARKET RISK: General economic conditions and/or the activities of individual
companies may cause the value of the securities in a Fund to increase or
decrease. A Fund's NAV may fluctuate with movements in the equity markets.
MATURITY RISK: A Fund will not necessarily hold its securities to maturity,
which could result in loss of principal.
MORTGAGE-BACKED RISK: In addition to prepayment, call and extension risks,
mortgage-backed securities may be subject to special risks, including price
volatility, liquidity, and enhanced sensitivity to interest rates.
Collateralized mortgage-backed securities (CMOs) may exhibit even more price
volatility and interest rate risk than other mortgage-backed securities. They
may lose liquidity as CMO market makers may choose not to repurchase, or may
offer prices, based on current market conditions, that are unacceptable to the
Fund based on the Adviser's analysis of the market value of the security. The
Bond and Balanced Funds may purchase "stripped" mortgage-backed securities
(SMBS) and other types of "stripped" securities. SMBS, in particular, are more
volatile and sensitive to
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<PAGE>
interest rate changes than ordinary debt securities, and there is a greater risk
that a Fund's initial investment in these securities may not be fully recouped.
MUNICIPAL OBLIGATION RISK: Payment on municipal obligations held by a Fund
relating to certain projects may be secured 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
judgment. 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. The
obligations of the issuer to pay the principal of and interest on a municipal
obligation are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due the principal of or interest on a
municipal obligation may be materially affected. Municipal lease obligations
and certificates of participation are subject to the added risk that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although these obligations may be secured
by the leased equipment or facilities, the disposition of the property in the
event of non-appropriation or foreclosure might prove difficult, time consuming
and costly, and result in a delay in recovering or the failure to fully recover
a Fund's original investment.
NON-DIVERSIFIED RISK: The Missouri Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. 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. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects issued
by issuers located in the same state, or in industrial development bonds, the
Fund 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.
PREPAYMENT RISK: Prepayment of the underlying mortgage collateral of some
fixed-income securities may result in a decreased rate of return.
SMALL COMPANY STOCK RISK: Investing in securities of smaller companies may be
riskier than investing in securities of larger, more established companies.
Smaller companies are more vulnerable to adverse developments because of more
limited product lines, markets or financial resources. They often depend on a
smaller, less experienced management group. Also, smaller company stocks may
trade less often and in limited volume compared to stocks trading on a national
securities exchange. Security prices of small company stocks may be more
volatile than the prices of larger company stocks. As a result, a Fund's NAV
may be subject to rapid and substantial changes if it invests in small company
stocks.
STATE-SPECIFIC RISK: The Missouri Tax-Free Intermediate Bond Fund invests its
assets predominantly in Missouri Obligations. The actual payment of principal
and interest on these obligations is dependent on the Missouri General Assembly
allotting money each fiscal year for these payments. You should also be aware
that provisions of the Missouri Constitution and other laws could result in
certain adverse consequences affecting Missouri Obligations. Increased
urbanization and continued decline in defense appropriations by the U.S.
Congress have had and will continue to have an adverse impact on the State of
Missouri in the forseeable future.
TAX RISK: A Fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other Funds. Interest income
on municipal obligations is normally not subject to regular federal income tax.
Any proposed or actual changes in federal income tax rates or exempt statutes
that apply to interest income, therefore, can significantly affect the demand
for and supply, liquidity and marketability of municipal obligations, which
could in turn affect a Fund's ability to buy and sell municipal obligations at
favorable yield and price levels.
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<PAGE>
YEAR 2000 RISKS: Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Adviser and the Funds' other
service providers do not properly process and calculate date-related information
and dates from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Adviser is taking steps to address the Year 2000 Problem
with respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Funds' other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Funds as a result of the Year 2000
Problem. The Year 2000 Problem would also adversely impact a Fund's portfolio
holdings and the markets in which they invest, causing their shares prices to go
down.
RISKS OF SHORT-TERM INVESTING: At times, the Adviser may decide to suspend the
normal investment activities of a Fund by investing up to 100% of its assets in
cash and cash equivalent short-term obligations, including money market
instruments, a term that includes bank obligations, commercial paper, U.S.
Government obligations, foreign government securities (if permitted) and
repurchase agreements. Bank obligations include obligations of foreign banks or
foreign branches of U.S. banks. The Adviser may temporarily adopt a defensive
position to reduce changes in the value of the Fund's shares that may result
from adverse market, economic, political or other conditions. When the Adviser
pursues a defensive strategy, the Funds may not be following their stated
objectives and may not profit from favorable developments that they would have
otherwise profited from if they were pursuing their normal investment
strategies.
PORTFOLIO TURNOVER: The Funds may buy and sell investments relatively often.
Such a strategy often involves higher expenses, including brokerage commissions,
and may increase the amount of capital gains (and, in particular, short-term
gains) realized by a portfolio. Shareowners must pay tax on such capital gains.
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<PAGE>
ACCOUNT POLICIES AND FEATURES
THE FOLLOWING INFORMATION IS INTENDED TO HELP YOU UNDERSTAND HOW TO PURCHASE AND
REDEEM SHARES OF THE COMMERCE FUNDS. IT WILL ALSO EXPLAIN THE FEATURES YOU CAN
USE TO CUSTOMIZE YOUR COMMERCE FUNDS ACCOUNT TO MEET YOUR NEEDS.
BUYING INSTITUTIONAL SHARES
HOW ARE INSTITUTIONAL SHARES PRICED?
You pay no sales charges (loads) to invest in these Funds. Your share price is
each Fund's net asset value (NAV), which is generally calculated as of the close
of trading (usually 4:00 p.m. Eastern Time) on the New York Stock Exchange
(NYSE) every day the NYSE is open. Your order will be priced at the next NAV
calculated after your order is accepted by The Commerce Funds' Transfer Agent.
Therefore, to receive the NAV of any given day, The Commerce Funds must accept
your order by the close of regular trading on the NYSE that day. If The
Commerce Funds receives and accepts your order after the NYSE closes, you will
receive the NAV that is calculated on the close of trading on the following day.
The Commerce Funds are open for business on the same days as the NYSE. Each
Fund's investments are valued based on market value, or where market quotations
are not readily available, based on fair value as determined in good faith by
the Funds' Board of Trustees. Certain short-term securities may be valued at
amortized cost, which approximates fair value.
Trading in foreign securities is generally completed before the end of regular
trading on the NYSE and may occur on weekends and U.S. holidays and at other
times when the NYSE is closed. As a result, there may be delays in reflecting
changes in the market values of foreign securities in the calculation of the NAV
for any Fund invested in foreign securities. You may not be able to redeem or
purchase shares of an affected Fund during these times.
SIDEBAR: HOW TO CALCULATE NAV
NAV = (VALUE OF ASSETS ATTRIBUTABLE TO THE CLASS)--(LIABILITIES ATTRIBUTABLE TO
THE CLASS)
- -------------------------------------------------------------------------------
NUMBER OF OUTSTANDING SHARES OF THE CLASS
WHAT IS THE MINIMUM INVESTMENT FOR THE FUNDS?
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
INVESTMENT INVESTMENTS
---------- -----------
<S> <C> <C>
REGULAR ACCOUNT.......................................................... $1,000 $250
AUTOMATIC INVESTMENT $ 500 $50/month
ACCOUNT...........................................................
INDIVIDUAL RETIREMENT ACCOUNTS (except SEP & SIMPLE IRAs), Keogh
Plans, corporate retirement plans, public employer deferred
plans, profit sharing plans and 401(k) $1,000 $250
plans.............................................................
SEP AND SIMPLE $ 50 $50/month
IRAS.........................................................
</TABLE>
WHAT IS THE MINIMUM INVESTMENT IF I AM AN EMPLOYEE OF COMMERCE BANCSHARES OR
ANOTHER COMMERCE FUNDS SERVICE PROVIDER?
For employees, directors, officers and retirees (as well as their legal
dependents) of Commerce Bancshares, Inc., Goldman Sachs & Co., NFDS and State
Street Bank and Trust Company and their subsidiaries or affiliates, the
following investment minimums apply:
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<PAGE>
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
Investment INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account........................................ $250 $100
AUTOMATIC INVESTMENT ACCOUNT........................... $100 $25/quarter
INDIVIDUAL RETIREMENT ACCOUNTS (including SEP, SIMPLE
and Roth IRAs) and Keogh Plans......................... $100 $25/quarter
</TABLE>
HOW DO I BUY INSTITUTIONAL SHARES?
The following section describes features and gives specific instructions on how
to purchase Institutional Shares directly from The Commerce Funds. The Commerce
Funds has authorized certain dealers to purchase shares of Funds on behalf of
their clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
1. CONSIDER THE FOLLOWING FEATURES TO CUSTOMIZE YOUR ACCOUNT:
. MAKING AUTOMATIC INVESTMENTS: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check
with your financial institution to determine eligibility.
. USING DOLLAR COST AVERAGING: Dollar cost averaging involves investing a
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.
Since dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through dollar cost averaging on your own or through the Automatic Investment
feature described above.
2. CONTACT THE COMMERCE FUNDS TO OPEN YOUR ACCOUNT.
By Mail:
- -------
Complete an account application. Mail the completed application and a check
payable to The Commerce Funds to:
The Commerce Funds
c/o Shareholder Services
P.O. Box 419525
Kansas City, MO 64141-6525
In Person
- ---------
You are welcome to stop by a Commerce Bank office location, where a registered
investment representative can assist you in opening an account.
. Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
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<PAGE>
. 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 must be
drawn only on U.S. banks.
HOW DO I ADD TO MY COMMERCE FUNDS ACCOUNT?
To add to your original investment, you may either mail your additional
investment to the address above or you may use Electronic Funds Transfer:
To use Electronic Funds Transfer, have your bank send your investment to:
Investors Fiduciary Trust Company, with these instructions:
ABA #101003621
Account #756-044-3
Your name and address
Your social security or tax ID number
Name of the Fund
Class of shares
Your new account number
WHAT ARE MY OPTIONS FOR CHANGING MY INVESTMENT WITHIN THE COMMERCE FUNDS?
. CHANGING SHARES FROM FUND TO FUND: As a shareholder, you have the privilege
of exchanging your shares for Institutional Shares of any other Commerce
Fund. Exchanges may also be made with the Goldman Sachs Institutional Liquid
Assets Prime Obligations Portfolio ("Money Market Fund"). Goldman Sachs Asset
Management, a separate operating division of Goldman, Sachs & Co., serves as
investment adviser for the Money Market Fund. Institutional Shares being
exchanged are subject to the minimum initial and subsequent investment
requirements as described above. 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 shareholders except
where notice is not required under the regulations of the Securities and
Exchange Commission. Before exchanging your shares, you should consider
carefully the investment objectives, policies, risks and expenses of the Fund
you are acquiring.
. MAKING AUTOMATIC EXCHANGES: You may request on your account application that
a specified dollar amount of Institutional Shares be automatically exchanged
for Institutional Shares of any other Commerce Fund. These automatic
exchanges may be made on any one day of each month and are subject to the
following conditions: 1) the minimum dollar amount for automatic exchanges
must be at least $250 per month; 2) the value of the account in the
originating Fund must be at least $1,000 after the exchange; 3) the value of
the account in the acquired Fund must equal or exceed the acquired Fund's
minimum initial investment requirement; and 4) the names, addresses and
taxpayer identification number for the shareholder accounts of the exchanged
and acquired Funds must be identical.
. CROSS REINVESTING OF DISTRIBUTIONS: You may invest dividend or capital gain
distributions from one Fund of the Institutional Class to another Fund of the
Institutional Class. If you elect to reinvest the distributions paid by one
Fund in shares of another Fund of The Commerce Funds, the dividends or
distributions will be treated as received by you for tax purposes. Cross
reinvestment privileges do not apply to the Money Market Fund described under
"Changing Shares From Fund to Fund."
REDEEMING INSTITUTIONAL SHARES
YOU MAY SELL SHARES AT ANY TIME: Your shares will be sold at the NAV next
calculated after your order is accepted by The Commerce Funds' Transfer Agent.
Your order will be processed promptly and you will generally receive the
proceeds within a week. PLEASE NOTE: If the Fund has not yet collected payment
for the shares you are selling, it may delay sending the proceeds for up to 15
business days.
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<PAGE>
RECEIPT OF PROCEEDS FROM A SALE: Ordinarily, sale proceeds will be disbursed the
next business day following receipt by the Transfer Agent of a properly
completed order. Payment by check will ordinarily be made within seven calendar
days following redemption or you can have your proceeds sent by federal wire to
your financial institution account. Proceeds will normally be wired the
business day after your request to redeem shares is received in good order by
the Transfer Agent. Your request to wire proceeds is subject to the financial
institution's wire charges.
Written requests to sell Institutional Shares must be signed by each
shareholder, including each joint owner. Certain types of redemption requests
will need to include a SIGNATURE GUARANTEE. You may obtain a SIGNATURE
GUARANTEE from most banks or securities dealers. Guarantees from notaries
public will not be accepted.
HOW DO I REDEEM SHARES FROM MY COMMERCE FUNDS ACCOUNT?
The following section describes how to redeem shares directly through The
Commerce Funds. The Commerce Funds has authorized certain dealers to redeem
shares of Funds on behalf of their clients. Some of the account features and
instructions described in this section may not be applicable to clients of these
dealers.
1. CONSIDER USING AN AUTOMATED REDEMPTION:
. MAKING AUTOMATIC WITHDRAWALS: If you are a shareholder 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 on either the 1st or 15th day of the month;
quarterly, semi-annual and annual withdrawals will be made on either the
1st or 15th day of the month(s) selected. To participate in this feature,
supply the necessary information on the account application or in a
subsequent written request. This feature may be suspended should the value
of your account fall below $500.
2. CONTACT THE COMMERCE FUNDS TO REDEEM SHARES FROM YOUR ACCOUNT.
By Mail:
Write a letter to us that gives the following information:
. names of all account owners
. your account number
. the name of the Fund
. the dollar amount you want to redeem
. what we should do with the proceeds
Each owner, including each joint owner should sign the letter. Mail your
request to:
The Commerce Funds
c/o Shareholder Services
P. O. Box 419525
Kansas City, MO 64141-6525
By Telephone--Requesting Proceeds Be Wired:
Call The Commerce Funds with your request. Please see "What Are The Important
Things To Consider When Contacting The Commerce Funds by Telephone" below for
specific instructions. When requesting a redemption by wire you must be
redeeming shares in the amount of $1,000 or more. Also, the Fund must have
your financial institution account information already on file. Proceeds will
be wired directly to this designated account.
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<PAGE>
By Telephone--Requesting Proceeds Be Sent By Check:
Call The Commerce Funds at 1-800-995-6365 (8 a.m. 4 p.m. CST) with your
request. Please see "What Are The Important Things to Consider When
Contacting The Commerce Funds by Telephone" below for specific instructions.
The check will be made payable to the shareholder(s) of record and sent to the
address listed on your account.
In Person:
You are welcome to stop by a Commerce Bank office location, where a registered
investment representative can assist you in redeeming shares from your
account.
WHAT ARE THE IMPORTANT THINGS TO CONSIDER WHEN CONTACTING THE COMMERCE FUNDS BY
TELEPHONE?
You may call us at 1-800-995-6365 (8 a.m.4 p.m. CST) to explain what you want to
do. To make additions by phone or request electronic transfers or request
redemptions, we need your prior written authorization. If you did not check
the box in Section ___ of your original account application, you must send us
a letter that gives us this authorization.
Telephone purchases will be made at the NAV next determined after the Transfer
Agent receives payment for the transaction. If you should experience
difficulty in redeeming your shares by telephone (e.g., because of unusual
market activity), we urge you to consider redeeming your shares by mail.
You should note that the Transfer Agent may act on a telephone purchase or
redemption request from any person representing himself 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 on telephone instructions that are reasonably believed to be
genuine. In attempting to confirm that telephone instructions are genuine,
The Commerce Funds will use all procedures considered reasonable; the Funds
may be liable for any losses if they fail to do so.
GENERAL POLICIES
. DIVIDENDS AND DISTRIBUTIONS POLICY: As a Fund shareholder, you are entitled
to any dividends and distributions from net investment income and net
realized capital gains. You can choose one of the following distribution
options for dividends and capital gains:
(1) reinvest all dividend and capital gain distributions in additional
Institutional Shares,
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Institutional Shares,
(3) receive all dividend and capital gain distributions in cash, or
(4) have all dividend and capital gain distributions deposited directly
into your designated account at a financial institution.
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional Institutional Shares of the
same Fund. For your protection, if you elect to have distributions mailed to
you and these cannot be delivered, they will be reinvested in additional
Institutional Shares of the same Fund. To change your distribution option,
contact The Commerce Funds at 1-800-995-6365 (8 a.m. to 4 p.m. CST). The
change will become effective after it is received and processed by the
Transfer Agent.
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<PAGE>
<TABLE>
<CAPTION>
Monthly QUARTERLY ANNUAL NET REALIZED
FUND Dividends* Dividends** Dividends*** Capital Gains****
- -------------------------- ------------------ ------------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
Growth and Income Fund X X
Growth Fund X X
MidCap Fund X X
International Equity Fund X X
Balanced Fund X X
Short-Term Government Fund X X
Bond Fund X X
National Tax-Free X
Intermediate Bond Fund
Missouri Tax-Free X
Intermediate Bond Fund
</TABLE>
*Monthly dividends are declared daily but are only distributed on or about the
last business day of the month.
**Quarterly dividends are both declared and paid on the calendar quarter months.
***Annual dividends are both declared and paid in December.
****Each Fund declares and distributes net realized capital gains annually
(December).
. Suspend or delay the payment of redemption proceeds when the NYSE is closed
(other than for customary weekend and holiday closings), during periods when
trading on the NYSE is restricted as determined by the Securities and
Exchange Commission (SEC), during any emergency as determined by the SEC or
during other periods of unusual market conditions.
Without notice, stop offering shares of a Fund, reject any purchase order
(including exchanges), or bar an investor who is engaging in excessive trading
from purchasing or exchanging shares of a Fund.
ARRANGEMENTS WITH CERTAIN INSTITUTIONS
Financial institutions or their designees that have entered into agreements with
The Commerce Funds or its agent may enter confirmed purchase orders on behalf of
clients and customers, with payment to follow no later than a Fund's pricing on
the following business day. If payment is not received by the Fund's Transfer
Agent by such time, the financial institution could be held liable for resulting
fees or losses. The Commerce Funds may be deemed to have received a purchase or
redemption order when a financial institution or its designee accepts the order.
Orders received by the Fund in proper form will be priced at the Fund's NAV next
computed after they are accepted by the financial institution or its designee.
Financial institutions are responsible for their customers and The Commerce
Funds for timely transmission of all subscription and redemption requests,
investment information, documentation and money.
BUSINESS OF THE COMMERCE FUNDS
SHAREHOLDER SERVICING
Certain financial institutions may charge their customers account fees for
purchasing or redeeming shares of The Commerce Funds. These institutions may
provide shareholder services to their clients that are not available to a
shareholder dealing directly with The Commerce Funds. Each institution is
responsible for notifying its customers regarding its fees and additional or
changed purchase or redemption terms. You should contact your financial
institution for this information.
The Funds have adopted a Shareholder Administrative Services Plan that permits
each Fund to pay up to 0.25% of the average daily net assets of the participants
to third parties for providing shareholder services to Commerce Fund
shareholders. Because these fees are paid out of each Fund's assets, over time
they will increase the cost of your investment and may cost you more than paying
other types of sales charges.
-44-
<PAGE>
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 of purchases and
redemptions.
TAX INFORMATION
The following is a brief summary of the federal income tax consequences of
investing in The Commerce Funds. You may also have to pay state and local taxes
on your investment, and you should always consult with your tax adviser for
specific guidance on your investment in The Commerce Funds.
TAXES ON DISTRIBUTIONS
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Fund held the relevant assets). You will be subject to
income tax on these distributions regardless of whether they are paid in cash or
reinvested in additional shares. Once a year, The Commerce Funds will send you
a statement showing the types and total amount of distributions you received
during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received, even
though, as an economic matter, the distribution simply constitutes a return of
your capital. This is known as "buying into a dividend."
TAXES ON EXCHANGES AND REDEMPTIONS
When you redeem or exchange shares in any Fund, you may recognize a gain or loss
for income tax purposes. This gain or loss will be based on the difference
between your tax basis in the shares and the amount you receive for them. To
aid in computing your tax basis, you generally should retain your account
statements for the periods during which you held shares. Any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends that were received with respect to
the shares. The one major exception to these tax rules is that distributions
on, and sales, exchanges and redemptions of, shares held in an IRA (or other tax
qualified plan) will not be currently taxable.
BACKUP WITHHOLDING
By law, The Commerce Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
INTERNATIONAL EQUITY FUND
It is expected that the International Equity Fund will be subject to foreign
withholding taxes with respect to dividends or interest received from sources in
foreign countries. The International Equity Fund may elect to treat a
proportionate amount of such taxes as constituting a distribution to each
shareholder, which would allow each shareholder either (1) to credit such
proportionate amount of taxes against U.S. federal income tax liability or (2)
to take such amount as an itemized deduction.
TAX CONSEQUENCES OF THE NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-
FREE INTERMEDIATE BOND FUNDS
The National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond
Funds' distributions will generally constitute tax-exempt income for
shareholders for federal income tax purposes. It is possible, depending on the
Funds' investments, that a portion of the Funds' distributions could be taxable
to shareholders as ordinary income or capital gains, but the Funds do not expect
that this will be the case. Moreover, although distributions are exempt for
federal income tax purposes, they will generally constitute taxable income for
state and local income tax purposes except that, subject to limitations that
vary depending on the state, distributions from interest paid by a state or
municipal entity may be exempt from tax in that state.
-45-
<PAGE>
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 Intermediate 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 U.S. 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.
SERVICE PROVIDERS
INVESTMENT ADVISER: COMMERCE BANK, N.A. (THE "ADVISER")
Commerce Bank, N.A. serves as Adviser for the Funds, selecting investments and
making purchases and sale orders for securities in each Fund's portfolio.
Commerce Bank, with offices at 8000 Forsyth Boulevard, St. Louis, Missouri 63105
and 922 Walnut Street, Kansas City, Missouri 64106, is a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank has
provided investment management services to The Commerce Funds since 1994, to
private and public pension funds, endowments and foundations since 1946 and to
individuals since 1906. As of December 31, 1998, the Adviser and its affiliates
had approximately $__ billion in assets under management.
The Adviser receives a fee for the advisory services provided and expenses
assumed under the Advisory Agreement. During the last fiscal year, the Funds
paid the Adviser the following fees, calculated as a percentage of the Funds'
average daily net assets:
<TABLE>
<CAPTION>
Contractual Annual Rate ACTUAL RATE PAID IN FISCAL YEAR
------------------------ 1998
---------------------------------
<S> <C> <C>
Growth and Income Fund........................... 0.75% 0.75%
Growth Fund...................................... 0.75% 0.75%
MidCap Fund...................................... 0.75% 0.75%
International Equity Fund........................ 1.50% 0.99%
Balanced Fund.................................... 1.00% 0.50%
Short-Term Government Fund....................... 0.50% 0.30%
Bond Fund........................................ 0.50% 0.50%
National Tax-Free Intermediate Bond Fund......... 0.50% 0.39%
Missouri Tax-Free Intermediate Bond Fund......... 0.50% 0.30%
</TABLE>
Any difference between the contractual fees and the actual fees paid by the
Funds reflects that the Adviser did not charge the full amount of the fees to
which it would have been entitled. The Adviser may discontinue or modify its
voluntary waiver in the future at its discretion.
-46-
<PAGE>
Fund Managers:
<TABLE>
<CAPTION>
PERSON FUND(S) EXPERIENCE
<S> <C> <C>
John Bartlett, CFA, Vice President Growth and Income Joined Commerce Bank in 1991
Fund manager since inception
Scott M. Colbert, CFA, Vice Short-Term Government, Joined Commerce Bank in 1993
President Bond, National Tax-Free Fund manager since inception
Intermediate Bond, Missouri 12 years of experience
Tax-Free Intermediate Bond,
Fixed Income portion of
Balanced
Paul D. Cox, CFA, Vice President MidCap Joined Commerce Bank in 1989
18 years of experience
Fund manager since inception
- --------------------------------------------------------------------------------------------------------
Joseph C. Williams III, CFA, Vice Growth, equity portion of Joined Commerce Bank in 1975
President Balanced Fund manager since inception
23 years of experience
- --------------------------------------------------------------------------------------------------------
</TABLE>
SUB-ADVISER: ROWE PRICE-FLEMING INTERNATIONAL, INC. ("PRICE-FLEMING" OR THE
"SUB-ADVISER")
Rowe Price-Fleming International Inc., a joint venture established in 1979
between T. Rowe Price Associates and the London-based Fleming Group, serves as
Sub-Adviser to the International Equity Fund. Price-Fleming's U.S. office is
located at 100 East Pratt Street, Baltimore, Maryland 21202. As of December 31,
1998, Price-Fleming managed approximately $___ billion in investments for
individual and institutional accounts.
Martin G. Wade manages the Fund day-to-day and has been chairman of its
Investment Advisory Committee since the Fund's inception. He joined Price-
Fleming in 1979.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Adviser will pay the Sub-Adviser a monthly management fee at an
annual rate of 0.75% of the first $20 million of the Fund's 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. When the Fund's assets reach $200
million, the Sub-Adviser has agreed to waive fees in excess of 0.50%, on an
annualized basis, on the average daily net assets of the Fund. For the fiscal
year ended October 31, 1998, Price-Fleming received advisory fees at the
effective annual rate of 0.__% of the International Equity Fund's average daily
net assets.
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 10004. GSAM is a separate operating division of
Goldman, Sachs & Co., the Distributor of the Funds.
DISTRIBUTOR: GOLDMAN, SACHS & CO. ("GOLDMAN" OR THE "DISTRIBUTOR")
Shares of each Fund are sold on a continuous basis by Goldman as Distributor.
Goldman is located at 85 Broad Street, New York, New York 10004.
-47-
<PAGE>
TRANSFER AGENT: STATE STREET BANK AND TRUST COMPANY ("STATE STREET" or THE
"TRANSFER AGENT")
State Street has delegated its responsibilities as Transfer Agent to its
indirect subsidiary, National Financial Data Services, Inc. ("NFDS"). State
Street is located at 225 Franklin Street, Boston, Massachusetts 02110. NFDS is
located at 1004 Baltimore Street, Kansas City, Missouri 64105.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY (THE "CUSTODIAN")
State Street also serves as the Custodian of each of the Funds.
-48-
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
If you would like more information about The Commerce Funds, you may request
the following documents:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains additional information
about the Funds and is incorporated by reference into this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds' annual and semi-annual reports contain additional information about
the Funds' investments. The annual report also discusses market conditions and
investment strategies that significantly affected the Funds' performance
during their last fiscal year.
To make shareholder inquiries or to receive free copies of the SAI and the
annual and semi-annual reports, contact The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525
(toll-free) 1-800-995-6365
You may also receive information about The Commerce Funds by:
Contacting a registered investment representative at selected
broker/dealers or Commerce Bank locations (call 1-800-995-6365 if you
need assistance in contacting your representative); or
Contacting your Company representative for specific information
regarding your retirement plan; or
Contacting your account administrator for specific information
regarding your Investment Management Group account; or
Calling The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
Accessing The Commerce Funds' Website at WWW.COMMERCEFUNDS.COM. The
Commerce Funds' website contains performance information about each of
the Funds as of the most recent calendar quarter. It also contains daily
NAV prices for the Funds and occasionally will have financial market
commentary from the Investment Adviser. We invite you to visit the site
frequently to get the latest information on The Commerce Funds.
You can review, for a fee, the reports of the Funds and the SAI by writing to
the SEC's Public Reference Section, Washington, D.C. 20459-6009, or by calling
the SEC at 1-900-SEC-0330. You can get copies of this information for free on
the SEC's Internet site at http://www.sec.gov.
The Funds' investment company registration number is 811-8598.
-49-
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
SERVICE SHARES
Short-Term Government Fund
BOND FUND
BALANCED FUND
GROWTH AND INCOME FUND
GROWTH FUND
MIDCAP FUND
INTERNATIONAL EQUITY FUND
* * *
INSTITUTIONAL SHARES
NATIONAL TAX-FREE INTERMEDIATE BOND FUND
MISSOURI TAX-FREE INTERMEDIATE BOND FUND
________________, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW OF THE COMMERCE FUNDS ................................................. 2
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS................................ 2
PRICING OF SHARES............................................................... 44
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................................. 45
DESCRIPTION OF SHARES........................................................... 50
ADDITIONAL INFORMATION CONCERNING TAXES......................................... 53
MANAGEMENT OF THE COMMERCE FUNDS................................................ 55
PORTFOLIO TRANSACTIONS.......................................................... 67
INDEPENDENT AUDITORS............................................................ 73
COUNSEL......................................................................... 73
ADDITIONAL INFORMATION ON PERFORMANCE........................................... 73
MISCELLANEOUS................................................................... 84
FINANCIAL STATEMENTS............................................................ 87
APPENDIX A...................................................................... A-1
APPENDIX B...................................................................... B-1
</TABLE>
This Statement of Additional Information is not a prospectus. It is meant to
be read in conjunction with The Commerce Funds' Prospectuses dated
______________, 1999. 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 1-800-995-6365. The financial statements and report thereon by the
Funds' independent accountants included in the Funds' Annual Report for the
fiscal period ended October 31, 1998 have been incorporated by reference into
this Statement of Additional Information.
<PAGE>
OVERVIEW OF THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company
registered under the Investment Company Act of 1940. The Commerce Funds is a
Delaware business trust, which was organized on February 7, 1994.
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. Investment
methods described in this Statement of Additional Information are among those
which one or more of the Funds have the power to utilize. Some may be employed
on a regular basis; others may not be used at all. Accordingly, reference to any
particular method or technique carries no implication that it will be utilized
or, if it is, that it will be successful.
Except for the Missouri Tax-Free Intermediate Bond Fund, each of the Funds is
a diversified series of The Commerce Funds. The Missouri Tax-Free Intermediate
Bond Fund is a non-diversified series of the Funds. This means that it is
permitted to invest more than 5% of its assets in the obligations of a single
issuer.
GROWTH AND INCOME FUND
- ----------------------
Although the Growth and Income Fund uses the S&P 500 and Russell 1000 Value
Indices for comparison purposes, the Fund may invest its assets in securities
that are not included in these indices. The Fund is not, therefore, an "index"
fund, which typically holds only securities that are included in the index it
attempts to replicate.
Other equity securities in which the Fund may invest include warrants and
securities that are convertible into common or preferred stocks. The Fund may
also invest, either directly or through investments in sponsored and unsponsored
American Depository Receipts ("ADRs"), up to 10% of its total assets in the
securities of foreign issuers. ADRs are receipts issued by a U.S. 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.
GROWTH FUND
- -----------
Although the Growth Fund uses the S&P 500 Index as a benchmark for
comparison, 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
-2-
<PAGE>
included in the index it attempts to replicate.
Other equity securities in which the Fund may invest include warrants and
securities that are convertible into common or preferred stocks. The Fund may
also invest, either directly or through investments in sponsored and unsponsored
ADRs, up to 10% of its total assets in securities of foreign issuers.
MIDCAP FUND
- -----------
Other equity securities in which the Fund may invest include warrants and
securities convertible into common or preferred stocks. 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.
INTERNATIONAL EQUITY FUND
- -------------------------
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 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 Fund may invest up to 10% of its total assets in hybrid investments, which
are discussed below.
BALANCED FUND
- -------------
Up to 20% of the fixed income portion of the Balanced Fund's portfolio may be
invested 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 subdivision ("Municipal
Obligations"). 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 securities acquired by the Balanced Fund will generally be issued
by
-3-
<PAGE>
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 ADRs.
SHORT-TERM GOVERNMENT FUND
- --------------------------
The Fund may purchase U.S. Government Obligations and mortgage-backed
securities with maturities of average lives in excess of five years in an amount
not to exceed 25% of its total assets. In addition, U.S. Government Obligations
with nominal maturities 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 will be permissible investments for the Fund.
BOND FUND
- ---------
Up to 20% of the total assets of the Bond 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 obligations in Municipal
Obligations. Municipal Obligations are discussed below. 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 obligations or U.S. Government
Obligations.
Although the Bond Fund seeks to equal or exceed the return of the Lehman
Brothers 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 Lehman Brothers 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 semi-annually and matures in five years will have
a duration of less than five years, which reflects
-4-
<PAGE>
the semi-annual 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.
NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE INTERMEDIATE BOND
- ---------------------------------------------------------------------------
FUNDS
- -----
Each of the National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds may invest up to 10% of its total 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
Fund.
Each of the Funds 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 purposes in short-term taxable money market instrument, in securities
issued by other investment companies which invest in taxable or tax-exempt money
market instruments and in U.S. Government Obligations, all as discussed
below.
In addition, the Funds 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.
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.
CONVERTIBLE SECURITIES
- ----------------------
The Bond, Balanced, Growth and Income, Growth, MidCap 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. 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
-5-
<PAGE>
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 issuer diversification of a
Fund and whether the securities are rated by Moody's, S&P or another NRSRO 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 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.
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. 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. 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 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
-6-
<PAGE>
denominated in a different currency if the Advisor believes that there is a
pattern of correlation between the two currencies.
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
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.
A separate account consisting of cash or liquid assets, 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.
-7-
<PAGE>
FOREIGN INVESTMENTS
- -------------------
As indicated in the Prospectuses, the Bond, Growth and Income, Growth, MidCap
and International Equity Funds may invest up to 20%, 10%, 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 Foreign Securities, 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.
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 and economic 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 and 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 U.S. entities or citizens.
The Balanced, Growth and Income, Growth, MidCap 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.
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FUTURES CONTRACTS AND RELATED OPTIONS
- -------------------------------------
The Bond, Balanced, Growth and Income, Growth, MidCap and International Equity
Funds may invest in futures contracts and options thereon (interest rate futures
contracts or index 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. 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.
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.
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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.
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 Fund.
HYBRID INSTRUMENTS
- ------------------
The International Equity Fund may invest up to 10% of its total assets in
Hybrid instruments. Hybrid instruments have been developed and combine the
elements of futures contracts or options with those of debt, preferred equity or
depository instruments (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 as 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
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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-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, a
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 a 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
a Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid
Instrument.
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. At various times
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
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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.
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
counterparty 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.
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. A Fund's investment in Rule 144A securities could
increase the level of illiquidity during any period that qualified institutional
buyers becomes uninterested in purchasing these securities.
INTEREST RATE SWAPS, FLOORS AND CAPS
- ------------------------------------
In order to hedge against fluctuations in interest rates, the Short-Term
Government, Bond, Balanced, National Tax-Free Intermediate Bond and Missouri
Tax-Free Intermediate Bond Funds may opt to 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
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particular investment or portion of its portfolio or to shorten the effective
duration of its portfolio securities. 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. 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, a 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.
If a Fund enters into interest rate and mortgage swaps, it will do so 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 Funds 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 Funds' borrowing restrictions. The net amount
of the excess, if any, of a 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 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.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity that 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.
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, a 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
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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 Funds' limitations on
investments in illiquid securities.
LENDING 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 in value at all times to at least the
market value of the securities loaned. 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 defined as "money market instruments" below in
"Temporary Investments." 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 a Fund if a material event affecting the investment
is to occur. 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
(including the value of the collateral received for the loan). 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 form the loan justifies the attendant risks.
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 case 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 assets, in an amount equal to
the forward purchase price. The benefits derived from the use of mortgage
dollar rolls may depend upon the Advisor's ability to correctly predict
mortgage
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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.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
- --------------------------------------------
The Short-Term Government, Bond and Balanced Funds may purchase mortgage-
related securities and the Bond and Balanced Funds may purchase asset-backed
securities that are secured by entities such as the 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. Purchasable mortgage-related
securities are represented by pools of mortgage loans assembled for sale to
investors by various governmental agencies, which are described below, 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
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 return a Fund will
receive when these amounts are reinvested.
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
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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 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.
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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 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
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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."
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.
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 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.
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 issuer 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. Each of these 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
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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.
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 (e.g., 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 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."
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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.
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 calculating the average weighted maturity of a
Fund, the maturity of asset-backed securities will be based on estimates of
average life.
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.
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The two principal classifications of Municipal Obligations consist of "general
obligation" and "revenue" issues, and the respective portfolios may also
purchase "moral obligation" issues, which are normally issued by special purpose
authorities. 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 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. 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. 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.
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 Intermediate Bond and Missouri Tax-Free
Intermediate 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.
Further, each of these Funds may purchase Municipal Obligations known as
"certificates of participation" which represent undivided proportional interests
in least payments by a governmental or non-profit entity. The least payments
and other rights under the least 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
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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 le 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.
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 Intermediate 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 a 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 a 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 Intermediate Bond and Missouri Tax-Free Intermediate Bond
Funds may, from time to time, invest more than 25% of their assets in Municipal
Obligations covered by insurance policies.
OPTIONS TRADING
- ---------------
Each of 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. The aggregate value of
securities subject to options written by the Bond, Balanced, International
Equity, National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate
Bond Funds will not exceed 5% of the respective Fund's total assets. The
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aggregate value of securities subject to options written by the Growth, Growth
and Income and MidCap Funds will not exceed 25% of the respective Fund's total
assets. Notwithstanding the foregoing, 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 existing futures positions
do not exceed 5% of the total assets of the Fund.
Options may relate to particular securities and various stock indexes or
currencies. 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
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<PAGE>
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 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
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<PAGE>
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.
A Fund will likely be unable to control losses by closing its position where a
liquid secondary market does 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. Successful use of options 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.
PASSIVE FOREIGN INVESTMENT COMPANIES
- ------------------------------------
The International Equity Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment companies. Such
entities have been the only or primary way to invest in certain countries. In
addition to bearing their proportionate share of the Fund's expenses (management
fees and operating expenses), shareowners will also indirectly bear similar
expenses of such entities. Capital gains on the sale of such holdings are
considered ordinary income regardless of how long the Fund held its investment.
In addition, the Fund may be subject to corporate income tax and an interest
charge on certain dividends and capital gains earned from these investments,
regardless of whether such income and gains are distributed to shareowners.
To avoid such tax and interest, the Fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax purposes
at that time; deductions for losses are allowable only to the extent of any
gains resulting from these deemed sales for prior taxable years. Such gains and
losses will be treated as ordinary income. The Fund will be required to
distribute any resulting income even though it has not sold the security.
PORTFOLIO TURNOVER
- ------------------
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 market 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.
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<PAGE>
*****
RATINGS OF SECURITIES
- ---------------------
Investment-grade obligations are those rated at the time of purchase AAA, AA,
A or BBB by S&P, Aaa, Aa, A or Baa by 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, 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 Bond, Balanced, National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds, a Fund's
portfolio securities may be downgraded below investment grade or may be deemed
by the Advisor to be no longer comparable to investment-grade securities. Up to
5% of the Bond Fund's portfolio securities and up to 5% of the Balanced Fund's
fixed-income portion of its portfolio securities may represent securities
downgraded below investment grade. The Advisor will consider such an event in
determining whether the Fund should continue to hold the security. See Appendix
A for a description of applicable debt ratings.
The International Equity Fund may also hold foreign or domestic money market
instruments and domestic securities rated at the time of purchase in one of the
three highest investment-grade categories by Moody's, S&P or another NRSRO. The
Fund does not intend to purchase unrated debt obligations. In an 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.
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch IBCA
Investor Service, Inc. and Thomson BankWatch, 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
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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.
Attached to this Statement of Additional Information is Appendix A, which
contains descriptions of the rating symbols used by NRSROs for securities in
which the Funds may invest.
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.
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.
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 cash or liquid assets 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
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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.
RIGHTS OFFERINGS AND WARRANTS
- -----------------------------
The Balanced, Growth and Income, Growth, MidCap 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. This 2% limit on unlisted warrants does not apply to
the International Equity Fund. Warrants acquired by a Fund in units or attached
to other securities are not subject to this restriction.
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 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 the Fund; and (d) not more than 10%
of the outstanding voting stock of any one investment company will be owned in
the aggregate by the 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 the Fund.
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SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI OBLIGATIONS [TO BE
- --------------------------------------------------------------------
UPDATED BY MISSOURI COUNSEL]
The following discussion highlights some of the more important economic and
financial trends and considerations affecting Missouri Obligations 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 5,402,508 in 1997 according to the United States
Bureau of Estimates Program, which represented an increase of 5.6% from the 1990
decennial census of 5,117,073 inhabitants. In 1996, St. Louis and the
surrounding metropolitan area constituted the 18th largest Metropolitan
Statistical Area (MSA) in the nation with approximately 2.55 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 1996, Kansas City was the 24th largest MSA
nationally with approximately 1.69 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. Missouri's personal income rose at a 5.6% rate during
1996. Missouri's employment stood at 2,790,252 at the end of 1997, up 20,717
from one year ago. At the end of June 1997, the state unemployment rate was
4.1% compared to 4.7% at the end of June 1996. The national rate was 5.2% at
the end of June 1997.
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 1996, services
represented the single most significant non-agricultural economic activity, with
wholesale and retail trade ranking second and manufacturing ranking third. In
1996, these three economic sectors accounted for 67.6% of the State's
nonagricultural employment. Manufacturing, which accounts for approximately
16.1% 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.
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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. In 1996,
Missouri ranked fourth among the states in Department of Defense 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.
Limitations on State debt and bond issues are contained in Article III,
Section 37 of the Constitution of Missouri. Pursuant to this section, (1) the
General Assembly may issue general obligation bonds solely to refund outstanding
bonds (provided that the refunding bonds must mature within 25 years of
issuance); (2) the General Assembly upon the recommendation of the Governor to
incur a temporary liability by reason of unforeseen emergency or of deficiency
in revenue, may issue bonds in an amount not to exceed $1 million for any one
year (must be paid within 5 years of issuance); and (3) the General Assembly, or
the people by initiative, may submit a proposition to incur temporary
indebtedness greater than $1 million by reason of unforeseen emergency or of
deficiency in revenue, 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 are issued pursuant to Section 37, 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.
Certain water pollution bonds and State building bonds are also authorized
pursuant to Sections 37(b)-(f), inclusive. In 1971, Missouri voters approved a
constitutional amendment providing for the issuance of $150 million 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 million of State Water Pollution Control Bonds.
In 1982, State voters approved a constitutional amendment authorizing the
issuance of $600 million of 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 million for controlling water pollution and making
improvements to drinking water systems. In 1994, state voters approved a
constitutional amendment authorizing the issuance of $250 million Fourth State
Building Bonds. Proceeds from the Fourth State Building Bonds fund the
rebuilding of institutions of higher education, land acquisition, construction
and purchase of buildings, and planning, furnishing, equipping and landscaping
such improvements and buildings.
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
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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,
and adjusted annually, in accordance with the formula set forth in the
amendment. Under that formula, the revenue limit (the "Revenue Limit") for any
fixed year equals the product obtained by multiplying (i) 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 times (ii) 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 the excess is not refunded but is 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 Limit does not apply to taxes imposed for payment of principal and
interest on bonds that have been approved by the voters, as authorized by the
Missouri Constitution.
In addition to the Revenue Limit, the General Assembly is prohibited without
voter approval from increasing taxes as fees in any fiscal year that in total
produces new annual revenues greater than $50 million, adjusted annually by the
percentage change in the personal income of Missouri for the second previous
fiscal year, or 1% of total state revenue for the previous fiscal year prior to
the General Assembly action, whichever is less. 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.
General revenue collections in fiscal year 1998 were $_______ million, ____%
above fiscal year 1997 collections. The fiscal year 1999 budget is
conservatively based upon general revenue collections of $______ million.
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STAND-BY COMMITMENTS
- --------------------
The National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate
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 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.
STRIPPED SECURITIES
- -------------------
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 Bond and Balanced Funds may acquire U.S. Government
Obligations and their unmatured interest coupons that have been separated
("stripped") by their
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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 either Fund in these
securities will not exceed 5% of the value of the Fund's total assets.
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 a Fund earns. 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 a 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 Bond and Balanced 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, a 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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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, U.S. Government Obligations,
foreign government securities (if permitted) and repurchase agreements. "Money
market investments" also include, for purposes of the National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds, 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 investment to present minimal credit risks, such investments
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. 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. 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.
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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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, S&P or another NRSRO. The
Fund does not intend to purchase unrated debt 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.
Investments by the National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds 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 rating agency. Commercial paper may include variable and floating rate
instruments.
When the Advisor pursues a temporary defensive strategy, the Funds may not
profit from favorable developments that would have been available if the Funds
were pursuing their normal investment strategies. In addition, when the Advisor
uses a defensive strategy, the Funds will not be pursuing their investment
objectives.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As stated in the Prospectuses, pursuant to their respective investment
objectives, the Funds may invest in U.S. Government Obligations. Examples of
the types of U.S. Government 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.
U.S. Government Obligations purchased by the Short-Term Government Fund 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
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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 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.
U.S. Government obligations have historically involved little risk of loss of
principal if held to maturity. The Short-Term Government Fund, however, will
not necessarily hold its securities to maturity. Generally, the market value of
securities not held to maturity can be expected to vary universally to changes
in prevailing interest rates. In addition, neither the U.S. Government, nor any
agency or instrumentality thereof has guaranteed, sponsored or approved the
Short-Term Government Fund or its shares. 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.
VARIABLE AND FLOATING RATE INSTRUMENTS
- --------------------------------------
The Funds may purchase variable rate and floating rate obligations issued by
corporations, industrial development authorities and governmental entities. 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.
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.
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Variable and floating rate demand instruments acquired by the National Tax-
Free Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds may include
participations 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.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
- ---------------------------------------------
Each Fund may purchase securities on a when-issued basis or enter into forward
commitment transactions. 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 the Fund to
lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in market prices or in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the yield or
price obtained in a transaction (and therefore the value of the security) may be
less favorable than the yield or price (and therefore the value of the security)
available in the market when the securities delivery takes place. When a Fund
agrees to purchase securities on a when-issued basis or enters into a forward
commitment to purchase securities, the Funds' Custodian will set aside cash or
liquid assets, as permitted by applicable law, 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 and 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
assets, as permitted by applicable law, 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.
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<PAGE>
A Fund 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. No Fund intends to engage in when-issued purchases and forward
commitments for speculative purposes. If deemed advisable as a matter of
investment strategy, however, a Fund may dispose of or renegotiate a commitment
after it is entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In
these cases a Fund may realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions, it
relies on the other party to consummate the trade. Failure of such party to do
so may result in the Fund's 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 the 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.
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 liquidations 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.
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<PAGE>
INVESTMENT LIMITATIONS
- ----------------------
Each Fund is subject to the investment limitations enumerated below, which may
not be changed with respect to a Fund without the approval of the lesser of (1)
67% of the Fund's 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 Fund's outstanding shares. Other restrictions in the form
of non-fundamental policies are subject to change by The Commerce Funds' Board
of Trustees without shareholder approval. In addition, the Funds' investment
objectives are fundamental and may not be changed 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. With respect to 75% of a Fund's total assets: (i) invest more than 5% of
a Fund's total assets in the securities of any one issuer; (ii) invest more than
25% of a Fund's total assets in the securities of issuers in any one industry;
and (iii) hold more than 10% of the outstanding voting securities of any one
issuer; provided that the foregoing does not apply to the National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds. Securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements fully collateralized by such securities are excepted
from these limitations.
2. 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.
3. 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 (including the value of the collateral for
the loan).
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<PAGE>
4. Borrow money, issue senior securities or pledge its assets, except that a
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,
provided the Fund maintains assets coverage of at least 300% for all 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.
5. Purchase securities on margin, except that (i) a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities, (ii) 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.
6. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended ("Securities Act") in purchasing and selling portfolio securities and
except insofar as such underwriting would comply with the limits set forth in
the 1940 Act.
7. 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 fundamental policy:
1. Each of the National Tax-Free Intermediate Bond Fund and the Missouri Tax-
Free Intermediate Bond Fund will limit its investments so that less than 25% of
the Fund's total assets will be invested in the securities of the issuers in any
one industry. For 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
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<PAGE>
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 the total assets of the National Tax-Free Fund,
and up to 50% of the total assets of the Missouri Tax-Free Fund, may be invested
without regard to this 5% limitation (although not more than 25% of the Missouri
Tax-Free Fund's total assets will be invested in the securities of any one
issuer).
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 the securities of any one investment company, (iii) not
more than 10% of the Fund's total assets, taken at market value, would be
invested in the aggregate in securities of investment companies as a group, and
(iv) 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).
3. Invest in illiquid securities and securities of unseasoned issuers, if as
a result more than 15% of its net assets would be invested in such securities.
4. Make investments for the purpose of exercising control or management.
5. Invest in warrants if at the time of acquisition a Fund's investment in
warrants would exceed 10% of the value of the Fund's net assets.
6. Invest in real estate limited partnership interests or participations or
other direct interests in or enter into leases with respect to oil, gas or other
mineral exploration or development programs if, as a result thereof, more than
5% of the value of the total assets of a Fund would be invested in such
programs, except that a Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration of development activities.
-42-
<PAGE>
7. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof with respect to more than 25% (5% with respect to the National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds) of the value of
its net assets.
As a matter of non-fundamental policy, the International Equity Fund will
engage in futures contracts and options thereon only for bona fide hedging,
total return enhancement, and risk management purposes, in each case in
accordance with rules and regulations of the CFTC. Initial margin deposits and
premiums on options for non-hedging purposes will not equal more than 5% of the
Fund's net assets.
1. With regard to the Short-Term Government, Bond, Balanced, Growth and
Income, Growth, MidCap 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% of a Fund's total assets
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 these 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 Intermediate Bond and Missouri Tax-Free
Intermediate 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
-43-
<PAGE>
5% of its total assets will be invested in the securities of any one
issuer, except that up to 25% of the total assets of the National Tax-
Free Intermediate Bond Fund, and up to 50% of the total assets of the
Missouri Tax-Free Intermediate Bond Fund, may be invested without
regard to this 5% limitation (although not more than 25% of the Fund's
total assets will be invested in the securities of any one issuer).
Additionally, a Fund may not borrow money, except from banks for
temporary or short-term purposes, provided that the Fund maintains
asset coverage of 300% for all such borrowings.
PRICING OF SHARES
The net asset value per share for each Fund of The Commerce Funds is
calculated separately for Institutional and Service Shares by adding the value
of all portfolio securities and other assets belonging to the Fund that are
allocable to a particular class, subtracting the liabilities charged to
such class of the Fund, and dividing the result by the number of shares
outstanding of such class of the Fund. 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 particular class of a Fund are charged with
the direct liabilities of that class 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. Payments under The Commerce Funds' Shareholder Administrative
Services Plans for Institutional Shares and Service Shares are allocated to the
Shares in proportion to the relative net asset values of the Funds. Payments
under the Distribution Plan pursuant to Rule 12b-1 are applicable only to the
Service Shares of The Short-Term Government, Bond, Balanced, Growth and Income,
Growth, MidCap and International Equity Funds.
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. Restricted
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.
-44-
<PAGE>
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 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. Service Shares of the Funds are sold to investors at the public offering
price based on a Fund's net asset value plus a front-end sales charge as
described in the Prospectus. Institutional Shares of the Funds are sold to
investors at the net asset value next determined after a purchase order is
received.
An illustration of the computation of the public offering price per share of
the Institutional and Service Shares of the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, MidCap and International Equity Funds and
the Institutional Shares of the National Tax-Free Intermediate Bond Fund and the
Missouri Tax-Free Intermediate Bond Funds, based on the value of the total net
assets and total number of shares outstanding on October 31, 1998, is as
follows:
-45-
<PAGE>
PUBLIC OFFERING PRICE
- ---------------------
Table
-----
<TABLE>
<CAPTION>
==================================================================================================================
Bond Fund Balanced Fund Growth & Income Fund Growth Fund
--------- -------------- -------------------- -----------
Institutional Service Institutional Service Institutional Service Institutional Service
------------- ------- ------------- ------- ------------- ------- ------------- -------
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets (in
000's)
- ------------------------------------------------------------------------------------------------------------------
Number of
Shares
Outstanding
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share
- ------------------------------------------------------------------------------------------------------------------
Sales Charge,
3.50 percent of
offering
price (3.63
percent of
net asset
value per
share)
- ------------------------------------------------------------------------------------------------------------------
Offering Price
to Public
==================================================================================================================
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
MidCap Fund International Equity Fund National Tax-Free Missouri Tax-Free
----------- ------------------------- ----------------- -----------------
Institutional Service Institutional Service Intermediate Bond Fund Intermediate Bond Fund
------------- ------- ------------- ------- ---------------------- ----------------------
Institutional Institutional
------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Assets (in
000's)
- --------------------------------------------------------------------------------------------------------------------
Number of
Shares
Outstanding
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value
Per Share
- --------------------------------------------------------------------------------------------------------------------
Sales Charge,
3.50 percent of
offering
price (3.63
percent of
net asset
value per
share)
- --------------------------------------------------------------------------------------------------------------------
Offering Price
to Public
====================================================================================================================
<CAPTION>
=============================================================
Short-Term
Government Fund
Institutional Service
------------- -------
- -------------------------------------------------------------
<S> <C> <C>
Net Assets (in 000's)
- -------------------------------------------------------------
Number of Shares
Outstanding
- -------------------------------------------------------------
Net Asset Value
Per Share
- -------------------------------------------------------------
Sales Charge, 2.00
percent of
offering price (2.04
percent of net
asset value per share)
- -------------------------------------------------------------
Offering Price
to Public
=============================================================
</TABLE>
ADDITIONAL REDEMPTION INFORMATION
- ---------------------------------
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 shareholder to
make full payment for shares
-47-
<PAGE>
purchased by the shareholder or to collect any charge relating to a transaction
effected for the benefit of a shareholder 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.
RETIREMENT PLANS
- ----------------
PROFIT-SHARING PLAN. The Commence 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 "Code").
The 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 Accounts. The Commerce Funds have available an
individual retirement account (the "regular 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 retirement saving. The Code limits the amount an individual may
contribute to an IRA and such contributions and earnings thereon are not subject
to federal income tax until distributed. Except for rollover distributions, an
individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may no longer
-48-
<PAGE>
contribute to a regular IRA held in his or her behalf. Distribution of an
individual's regular IRA assets (and earnings thereon) before the individual
attains age 59 1/2 will result in an additional 10% tax on the amount included
in the individual's gross income.
The Commerce Funds permit certain employers (including self-employed
individuals) to make contributions to an employee's regular IRA if the employer
establishes a Simplified Employee Pension ("SEP") plan. A SEP permits an
employer to make discretionary contributions to all of its employees' regular
IRAs equal to a uniform percentage of each employee's compensation (subject to
certain limits). The Code provides certain tax benefits to employees who
contribute to an employee's regular IRA pursuant to a SEP. For example, employer
contributions to an employee's regular IRA pursuant to a SEP are deductible
(subject to certain limits).
The Commerce Funds also have available a Roth individual retirement account
(the "Roth IRA") for use by individuals with compensation for services rendered.
Individuals whose adjusted gross income ("AGI") is within the applicable income
limitations (an AGI of up to $110,000 for a single individual and an AGI of up
to $160,000 for married couples filing jointly) may contribute at any age to a
Roth IRA for the individual and for his or her nonworking spouse. Roth IRA
contributions are not deductible. Earnings on amounts contributed to a Roth
IRA, however, may be withdrawn tax and penalty-free if the Roth IRA has been
held for at least five years and the distribution is due to the account owner's
attainment of age 59 1/2 or another qualifying event. Distributions which do
not meet these criteria are generally subject to a 10% withdrawal tax.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS. Finally,
The Commerce Funds offer a simplified tax-favored retirement plan for employees
of small employers (a "SIMPLE IRA Plan"). Each eligible employee of
participating employers may choose to defer a percentage of his or her pre-tax
compensation to the employee's SIMPLE individual retirement account (a "SIMPLE
IRA"). The employer must generally make an annual, non-discretionary
contribution to the SIMPLE IRA of each eligible employee. The Code provides
certain tax benefits for contributions by an employer, pursuant to a SIMPLE IRA
Plan, to an employee's SIMPLE IRA. For example, these contributions are
deductible (subject to certain limits) and not subject to federal income tax
until distributed.
In the Profit-Sharing/401(k) Plan and in the IRAs available through the
Funds, distributions of net investment income and capital gains will be
automatically reinvested.
-49-
<PAGE>
The foregoing brief descriptions are not complete or definitive
explanations of the Profit-Sharing/401(k) Plan or IRAs available for investment
in the Funds. In addition, the foregoing plans are not available for purposes
of the National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate
Bond Funds. Any person who wishes to establish a retirement plan account may do
so by contacting The Commerce Funds directly. The complete Plan and IRA
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
Under the Funds' Trust Instrument, the shares of 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 Short-Term Government, Bond, Balanced, Growth and Income, Growth,
MidCap and International Equity Funds offer two classes of shares:
Institutional Shares and Service Shares. The National Tax-Free Intermediate
Bond Fund and the Missouri Tax-Free Intermediate Bond Fund offer only
Institutional Shares.
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 the Prospectuses 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 capita 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.
-50-
<PAGE>
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 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 Commerce Funds or any 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 any 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 the 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
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<PAGE>
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 10% 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 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 of The Commerce Funds or a particular
Fund means, with respect to the approval of an investment advisory agreement or
a change in an investment objective or a fundamental investment policy, the vote
of the lesser of (1) 67% of the shares of The Commerce Funds or the 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 Commerce Funds or the Fund.
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.
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<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year, so that each Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
The International Equity Fund. It is expected that the International
Equity Fund will be subject to foreign withholding taxes with respect to
dividends or interest received from sources in foreign countries. The
International Equity Fund may make an election to treat a proportionate amount
of such taxes as constituting a distribution to each shareowner, which would
allow each shareowner either (1) to credit such proportionate amount of taxes
against U.S. federal income tax liability or (2) to take such amount as an
itemized deduction.
FEDERAL TAX-EXEMPT INFORMATION
The National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds' distributions will generally constitute tax-exempt
income for shareowners for federal income tax purposes. It is possible,
depending upon the Funds' investments, that a portion of the Funds'
distributions could be taxable to shareowners as ordinary income or capital
gains, but the Funds do not expect that this will be the case.
State and local income taxes generally apply to interest on bonds of
states and political subdivisions outside of the state in which the tax is
imposed. Missouri exempts interest on (i) its own obligations, (ii) the
obligations of its political subdivisions, (iii) U.S. Government obligations,
and (iv) obligations of certain U.S. territories and possessions, from its
personal income tax and general corporate income tax. The Funds' distributions
from these sources will retain their exempt character in the hands of
shareowners.
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<PAGE>
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Funds generally will not be deductible for federal income
tax purposes.
You should note that a portion of the exempt-interest dividends paid
by the Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest
dividends will also be considered along with other adjusted gross income in
determining whether any Social Security or Railroad Retirement payments received
by you are subject to federal income taxes.
-54-
<PAGE>
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 c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, ADDRESS AND AGE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------- -------------- -------------------------------------------
<S> <C> <C>
John Eric Helsing Trustee and Chairman Retired. Former Professor and Chairman, Department
c/o The Commerce Funds of Business Administration and Economics of William
922 Walnut Street Jewell College since September 1990. Lecturer at
Kansas City, MO 64141 William Jewell College since September 1996.
DOB: 11/6/33 Director, Valentine Radford Communications and
Trustee, Midwest Research Institute.
*Warren W. Weaver Trustee and President Retired. Former Vice Chairman, Commerce Bancshares,
c/o The Commerce Funds Inc. and Commerce Bank, N.A. Director, Milbank Mfg.
922 Walnut Street Company; Director, Roddis Lumber Company.
Kansas City, MO 64141
DOB: 10/10/30
*Randall D. Barron Trustee and Treasurer Retired. Former President, Missouri Division,
c/o The Commerce Funds Southwestern Bell Telephone Company since 1984.
922 Walnut Street Former Director, Commerce Bancshares, Inc.
Kansas City, MO 64141
DOB: 10/25/29
David L. Bodde Charles N. Kimball Professor of Technology and
c/o The Commerce Funds Trustee Innovation, University of Missouri, Kansas City
922 Walnut Street since July 1996. Vice President, Midwest Research
Kansas City, MO 64141 Institute since January 1991. Executive Director,
DOB: 1/27/43 Commission on Engineering, National Academy of
Sciences from April 1986 to January 1991; Director,
Missouri Technological Corporation. Director,
Kansas City Power & Light Company since 1994.
John Joseph Holland Trustee Executive Vice President from June 1998 to present,
c/o The Commerce Funds Butler Manufacturing Company and Vice President and
922 Walnut Street Chief Financial Officer from January 1990-June 1998;
Kansas City, MO 64141 Director, Allendale Insurance Company.
DOB: 3/05/50
Gordon Linke Vice President Vice President of Goldman, Sachs & Co. March 1990 to
Goldman Sachs Asset present.
Management
555 California Street
Suite 4500
San Francisco, CA 94104
DOB: 12/18/57
</TABLE>
*Trustees who are "interested persons" of The Commerce Funds, as defined in the
1940 Act.
-55-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, ADDRESS AND AGE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------- ----- -------------------------------------------
<S> <C> <C>
Nancy L. Mucker Vice President Vice President, Goldman Sachs since April 1985.
Goldman Sachs Asset Manager of Shareholder Services for Goldman Sachs
Management Asset Management Funds Group since November 1989.
4900 Sears Tower
Chicago, IL 60606
DOB: 7/26/49
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath LLP,
Drinker Biddle & Reath LLP Philadelphia, Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107
DOB: 02/07/43
Philip V. Guica, Jr. Assistant Secretary Assistant Treasurer and Vice President, Goldman,
Goldman, Sachs & Co. Sachs & Co. (May 1992 present)
10 Hanover Square
New York, NY 10004
DOB: 03/03/62
John Perlowski Assistant Secretary Vice President, Goldman, Sachs & Co., since July
Goldman, Sachs & Co. 1995. Director/Fund Accounting & Custody,
One New York Plaza Investors Bank & Trust Co., November 1993 to July
New York, NY 10004 1995. Formerly, Manager, Audit Division, Arthur
DOB: 11/7/64 Andersen, September 1986 to November 1993.
Michael J. Richman, Esq. Assistant Secretary Vice President and Assistant General Counsel of
Goldman Sachs & Co. Goldman Sachs and Counsel to the Funds Group of
12th Floor Goldman Sachs Asset Management since June 1992.
Legal Department Associate General Counsel to Goldman Sachs Asset
85 Broad Street Management since February 1994. Formerly Partner,
New York, NY 10004 Hale and Dorr from September 1991 to June 1992.
DOB: 10/24/60 Attorney-at-law, Gaston & Snow prior thereto.
Howard B. Surloff Assistant Secretary Counsel to Goldman Sachs and the Funds Group of
Goldman Sachs & Co. Goldman Sachs Asset Management since November 1993.
12th Floor Assistant General Counsel since November 1995 and
Legal Department Vice President of Goldman Sachs since May 1994.
85 Broad Street Formerly Associate of Shereff, Friedman, Hoffman &
New York, NY 10004 Goodman.
DOB: 6/21/65
</TABLE>
* * *
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 Commerce Funds has been advised by
such officers that all such transactions
-56-
<PAGE>
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. Guica,
Linke, Perlowski, Richman and Surloff and Ms. Mucker hold similar positions with
one or more investment companies that are advised by Goldman Sachs.
Effective July 29, 1998, each Trustee receives a fee of $1,500 for each
regular meeting of the Board of Trustees, plus $750 for each special meeting of
the Board of Trustees. Prior to July 29, 1998, Trustees were entitled to
receive an annual retainer of $5,000 per year, plus $750 for each special
meeting of the Board of Trustees. All Trustees are reimbursed for out of pocket
expenses incurred in connection with attendance at meetings. Drinker Biddle &
Reath LLP, of which Mr. McConnel is a partner, receives legal fees as counsel to
the Trust. The following chart provides certain information about the Trustee
fees paid by the Trust for the fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS
AGGREGATE ACCRUED AS AGGREGATE
NAME OF COMPENSATION PART OF FUND COMPENSATION
PERSON/POSITION FROM THE TRUST EXPENSES FROM THE FUND
--------------- -------------- -------- -------------
<S> <C> <C> <C>
JOHN ERIC HELSING, $________ $0 N/A
Trustee, Chairman
WARREN W. WEAVER, $________ $0 N/A
Trustee, President
RANDALL D. BARRON, $________ $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $________ $0 N/A
JOHN JOSEPH HOLLAND, $________ $0 N/A
Trustee
</TABLE>
Effective October 28, 1998, each Trustee became entitled to
participate in The Commerce Funds Deferred Compensation Plan (the "Plan").
Under the Plan, a Trustee may elect to have his or her deferred fees treated as
if they had been invested by The Commerce Funds in the shares of one or more
portfolios in The Commerce Funds, and the amount paid to the Trustees under the
Plan will be determined based upon the performance of such investments.
Deferral of Trustees' fees will have no effect on a portfolio's assets,
liabilities, and net income per share, and will not obligate The Commerce Funds
to retain the services of any Trustee or obligate a portfolio to any level of
compensation to the Trustee. The Commerce Funds may invest in underlying
securities without shareowner approval.
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<PAGE>
The Trustees and officers of The Commerce Funds as a group held less
than 1% of each of the Institutional and Service Classes of the Funds.
INVESTMENT ADVISOR
The Funds are advised by Commerce Bank, N.A., a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank, N.A.
(or its predecessor organizations) have provided investment management services
to The Commerce Funds since 1994, to private and public pension funds,
endowments and foundations since 1946 and to individuals since 1906.
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 calculated as a
percentage of the Funds' average daily net assets as stated below:
Annual Rate
-----------
Short-Term Government Fund........................ 0.50%
Bond Fund......................................... 0.50%
Balanced Fund..................................... 1.00%
Growth Fund....................................... 0.75%
Growth and Income Fund............................ 0.75%
MidCap Fund....................................... 0.75%
International Equity Fund......................... 1.50%
National Tax-Free Intermediate Bond Fund.......... 0.50%
Missouri Tax-Free Intermediate Bond Fund.......... 0.50%
For the fiscal years ended October 31, 1998, 1997 and 1996, The Commerce Funds
paid the Advisor fees for advisory services (net of waivers) as follows:
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<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1998 October 31, 1997 October 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 119,281 $ 82,030
Bond Fund $ 867,384 $ 600,758
Balanced Fund $ 649,432 $ 438,474
Growth and Income Fund (1) $ 106,879 N/A
Growth Fund $2,132,218 $1,262,077
MidCap Fund $ 664,643 $ 453,655
International Equity Fund $ 674,111 $ 315,480
National Tax-Free $ 104,058 $ 68,740
Intermediate Bond Fund
Missouri Tax-Free $ 58,452 $ 36,710
Intermediate Bond Fund
</TABLE>
____________________
(1) Commenced investment operations on March 3, 1997.
For the fiscal years ended October 31, 1998, 1997 and 1996, the Advisor
voluntarily agreed to waive a portion of its advisory fee for certain
portfolios. During the periods stated, these waivers reduced advisory fees by
the following:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1998 October 31, 1997 October 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 79,521 $ 54,686
Balanced Fund $216,475 $146,158
International Equity Fund $346,574 $255,695
Missouri Tax-Free Intermediate $ 38,968 $ 24,474
Bond Fund
</TABLE>
-59-
<PAGE>
In addition, for the fiscal years ended October 31, 1998, 1997 and 1996, the
Advisor voluntarily agreed to reimburse the expenses of certain of the Funds.
The effect of these reimbursements during the period was to reduce expenses as
follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1998 October 31, 1997 October 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 88,977 $63,161
Bond Fund $ 0 $ 0
Balanced Fund $128,384 $43,556
Growth Fund $ 0 $ 0
International Equity Fund $ 0 $96,415
National Tax-Free Intermediate $ 61,410 $95,722
Bond Fund
Missouri Tax-Free $ 69,387 $89,907
Intermediate Bond Fund
Growth and Income Fund(1) $116,567 $ 0
MidCap Fund
</TABLE>
___________________
(1) Commenced investment operations on March 3, 1997.
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 shareholder 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.
-60-
<PAGE>
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.
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
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").
T. Rowe Price was incorporated in Maryland in 1947 as successor to 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. Flemings is a diversified
investment organization which participates in a global network of regional
investment offices in New York, London, Zurich, Geneva, Johannesburg, Bangkok,
Bombay, Jakarta, Singapore, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, and
Taipei.
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 a 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.
-61-
<PAGE>
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 the Fund's 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. When the Fund's assets reach $200
million, the Sub-Advisor has agreed to waive fees in excess of 0.50% on an
annualized basis of the average daily net assets of the Fund. For the fiscal
year ended October 31, 1998, Price-Fleming received advisory fees at the
effective annual rate of 0.__% of the International Equity Fund's average daily
net assets.
For the fiscal years ended October 31, 1998, 1997 and 1996, the Advisor paid
the Sub-Advisor sub-advisory fees of $____________, $420,324 and $259,923,
respectively.
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 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 for which each receives from Price-
Fleming a fee of 0.075% of the market value of all assets in equity accounts
under Price-Fleming's management. FIM is a wholly-owned subsidiary of Robert
-62-
<PAGE>
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.
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; (v) provide various accounting services to The Commerce Funds
and to the Administrator for the benefit of The Commerce Funds; and (vi) act as
foreign custody manager pursuant to Rule 17f-5 of the 1940 Act with respect to
the monitoring of the Funds' assets held by eligible foreign sub-Custodians.
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. State Street is located at 225 Franklin
Street, Boston, Massachusetts 02110.
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, 1/133rd 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.
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
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<PAGE>
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 shareholder 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.
ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is
located at 85 Broad Street, New York, New York 10004. 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. For the fiscal year ended October 31,
1998, GSAM received administration fees at the annual rate of 0.15% of the
average daily net assets of each Fund. For the fiscal years ended October 31,
1998, 1997 and 1996, the fees paid by the Funds for administration services were
as follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1998 October 31, 1997 October 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Short-Term Government Fund $ 59,641 $ 41,015
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1998 October 31, 1997 October 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Bond Fund 260,215 180,227
Balanced Fund 129,886 87,695
Growth and Income Fund(1) 21,376 N/A
Growth Fund 426,443 252,415
MidCap Fund 132,929 90,731
International Equity Fund 102,068 57,118
National Tax-Free 31,217 20,622
Intermediate Bond Fund
Missouri Tax-Free 29,226 18,355
Intermediate Bond Fund
</TABLE>
_________
(1) Commenced investment operations on March 3, 1997.
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 is located at 85 Broad Street, New York, New York
10004. 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 $___________, $47,000, and $31,000 of such sales loads
for the fiscal years ended October 31, 1998, 1997 and 1996, respectively.
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE SERVICES PLANS
- -----------------------------------------------------------------------
The Distributor is entitled to payment on a monthly basis at an annual rate
not exceeding 0.25% of the average daily net assets of Service Shares from the
Trust for distribution expenses incurred pursuant to the Distribution Plan (the
"12b-1 Plan") adopted on behalf of the Service Shares. Under the 12b-1 Plan, the
Trust may pay the Distributor (or any other person) for: (i) direct out-of-
pocket promotional expenses incurred by the Distributor in advertising and
marketing Service Shares; (ii) expenses incurred in connection with preparing,
printing, mailing, and distributing or publishing advertisements and sales
literature for Service Shares; (iii) expenses incurred in connection with
printing and mailing prospectuses and statements of additional information to
other than current Service Class shareowners; (iv) periodic payments or
commissions to one or more securities dealers, brokers, financial institutions
or other industry professionals, such as investment advisors, accountants, and
estate planning firms with respect to a Fund's Service Shares beneficially owned
by customers for whom the distribution organization is the record or holder of
record of such Service
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<PAGE>
Shares; or (v) for such other services as may be construed, by any court or
governmental agency or commission, including the Securities and Exchange
Commission, to constitute distribution services under the 1940 Act or rules and
regulations thereunder.
During the fiscal year ended October 31, 1998, The Commerce Funds paid the
Distributor $__________ in the aggregate under the Funds' 12b-1 Plan.
The Commerce Funds may enter into Servicing Agreements with Service
Organizations, which may include the Advisor and its affiliates, pursuant to the
Shareholder Administrative Services Plans for Institutional Shares and Service
Shares (the "Services Plans"). The Servicing Agreements provide that the
Service Organizations will render shareholder administrative support services to
their customers who are the beneficial owners of Institutional and Service
Shares of the Short-Term Government, Bond, Balanced, Growth, Growth and Income,
MidCap and International Equity Funds and Institutional Shares of the National
Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds in
consideration for a Fund's payment of up to 0.25% (on an annualized basis) of
the average daily net asset value of the shares of the Fund beneficially owned
by such customers and held by the Service Organizations. At The Commerce Fund's
option, it may reimburse the Service Organizations' out-of-pocket expenses as
well. Such services may include: (i) processing dividend and distribution
payments from a Fund; (ii) providing information periodically to customers
showing their share positions in Institutional and Service Shares; (iii)
arranging for bank wires; (iv) responding to customer inquiries concerning their
investments in shares; (v) providing subaccounting with respect to shares
beneficially owned by customers or the information necessary for such
subaccounting; (vi) if required by law, forwarding shareholder communications;
(vii) processing share exchange and redemption requests from customers; (viii)
assisting customers in changing dividend options, account designations and
addresses; (ix) establishing and maintaining accounts and records relating to
customers that invest in shares; (x) responding to customer inquiries relating
to the services performed by the Service Organization; and (xi) 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. For the fiscal year ended October 31, 1998, an aggregate of
$_____________ in fees were accrued under the Services Plans.
The Services Plans are subject to annual reapproval by a majority of the
Trust's Board of Trustees, including a majority of the Non-Interested Plan
Trustees and is terminable without penalty at any time with respect to any Fund
by a vote of a
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<PAGE>
majority of the Non-Interested Plan Trustees or by vote of the holders of a
majority of the outstanding shares of each Class of the Fund involved. Any
agreement entered into pursuant to the Services Plans with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of a majority of the Non-Interested Plan Trustees, by vote of the
holders of a majority of the outstanding shares of each Class of such Fund, or
by the Service Organizations. Each agreement will also terminate automatically
in the event of its assignment.
The Trust's Board of Trustees has concluded that there is a reasonable
likelihood that the Services Plans will benefit the Funds and their shareowners.
PORTFOLIO TRANSACTIONS
BROKERAGE TRANSACTIONS AND COMMISSIONS
- --------------------------------------
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of Commerce 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 Agreements for the Funds provide 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 Agreements authorize the Advisor, subject to the prior approval of the Board
of Trustees, to cause the
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<PAGE>
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 it determines 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, broad overviews of the stock, bond and government securities markets
and the economy, and advice as to the value of securities, 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.
During the last fiscal year, the following brokers effected brokerage
transactions on behalf of the Funds and provided research services in connection
with such brokerage transactions:
Amount of Amount of
Fund Transaction Commission Paid
- ---- ----------- ---------------
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 ("SEC"). 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
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<PAGE>
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
SEC. 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 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 a Fund.
The Commerce Funds are required to identify any securities of its "regular
brokers or dealers" acquired by the Funds during the most recent fiscal year.
During the fiscal year ended October 31, 1998, the Funds held securities of
their regular broker/dealers as follows:
Aggregate Amount
Fund Broker/Dealer of Securities Held
- ---- ------------- ------------------
During the fiscal year ended October 31, 1998, the Funds entered into
repurchase agreement transactions with State Street Bank and Trust Company,
which was one of the broker/dealers that engaged as principal in the largest
dollar amount of portfolio transactions with the Funds. At October 31, 1998,
the value of each Fund's outstanding repurchase agreement transactions with
State Street Bank and Trust Company was as follows:
Short-Term Government Fund $ _________
Bond Fund $ _________
Balanced Fund $ _________
-69-
<PAGE>
Growth and Income Fund $ _________
Growth Fund $ _________
MidCap Fund $ _________
International Equity Fund $ _________
National Tax-Free Intermediate Bond Fund $ _________
Missouri Tax-Free Intermediate Bond Fund $ _________
For the fiscal years ended October 31, 1998, 1997 and 1996, the Balanced,
Growth, MidCap, Growth and Income and International Equity Funds paid brokerage
commissions as follows:
-70-
<PAGE>
<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 Were Paid Research
---- ------- --------- --------
Fiscal year ended October 31, 1998:
- ----------------------------------
<S> <C> <C> <C> <C>
Balanced Fund
Growth Fund
MidCap Fund
Growth and Income Fund
International Equity Fund
<CAPTION>
Fiscal year ended October 31, 1997:
- ----------------------------------
<S> <C> <C> <C> <C>
Balanced Fund $ 60,007 $ 0 $ 44,338,406 $ 7,789
Growth Fund $226,998 $ 0 $190,623,385 $38,228
MidCap Fund $170,066 $ 0 $ 95,860,725 $24,770
Growth and Income
Fund(1) $ 70,590 $ 6,542 $ 40,963,033 $ 0
International
Equity Fund $121,982 $10,271 $ 42,752,888 $ 0
<CAPTION>
Fiscal year ended October 31, 1996:
- ----------------------------------
<S> <C> <C> <C> <C>
Balanced Fund $ 58,679 $ 0 $ 30,457,207 $14,261
Growth Fund $161,450 $ 0 $101,777,048 $44,688
MidCap Fund $107,348 $ 0 $ 46,977,298 $25,374
International $ 92,250 $5,447 $ 30,494,870 $ 0
Equity Fund
</TABLE>
__________
(1) Commenced investment operations March 1, 1997.
-71-
<PAGE>
For the fiscal years ended October 31, 1998, 1997 and 1996, the following
affiliated persons received brokerage commissions on behalf of Institutional
Shares of the International Equity Fund.
<TABLE>
<CAPTION>
% of Total Total Amount of % of Total Amount
Commissions Paid to Transactions on of Transactions on
Affiliated Persons in Which Commissions Which Commissions
Commissions Paid to Most Recent Fiscal Were Paid to Were Paid to
Broker Name Affiliated Persons Year Affiliated Persons Affiliated Persons
- ----------- ------------------- ---------------- ------------------ ------------------
Year Ended October 31, 1998
- ---------------------------
Year Ended October 31, 1997
- ---------------------------
<S> <C> <C> <C> <C>
Flemings Securities, Ltd. $ 691 0.57% $ 168,512 0.39%
Goldman, Sachs & Co. $ 825 0.68% $ 206,187 0.48%
Goldman Sachs $5,270 4.32% $1,954,939 4.57%
International, BA
Goldman Sachs $ 111 0.09% $ 55,641 0.13%
International, Ltd.
Goldman Sachs $ 336 0.28% $ 168,325 0.39%
International
Finance, London.
Jardine Fleming $ 888 0.73% $ 145,617 0.34%
Hong Kong
Robert Fleming & $2,048 1.68% $ 867,879 2.03%
Co., London
Robert Fleming $ 102 0.08% $ 40,582 0.09%
Securities, Ltd.
</TABLE>
Year Ended October 31, 1996
- ---------------------------
Flemings Securities, Ltd., Flemings, Jardine Fleming, Jardine Fleming Hong
Kong, Robert Fleming & Co., London, Robert Fleming Securities, Ltd. and Robert
Fleming Securities, Inc. are affiliates of the Sub-Advisor to The International
Equity Fund. Goldman, Sachs & Co. is the Distributor for The Commerce Funds.
Goldman Sachs International, Ltd. is an affiliate of the Distributor.
-72-
<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 LLP, (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, shareholder reports or other communications to
shareowners. The performance of each Fund may also 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.
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) to the sixth power - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
-73-
<PAGE>
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 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.
-74-
<PAGE>
The Commerce Funds do not calculate a 30-day yield for the Balanced, Growth
and Income, Growth, MidCap and International Equity Funds. Based on the
foregoing calculations, for the 30-day period ended October 31, 1998, the yields
for the Short-Term Government, Bond, National Tax-Free Intermediate Bond and
Missouri Tax-Free Intermediate Bond Funds, were as follows:
<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
Government Fund
Institutional Shares _____% _____%
Service Shares _____% _____%
Bond Fund
Institutional Shares _____% N/A
Service Shares _____% N/A
National Tax-Free
Intermediate Bond
Fund _____% _____%
Missouri Tax-Free
Intermediate 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 October 31, 1998, the Distribution Rates for the Short-Term
Government, Bond, National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds, were as follows:
-75-
<PAGE>
<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
Government Fund
Institutional Shares _____% _____% _____% _____%
Service Shares _____% _____% _____% _____%
Bond Fund
Institutional Shares _____% N/A _____% N/A
Service Shares _____% N/A _____% N/A
National Tax-Free
Intermediate Bond
Fund
Institutional Shares _____% _____% _____% _____%
Missouri Tax-Free
Intermediate Bond
Fund
Institutional Shares _____% _____% _____% _____%
</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 October 31, 1998 for the
National Tax-Free Intermediate Bond Fund and Missouri Tax-Free Intermediate Bond
Fund, with and without fee waivers (assuming a 39.6% federal tax rate for both
Funds and a 6.0% Missouri tax rate for the Missouri Tax-Free Intermediate Bond
Fund) were as follows:
-76-
<PAGE>
<TABLE>
<CAPTION>
Yield Assuming Yield Assuming Maximum
Maximum Sales Load Sales Load and Without
and With Fee Waivers Fee Waivers
and Reimbursements or Reimbursements
------------------ -----------------
<S> <C> <C>
National Tax-Free
Intermediate Bond
Fund
_____% _____%
Missouri Tax-Free
Intermediate Bond
Fund
_____% _____%
</TABLE>
The foregoing calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareowner accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming completed redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period. In addition, the Funds' yields and distribution rates will
reflect the deduction of the maximum sales load charged in connection with
purchases of shares. The yield and distribution rate calculations do not
include fees that may be imposed by institutions on their customers. If the
foregoing fees had been included in the yields and distribution rates reported
above, performance of these Funds would have been lower.
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:
P (1 + T) to the nth power = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
-77-
<PAGE>
n = number of years.
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 1, 5
or 10 year periods at the end of the 1, 5 or 10
year periods (or fraction thereof).
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 dates during the period and include all recurring fees charged to
all shareholder 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, the average annual total returns for the
Funds were as follows:
-78-
<PAGE>
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load No Sales Load
Load and With Fee Load and Without and With Fee and Without Fee
Waivers and Fee Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
Average Annual Return for the period from commencement of operations through October 31, 1998.
<S> <C> <C> <C> <C>
Short-Term Government
Fund(1)
Institutional Shares _____% _____% _____% _____%
Bond Fund(1)
Institutional Shares _____% N/A _____% N/A
Balanced Fund(1)
Institutional Shares _____% _____% _____% _____%
Growth Fund(1)
Institutional Shares _____% N/A _____ N/A
MidCap Fund(1)
Institutional Shares _____% N/A _____% N/A
International Equity
Fund(1)
Institutional Shares _____% _____% _____% _____%
Growth and Income Fund
Institutional
Shares(2) _____% _____% _____% _____%
</TABLE>
____________________
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on March 3, 1997.
-79-
<PAGE>
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load No Sales Load
Load and With Load and Without and With Fee and Without Fee
Fee Waivers and Fee Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
Average Annual Total Returns for the one-year period ended October 31, 1998.
<S> <C> <C> <C> <C>
Short-Term Government
Fund
Institutional Shares _____% _____% _____% _____%
Bond Fund
Institutional Shares _____% N/A _____% N/A
Balanced Fund
Institutional Shares _____% _____% _____% _____%
Growth Fund
Institutional Shares _____% N/A _____% N/A
MidCap Fund
Institutional Shares _____% N/A _____% N/A
International Equity
Fund
Institutional Shares ______% _____% _____% _____%
Growth and Income Fund
Institutional Shares
______% _____% _____% _____%
</TABLE>
-80-
<PAGE>
Based on the foregoing calculations, the aggregate total returns for the Funds
were as follows:
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load No Sales Load
Load and With Load and Without and With Fee and Without Fee
Fee Waivers and Fee Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
Aggregate Total Return for the period from commencement through October 31, 1998.
<S> <C> <C> <C> <C>
Short-Term
Government Fund(1)
Institutional Shares _____% _____% _____% _____%
Service Shares _____% _____% _____% _____%
Bond Fund(1)
Institutional _____% N/A _____% N/A
Shares _____% N/A _____% N/A
Service Shares
Balanced Fund(1)
Institutional _____% _____% _____% _____%
Shares _____% _____% _____% _____%
Service Shares
Growth and Income
Fund(2)
Institutional _____% _____% _____% _____%
Shares _____% _____% _____% _____%
Service Shares
Growth Fund(1)
Institutional _____% N/A _____% N/A
Shares _____% N/A _____% N/A
Service Shares
MidCap Fund(1)
Institutional _____% N/A _____% N/A
Shares _____% N/A _____% N/A
Service Shares
International
Equity Fund(1)
Institutional _____% _____% _____% _____%
Shares _____% _____% _____% _____%
Service Shares
National Tax Free
Intermediate Bond _____% _____% _____% _____%
Fund(3)
Missouri Tax Free
Intermediate Bond _____% _____% _____% _____%
Fund(3)
</TABLE>
____________________
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on March 3, 1997.
(3) Commenced investment operations on February 21, 1995.
-81-
<PAGE>
The average annual total return and aggregate total return information
presented for the Funds in the foregoing Tables is based on average annual total
return and aggregate total return, respectively, of Institutional Shares of the
Short-Term Government, Bond, Balanced, Growth, Growth and Income, MidCap and
International Equity Funds and Shares of the National Tax-Free Intermediate Bond
and Missouri Tax-Free Intermediate Bond Funds during the periods indicated, as
adjusted to reflect the effect of the maximum sales charge of 2.00% on purchases
of Institutional Shares of the Short-Term Government Fund and 3.50% on purchases
of Institutional Shares of the Bond, Balanced, Growth, Growth and Income,
MidCap, International Equity, National Tax-Free Intermediate Bond and Missouri
Tax-Free Intermediate Bond Funds and the maximum payments under the Shareholder
Administrative Services Plans applicable to Institutional and Service Shares and
the distribution expenses pursuant to the 12b-1 Plan applicable to Service
Shares. The sales charge was removed from the Institutional Shares of the
Short-Term Government, Bond, Balanced, Growth, Growth and Income, MidCap and
International Equity Funds as of May 29, 1998 and was removed from the
Institutional Shares of the National Tax-Free Intermediate Bond and Missouri
Tax-Free Intermediate Bond Funds as of October 31, 1998. The average annual
total returns and aggregate total returns do not include fees that may be
imposed by institutions upon their customers. If such fees had been included in
the returns reported above, performance of these Funds would have been lower.
-82-
<PAGE>
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 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 shareholder
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,
shareholder 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.
-83-
<PAGE>
MISCELLANEOUS
As of December 7, 1998, the Advisor held of record 92.8% of the outstanding
shares of the Short-Term Government Fund; 89.5% of the outstanding shares of the
Institutional Class of the Bond Fund; 69.7% of the outstanding shares of the
Institutional Class of the Balanced Fund; 72.9% of the outstanding shares of the
Institutional Class of the Growth Fund; 84.9% of the outstanding shares of the
Institutional Class of the MidCap Fund; 93.0% of the outstanding shares of the
Institutional Class of the International Equity Fund; 95.1% of the outstanding
shares of the Institutional Class of the Growth & Income Fund; 95.8% of the
outstanding shares of the Institutional Class of the National Tax-Free
Intermediate Bond Fund; and 87.9% of the outstanding shares of the Institutional
Class of the Missouri Tax-Free Intermediate Bond Fund, as fiduciary or agent on
behalf of its customers.
Any persons or organizations listed above as owning 25% or more of the
outstanding shares of a Fund may be presumed to "Control" (as that term is
defined in the 1940 Act) the Fund. As a result, those persons or organizations
could have the ability to vote a majority of the shares of the Institutional
Class of a Fund on any matter requiring the approval of shareowners of the Fund.
As of December 3, 1998, the following shareowners owned of record 5% or more
of the Short-Term Government Fund's outstanding Institutional Shares: Hoco and
Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 62.36%; and Mori and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 33.88%, for which beneficial
ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareowners owned of record 5% or more of
the Bond Fund's outstanding Institutional Shares: Hoco and Co. Mutual Funds,
P.O. Box 13366, Kansas City, MO, 60.41%; and Mori and Co. Mutual Funds, P.O. Box
13366, Kansas City, MO, 31.50%, for which beneficial ownership is disclaimed or
presumed disclaimed.
As of the same date, the following shareowner owned of record 5% or more of
the Balanced Fund's outstanding Institutional Shares: Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 80.44%, for which beneficial ownership
is disclaimed or presumed disclaimed.
-84-
<PAGE>
As of the same date, the following shareowners owned of record 5% or more of
the Growth and Income Fund's outstanding Institutional Shares: Hoco and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 64.01%; and Mori and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 32.43%, for which beneficial ownership
is disclaimed or presumed disclaimed.
As of the same date, the following shareowners owned of record 5% or more of
the Growth Fund's outstanding Institutional Shares: Hoco and Co. Mutual Funds,
P.O. Box 13366, Kansas City, MO, 67.48%; Mori and Co. Mutual Funds, P.O. Box
13366, Kansas City, MO, 14.45%; Sunnen Employees Profit Sharing Plan, c/o
Commerce Bank, N.A., 8000 Forsyth, St. Louis, MO, 63105, 9.09%; for which
beneficial ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareowners owned of record 5% or more of
the MidCap Fund's outstanding Institutional Shares: Hoco and Co. Mutual Funds,
P.O. Box 13366, Kansas City, MO, 59.54%; Mori and Co. Mutual Funds, P.O. Box
13366, Kansas City, MO, 29.08%; for which beneficial ownership is disclaimed or
presumed disclaimed.
As of the same date, the following shareowners owned of record 5% or more of
the International Equity Fund's outstanding Institutional Shares: Hoco and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 59.54%; Mori and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 29.08%; for which beneficial ownership
is disclaimed or presumed disclaimed.
As of the same date, the following shareowners owned of record 5% or more of
the National Tax-Free Intermediate Bond Fund's outstanding Institutional Shares:
Mori and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 84.81%, for which
beneficial ownership is disclaimed or presumed disclaimed; Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 11.70%, for which beneficial ownership
is disclaimed or presumed disclaimed; and Helen Pierson Trust, c/o Commerce
Bank, N.A., 8000 Forsyth, St. Louis, MO, 63105, 9.12%.
As of the same date, the following shareowners owned of record 5% or more of
the Missouri Tax-Free Intermediate Bond Fund's outstanding Institutional Shares:
Mori and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 12.29%; Hoco and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 79.51%; for which beneficial
ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareowners owned 5% or more of the Short-
Term Government Fund's outstanding Service Shares: Fringe Benefits Rockhurst
High, Mutual Fund Processing, P.O. Box 13366, Kansas City, MO 64199-3366,
27.56%; IRA Rollover, Charles J. Hart, 7355 Shaftsbury Ave., St. Louis, MO
63130-2243, 5.37%; Hester Lee Cain Trust, 2840 E. Crestview, Springfield, MO
65804, 7.59%; and Juanita Phillips, 3035 E. Glenwood, Springfield, MO 65804,
11.42%.
As of the same date, the following shareowners owned 5% or more of the Bond
Fund's outstanding Service Shares: Fringe Benefits Rockhurst High, Mutual Fund
Processing, P.O. Box 13366, Kansas City, MO 64199-3366, 35.22%.
-85-
<PAGE>
As of the same date, the following shareowner owned 5% or more of the Balanced
Fund's outstanding Service Shares: Commerce Bank N.A., P.O. Box 13366, Kansas
City, MO, 6.78%.
As of the same date, the following shareowner owned 5% or more of the Growth
and Income Fund's outstanding Service Shares: IRA, FBO Deborah J. Groves, 1568
Parksite Drive, Cape Girardeau, MO, 23.88%.
As of the same date, the following shareowner owned 5% or more of the Growth
Fund's outstanding Service Shares: Fringe Benefits Rockhurst High, Mutual Fund
Processing, P.O. Box 13366, Kansas City, MO 64199-3366, 9.9%.
As of the same date, the following shareowners owned 5% or more of the MidCap
Fund's outstanding Service Shares: Kathleen S. or John D. Muller, 4739
Beleview, Kansas City, MO, 16.30%; Fringe Benefits Rockhurst High, Mutual Fund
Processing, P.O. Box 13366, Kansas City, MO 64199-3366, 7.8%; and Boulevard
Enterprises, a partnership, Gus Jianas, 2533 Southwest Blvd., Kansas City, MO
64108-2345, 6.60%.
As of the same date, the following shareowners owned 5% of the International
Equity Fund's outstanding Service Shares: Commerce Bank N.A., P.O. Box 13366,
Kansas City, MO, 7.73%; and Boulevard Enterprises, a partnership, Gus Jianas,
2533 Southwest Blvd., Kansas City, MO 64108-2345, 22.68%.
As used in the Statement of Additional Information and in the Prospectuses of
the same date, "assets belonging to a particular series of a Fund" means the
consideration received by The Commerce Funds upon the issuance or sale of shares
in that particular series of the Fund, together with all income, earnings,
profits and proceeds derived from the investment thereof, including any proceeds
from the sale, exchange or liquidation of such investments, any funds or
payments derived from any reinvestments of such proceeds, and a portion of any
general assets of the Fund not belonging to a particular series of the Fund.
Assets belonging to a particular series of the Fund are charged with the direct
liabilities in respect of that particular series of the Fund and with a share of
the general liabilities of the particular series of the Fund which are normally
allocated in proportion to the relative net asset levels of the respective
series and Funds. Determinations by the Board of Trustees as to the direct and
allocable liabilities, and allocable portion of any general assets, with respect
to a particular series or Fund are conclusive.
-86-
<PAGE>
FINANCIAL STATEMENTS
The Commerce Funds' Annual Report with respect to the Funds for the fiscal
year ended October 31, 1998 has been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") are incorporated by reference into this Statement of Additional
Information. The Financial Statements included in the Annual Report for the
Funds for the fiscal period ended October 31, 1998 have been audited by The
Commerce Funds' independent accountants, KPMG Peat Marwick LLP, whose report
thereon also appears in such Annual Report and is incorporated herein by
reference. The Financial Statements in such Annual Report have been
incorporated herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
-87-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings 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" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps employs
three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the 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.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-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.
A-2
<PAGE>
"D-3" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates that
default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal and interest of debt instruments with original maturities
of one year or less. The following summarizes the ratings used by Thomson
BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson BankWatch's highest category and
indicates a very high likelihood that principal and interest will be paid on a
timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-highest
category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest investment-
grade category and indicates that while the obligation is more susceptible to
adverse developments (both internal and external) than those with higher
ratings, the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest rating
category and indicates that the obligation is regarded as non-investment grade
and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective
A-4
<PAGE>
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation 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.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and municipal
A-5
<PAGE>
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 risk appear somewhat larger than the "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 are considered as 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
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of 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 operating 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
A-6
<PAGE>
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 to be 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 in periods of greater 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.
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 ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
A-7
<PAGE>
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate that there
is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these 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 indicates that the ability to repay principal and
interest on a timely basis is extremely high.
A-8
<PAGE>
"AA" - This designation indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to 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 the lowest investment-grade category and
indicates an acceptable capacity to repay principal and interest. Issues rated
"BBB" are 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 Ratings Group for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay
principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"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
A-9
<PAGE>
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are 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" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of
protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes 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" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in this
category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-10
<PAGE>
APPENDIX B
The Bond, Balanced, Growth, MidCap, International Equity, National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds may enter into
futures contracts and options. 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.
B-1
<PAGE>
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 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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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 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
B-4
<PAGE>
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.
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.
B-5
<PAGE>
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 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.
B-6
<PAGE>
COMMERCE FUNDS
FORM N-1A
PART C. OTHER INFORMATION
Item 23. EXHIBITS
--------
(a) Trust Instrument dated February 7, 1994./1/
(b) Bylaws of Registrant./1/
(c) Not applicable.
(d) (1) Advisory Agreement among Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City)./1/
(2) Sub-Advisory Agreement among Commerce Bank, N.A. (St.
Louis), Commerce Bank, N.A. (Kansas City) and Rowe Price-
Fleming International, Inc./1/
(3) Addendum No. 1 to Advisory Agreement among Registrant,
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A.
(Kansas City) with respect to the Growth and Income
Fund./3/
(e) Distribution Agreement between Registrant and Goldman, Sachs
& Co./1/
(1) Addendum No. 1 to Distribution Agreement between
Registrant and Goldman, Sachs & Co. with respect to the
Growth and Income Fund./3/
(f) Deferred Compensation Plan and Forms of Agreement.
(g) (1) Custodian Agreement between Registrant and State Street
Bank and Trust Company./1/
(2) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company./1/
(h) (1) Administration Agreement between Registrant and Goldman
Sachs Asset Management./1/
(2) Addendum No. 1 to Administration Agreement between
Registrant and Goldman Sachs Asset Management with respect
to the Growth and Income Fund./3/
C-1
<PAGE>
(3) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company./1/
(4) Amended and Restated Shareholder Administrative Services
Plan for Institutional Shares and related Servicing
Agreement.
(5) Amended and Restated Shareholder Administrative Services
Plan for Service Shares and related Servicing Agreement.
(i) Not Applicable.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of Independent Auditors.
(k) Not Applicable.
(l) (1) Purchase Agreement between Registrant and Initial
Trustee./1/
(2) Purchase Agreement between Registrant and Goldman, Sachs &
Co./1/
(3) Purchase Agreement between Registrant and Commerce Bank,
N.A. (Kansas City)./1/
(4) Purchase Agreement between Registrant and Goldman, Sachs &
Co./3/
(m) Amended and Restated Distribution Plan for Service Shares./2/
(n) Not applicable.
(o) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation
of a Multi-Class System.
________________________________________
1. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-1A filed on June 30, 1995.
2. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 4 to Registrant's Registration Statement on
Form N-1A filed on December 13, 1996.
3. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 6 to Registrant's Registration Statement on
Form N-1A filed on September 16, 1997.
C-2
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
-----------------------------------------------------------
Registrant is controlled by its Board of Trustees. As of the date of
this Registration Statement, no person is controlled by or under
common control with the Registrant.
Item 25. INDEMNIFICATION
---------------
Section IV of the Administration Agreement and Section XIII of the
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. Copies of the Administration
Agreement and Distribution Agreement are incorporated herein by reference as
Exhibits 23(e) and (h), respectively.
Registrant has obtained 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 23(a), 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
--------
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.
C-3
<PAGE>
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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
--------------------------------------------------------
(a) Commerce Bank, N.A., the Registrant's investment adviser,
provides 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. 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, 1996, as well as
the capacity in which such person was connected.
C-4
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- ------------------------------- ------------------------------------ ---------------------------------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mr. John O. Brown, Key Industries, Inc. Director
Vice Chairman and Director 523 East Wall
Ft. Scott, KS 66701-1554
- --------------------------------------------------------------------------------------------------------
Mr. Jonathan M. Kemper, Tower Properties Company Director
Vice Chairman and Director 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Vice Chairman
1000 Walnut Street
Kansas City, MO 64106
- --------------------------------------------------------------------------------------------------------
Mr. Edward J. Reardon II None None
Executive Vice President and
Director
- --------------------------------------------------------------------------------------------------------
Mr. Robert C. Matthews, Jr. None None
Executive Vice President and
Director
========================================================================================================
</TABLE>
C-5
<PAGE>
<TABLE>
========================================================================================================
<S> <C> <C>
Mr. David W. Kemper, Tower Properties Company Director
Chairman, President, CEO 911 Main Street, Suite 100
and Director Kansas City, MO 64106
Commerce Bancshares, Inc. Chairman, President and Chief
1000 Walnut Street Executive Officer
Kansas City, MO 64106
Business Men's Assurance Director
Company of America
One Penn Valley Park
Kansas City, MO 64108
Seafield Capital Corporation Director
2600 Grand Avenue Suite 500
Kansas City, MO 64108
Wave Technologies International, Director
Inc.
10845 Olive Blvd.
St. Louis, MO 63146
Ralcorp Holdings, Inc. Director
901 Chouteau Avenue
St. Louis, MO 63102
- --------------------------------------------------------------------------------------------------------
Mr. Seth M. Leadbeater, None None
Executive Vice President
and Director
========================================================================================================
</TABLE>
(b) The information required by this Item 26 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 Investment Advisers Act of 1940
(File No. 801-14713).
Item 27. PRINCIPAL UNDERWRITERS
----------------------
(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 Trust and Trust for Credit Unions, and as
administrator and distributor for the units of The Benchmark Funds
and The Commerce Funds.
(b) Set forth below is certain information pertaining to the
executive committee of Goldman, Sachs & Co., Registrant's principal
underwriter. None
C-6
<PAGE>
of the members of the executive committee hold positions or offices
with the Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
<TABLE>
<CAPTION>
Name and Principal
Business Address Position
- ------------------ --------
<S> <C>
Jon S. Corzine (1) Managing Director
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Managing Director
John A. Thain (3) Managing Director
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
</TABLE>
____________________
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London
EC4A 2BB, England
(c) None.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
(1) Commerce Bank, N.A., 8000 Forsyth Boulevard, Clayton, Missouri, and 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., One New York Plaza, 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 LLP, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania (Registrant's Trust Instrument,
By-Laws and minute books).
C-7
<PAGE>
Item 29. MANAGEMENT SERVICES
-------------------
Not Applicable.
Item 30. UNDERTAKINGS
-------------
Not Applicable.
C-8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 8 to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Mission
Hills, State of Kansas, on the 18th day of December 1998.
THE COMMERCE FUNDS
Registrant
/s/ Warren W. Weaver
-----------------------------
Warren W. Weaver
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-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* Trustee, Treasurer December 18, 1998
- ----------------------
Randall D. Barron
/s/ David L. Bodde* Trustee December 18, 1998
- -------------------
David L. Bodde
/s/ John Eric Helsing* Trustee, Chairman December 18, 1998
- ----------------------
John Eric Helsing
/s/ John Joseph Holland* Trustee December 18, 1998
- -----------------------
John Joseph Holland
/s/ Warren W. Weaver Trustee, President December 18, 1998
- ----------------------
Warren W. Weaver
* By: /s/ Warren W. Weaver
---------------------
Warren W. Weaver
Attorney-in-Fact
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Warren W. Weaver, hereby
constitutes and appoints W. Bruce McConnel, III, his true and lawful attorney,
to execute in his name, place, and stead, in his capacity as Trustee or officer,
or both, of the Trust, the Registration Statement and any amendments thereto and
all instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorney shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as he might or could do
in person, said acts of said attorney being hereby ratified and approved.
DATED: December 12, 1996
/s/ Warren W. Weaver
- ---------------------------
Warren W. Weaver
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Joseph Holland,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ John Joseph Holland
- ----------------------------
John Joseph Holland
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Eric Helsing,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/John Eric Helsing
- ---------------------------
John Eric Helsing
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Randall D. Barron,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/Randall D. Barron
- ---------------------------
Randall D. Barron
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, David L. Bodde, hereby
constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his true
and lawful attorneys, to execute in his name, place, and stead, in his capacity
as Trustee or officer, or both, of the Trust, the Registration Statement and any
amendments thereto and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission; and
said attorneys shall have full power and authority to do and perform in his name
and on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises, as fully and to all intents and purposes
as he might or could do in person, said acts of said attorneys being hereby
ratified and approved.
DATED: December 12, 1996
/s/David L. Bodde
- ---------------------------
David L. Bodde
<PAGE>
COMMERCE FUNDS
--------------
EXHIBIT INDEX
-------------
Exhibits
- --------
23(f) Deferred Compensation Plan.
23(h)(4) Amended and Restated Shareholder Administrative Services Plan for
Institutional Shares.
23(h)(5) Amended and Restated Shareholder Administrative Services Plan for
Service Shares.
23(j)(1) Consent of Drinker Biddle & Reath LLP.
23(j)(2) Consent of Independent Auditors.
23(o) Amended and Restated Plan Pursuant to Rule 18f-3.
<PAGE>
EXHIBIT 23(F)
THE COMMERCE FUNDS
DEFERRED COMPENSATION PLAN
EFFECTIVE OCTOBER 28, 1998
<PAGE>
THE COMMERCE FUNDS
DEFERRED COMPENSATION PLAN
EFFECTIVE OCTOBER 28, 1998
The Commerce Funds Deferred Compensation Plan (the "Plan"), a
nonqualified unfunded deferred compensation plan, was adopted by the Board of
Trustees (the "Board") on October 28, 1998, to allow members of the Board to
defer all or a portion of the compensation earned by a Trustee for his services
as Trustee.
1. Eligibility. Each Trustee of the Board of The Commerce Funds (the
-----------
"Trust") shall be eligible to participate in the Plan.
2. Terms of Participation
----------------------
(a) A Trustee may elect to participate in the Plan by filing a
Deferred Compensation Agreement (the "Agreement") with the Treasurer of the
Trust (the "Treasurer") (or his delegate) in the form attached hereto and
incorporated by reference herein. A Trustee's participation will commence on
January 1 of the calendar year immediately following the year in which the
Trustee executed the Agreement and filed it with the Treasurer, except that when
a Trustee executes an Agreement within 30 days of the Plan's initial effective
date or within 30 days of first becoming eligible to participate in the Plan,
participation will commence with respect to services to be performed subsequent
to the date of the Agreement.
(b) Participation in the Plan will continue until the Trustee
furnishes written notice to the Treasurer that the Trustee terminates his
--------------
participation in the Plan or until such time as the Trust terminates the Plan
pursuant to Section 6 below. Termination by a Trustee shall be made by written
notice delivered or mailed to the Treasurer (or his delegate) no later than
December 31 of the calendar year preceding the calendar year in which such
termination is to take effect.
(c) A Trustee who has terminated his participation may
subsequently elect to participate in the Plan by filing a new Agreement in
accordance with subsection (a) above.
(d) A Trustee may alter the amount of deferral for any future
calendar year, and/or elect a different method by which he will receive amounts
deferred for future calendar years, if the Trustee and the Trust enter into a
new Agreement on or before December 31 of the calendar year preceding the
calendar year for which the new Agreement is to take effect. For each new
Agreement which changes the method of receipt of deferred amounts, a new record
account (the "Deferred Compensation Account" or "Account") will be established
for the Trustee.
<PAGE>
3. Deferred Compensation Account. While a Trustee participates in
-----------------------------
the Plan pursuant to an Agreement, all deferred compensation payable by the
Trust for the Trustee's services shall be credited to the Trustee's Deferred
Compensation Account ("Account") under the applicable Agreement. A Trustee shall
allocate amounts in his Account(s) among the investment options available under
the Plan by submitting a written request to the Treasurer (or his delegate) on
such form as may be required by the Treasurer prior to the date deferrals are
scheduled to begin. The Board shall specify from time to time the investment
options available under the Plan. The Trustee may request that the investment
allocation of his Account, including past as well as future deferrals, be
changed by submitting a written request to the Treasurer (or his delegate) on
such form as may be required by the Treasurer, or by telephoning the Treasurer
(or his delegate). Such changes shall become effective as soon as
administratively feasible after the Treasurer (or his delegate) receives such
request.
The Trustee's Account(s) will be credited daily with any income,
gains, and losses that would have been realized if amounts equal to the deferred
amounts had been invested in accordance with the Trustee's allocation election
on the date such deferred amounts were credited to the Trustee's Account(s).
For this purpose, any amounts that would have been received, had amounts been
invested as described above, from a chosen investment option will be treated as
if reinvested in that option on the date such amounts would have been received.
4. Distribution. As of January 31 of the year immediately following
------------
the year in which the Trustee ceases to be a Trustee, the total amount credited
to the Trustee's Account under the applicable Agreement shall be distributed to
the Trustee (or upon his death, to his designated beneficiary) in accordance
with one of the alternatives set forth below:
(i) one single-sum payment; or
(ii) any number of annual installments (as calculated in the
following paragraph) for a period of two to 10 years. Installments shall be paid
annually as of January 31 until the balance in the Trustee's Account is
exhausted.
Selection of an alternative shall be made at the time the Trustee
executes the Agreement. Except as provided in the following paragraph, the
amount of each installment payment, other than the final payment, shall be equal
to 1/n multiplied by the balance in the Trustee's Account as of the previous
December 31, where "n" equals the number of payments yet to be made. The final
payment will equal the balance in the Trustee's Account as of the final January
31 payment date. For example, if payments are to be made in 10 annual
installments commencing on January 31, 2000, the first payment will be equal to
1/10th of the December 31, 1999 balance in the Account, and the following year's
payment would be equal to 1/9th of the December 31, 2000 balance.
If the balance in the Trustee's Account as of the date of the
first scheduled payment is less than $2,000, the Trust shall instead pay such
amount in a single sum as of that date. Further, the Trustee may not select a
period of time which will cause an annual payment to
-2-
<PAGE>
be less than $1,000. Notwithstanding the foregoing, in the event the Trustee
ceases to be a Trustee of the Trust and becomes a proprietor, officer, partner,
or employee of, or otherwise becomes affiliated with, any business or entity
that is in competition with the Trust, or becomes employed by any governmental
agency having jurisdiction over the affairs of the Trust, the Trust reserves the
right at the sole discretion of the Board to make an immediate single-sum
payment to the Trustee in an amount equal to the balance in the Trustee's
Account at that time.
Notwithstanding the preceding two paragraphs, the Trust may at
any time make a single-sum payment to the Trustee (or surviving beneficiary)
equal to a part or all of the balance in the Trustee's Account upon a showing of
an unforeseeable (i.e., unanticipated) financial emergency caused by an event
beyond the control of the Trustee (or surviving beneficiary) that would result
in severe financial hardship to the Trustee (or surviving beneficiary) if such
payment were not made. The determination of whether such emergency exists shall
be made at the sole discretion of the Board (with the Trustee requesting the
payment not participating in the discussion or the decision). The amount of the
payment shall be limited to the amount necessary to meet the financial
emergency, and any remaining balance in the Trustee's Account shall thereafter
be paid at the time and in the manner otherwise set forth in this Section.
If there is no beneficiary designation in effect at the Trustee's
death or the designated beneficiary is dead at the Trustee's death, any amounts
in the Trustee's Account shall be paid in a single sum to the Trustee's estate.
If the designated beneficiary dies after beginning to receive installment
payments, any amounts payable from the Trustee's Account shall be paid in a
single sum to the beneficiary's estate at the beneficiary's death.
5. Designation of Beneficiary. A Trustee may designate in writing
--------------------------
any person or legal entity as his beneficiary to receive any amounts payable
from his Account(s) upon his death. If the Trustee should die without
effectively designating a surviving beneficiary, his beneficiary shall be his
estate.
6. Amendment and Termination of the Plan. The Board reserves the
-------------------------------------
right to amend or terminate the Plan by a Board resolution. Any such amendment
or termination shall be effective at the end of the calendar year during which
notification is given to each participating Trustee. A written notice of any
such amendment or termination shall be mailed by first class mail, addressed to
the Trustee's last known address, or delivered by any other means, which is
acknowledged in writing by the Trustee, no later than the date on which the
amendment or termination is to take effect. The balance in the Trustee's
Account(s) shall remain subject to the provisions of the Plan and distribution
will not be accelerated because of the termination of the Plan.
7. Non-Assignability. The right of the Trustee or any other person
-----------------
to receive payments under this Plan or any Agreement hereunder shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the Trustee or
any beneficiary.
-3-
<PAGE>
8. Miscellaneous.
-------------
(a) No Funding. The Trust shall not be required to fund or secure
----------
in any way its obligations hereunder. Nothing in the Plan or in any Agreement
hereunder and no action taken pursuant to the provisions of the Plan or of any
Agreement hereunder shall be construed to create a trust or a fiduciary
relationship of any kind. Payments under the Plan and any Agreement hereunder
shall be made when due from the general assets of the Trust. Neither a Trustee
nor his designated beneficiary shall acquire any interest in such assets by
virtue of the Plan or any Agreement hereunder. This Plan constitutes a mere
promise by the Trust to make payments in the future, and to the extent that a
Trustee or his designated beneficiary acquires a right to receive any payment
from the Trust under the Plan, such right shall be no greater than the right of
any unsecured general creditor of the Trust. The Trust intends for this Plan to
be unfunded for tax purposes and for the purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended.
(b) Interpretation. The Board shall have full power and authority
--------------
to interpret, construe, and administer this Plan and any Agreement hereunder and
its interpretation and construction thereof, and actions hereunder, including
any valuation of the Trustee's Account(s), or the amount or recipients of the
payment to be made therefrom, shall be binding and conclusive on all persons for
all purposes. The Board shall not be liable to any person for any action taken
or omitted in connection with the interpretation and administration of this Plan
and any Agreement hereunder unless attributable to its own willful misconduct or
lack of good faith.
(c) Withholding. To the extent required by law, the Trust shall
-----------
withhold federal or state income or employment taxes from any payments under the
Plan or any Agreement hereunder and shall furnish the Trustee (or beneficiary)
and the applicable governmental agency or agencies with such reports,
statements, or information as may be required in connection with such payments.
(d) Incapacity of Payee. If the Board shall find that any person
-------------------
to whom any payment is payable under this Plan or any Agreement hereunder is
unable to care for his affairs because of illness or accident, or is a minor,
any payment due (unless a prior claim therefor shall have been made by a duly
appointed guardian, committee or other legal representative) may be paid to the
spouse, a parent, a brother or sister, or to any person deemed by the Board to
have incurred expense for the person who is otherwise entitled to payment, in
such manner and proportions as the Board may determine. Any such payment shall
serve to discharge the liability of the Trust under this Agreement to make
payment to the person who is otherwise entitled to payment.
(e) Expenses. All expenses incurred in administering this Plan
--------
and any Agreement hereunder shall be paid by the Trust.
-4-
<PAGE>
(f) No Additional Rights. Nothing in this Plan or any Agreement
--------------------
hereunder shall be construed as conferring any right on the part of the Trustee
to be or remain a Trustee of the Trust or to receive any particular amount of
Trustee's fees.
(g) Binding Nature. This Plan and any Agreement hereunder shall be
--------------
binding upon, and inure to the benefit of, the Trust, its successors and
assigns, and each Trustee and his heirs, executors, administrators, and legal
representatives.
(h) Governing Law. This Plan and any Agreement hereunder shall be
-------------
governed by and construed under the laws of the State of Delaware.
(i) Effective Date. This Plan shall be effective as of October
--------------
28, 1998.
Date: October 28, 1998
-5-
<PAGE>
THE COMMERCE FUNDS
DEFERRED COMPENSATION AGREEMENT
This Agreement is entered into this ______ day of ______, ____,
between The Commerce Funds (the "Trust") and ______________ (the "Trustee").
WHEREAS, the Trustee will be rendering valuable services to the Trust
as a member of the Board of Trustees (the "Board"), and the Trust is willing to
accommodate the Trustee's desire to be compensated for such services on a
deferred basis;
NOW, THEREFORE, the parties hereto agree as follows:
1. With respect to services performed by the Trustee for the Trust
on and after ____________ __, 199_, the Trustee shall defer _____
percent [INSERT WHOLE NUMBER FROM ONE TO 100] of the amounts
otherwise payable to the Trustee for serving as a Trustee. The
deferred compensation shall be credited to a book reserve
maintained by the Trust in the Trustee's name, together with
credited amounts in the nature of income, gains, and losses (the
"Account"). The Account maintained for the Trustee shall be paid
to the Trustee on a deferred basis in accordance with the terms
of this Agreement.
2. The Trust shall credit the Trustee's Account as of the day such
amount would be paid to the Trustee if this Agreement were not in
effect. Such Account shall be valued on a daily basis, and the
Trustee shall receive a written accounting of his Account balance
at the end of each calendar quarter.
The Trustee may request that all or a portion of the amount in
his Account be allocated among one or more of the investment
options offered by the Board under The Commerce Funds Deferred
Compensation Plan (the "Plan"). The initial allocation request
may be made at the time of enrollment. Once made, an investment
allocation request shall remain in effect for all future amounts
allocated to the Trustee's Account until changed by the Trustee.
The Trustee may change his investment allocation for past
deferrals and future deferrals by submitting a written request to
the Treasurer of the Trust (the "Treasurer") (or his delegate) on
such form as may be required by the Treasurer or by telephoning
the Treasurer (or his delegate). Such changes shall become
effective as soon as administratively feasible after the
Treasurer (or his delegate) receives such request. Although the
Trust intends to invest the amounts in the Trustee's Account
according to the Trustee's requests, the Trust reserves the right
to invest the amounts in the Trustee's Account without regard to
<PAGE>
such requests. However, the investment return on the amounts
credited to the Trustee's Account shall be the same as the
investment return on the investment option(s) in which he elects
investment, regardless of whether the Trustee's elections are
actually implemented. In the absence of any investment election
by a Trustee, amounts credited to the Trustee's Account will be
treated as having been invested in the _______________ Fund for
purposes of determining the investment return on the amounts.
Title to and beneficial ownership of any assets, whether cash or
investments, which the Trust may use to pay benefits hereunder,
shall at all times remain in the Trust, and the Trustee and any
designated beneficiary shall not have any property interest
whatsoever in any specific assets of the Trust.
3. As of January 31 of the calendar year immediately following the
calendar year in which the Trustee ceases to be a Trustee, the
Trust (subject to the terms of the Plan) shall: [CHECK ONE]
[ ] pay the Trustee (or his beneficiary) a single-sum amount
equal to the balance in the Trustee's Account on that date;
or
[ ] commence making annual payments to the Trustee (or his
beneficiary) for a period of ___ [INSERT A WHOLE NUMBER FROM
TWO THROUGH 10] years.
If the second box is selected, subsequent installments shall be
paid as of January 31 of each succeeding calendar year in
approximately equal annual installments as adjusted and computed
by the Trust in accordance with the terms of the Plan, with the
final payment equaling the then remaining balance in the
Trustee's Account.
4. In the event the Trustee dies before payments have commenced or
been completed under Section 3, the Trust shall make payment in
accordance with Section 3 to the Trustee's designated
beneficiary, whose name, address, and Social Security number are:
___________________________________
___________________________________
___________________________________
-2-
<PAGE>
If there is no beneficiary designation in effect at the Trustee's
death or the designated beneficiary predeceases the Trustee, any
amounts in the Trustee's Account shall be paid in a single sum to
the Trustee's estate. If the designated beneficiary dies after
beginning to receive installment payments, any amounts payable
from the Trustee's Account shall be paid in a single sum to the
beneficiary's estate at the beneficiary's death.
5. This Agreement shall remain in effect with respect to the
Trustee's compensation for services performed as a Trustee of the
Trust in all future years unless terminated on a prospective
basis in writing in accordance with the terms of the Plan. The
----------
Trustee may subsequently elect to defer his compensation by
executing a new Deferred Compensation Agreement. If a new
Agreement is entered into which changes the manner in which
deferred amounts will be distributed, a new Trustee's Account
will be established for purposes of crediting deferrals, income,
gains, and losses under the new Agreement. Any new Agreement
shall relate solely to compensation for services performed after
the new Agreement becomes effective and shall not alter the terms
of this Agreement with respect to the deferred payment of
compensation for services performed during any calendar year in
which this Agreement was in effect. Notwithstanding the
foregoing, the Trustee may at any time amend the beneficiary
designation hereunder by written notice to the Board.
6. This Agreement constitutes a mere promise by the Trust to make
benefit payments in the future, and the right of any person to
receive such payments under this Agreement shall be no greater
than the right of any unsecured general creditor of the Trust.
The Trust and Trustee intend for this Agreement to be unfunded
for tax purposes and for the purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended.
7. Any written notice to the Trust referred to in this Agreement
shall be made by mailing or delivering such notice to the Trust
to the attention of the Treasurer c/o Larry Franklin, The
Commerce Funds, 922 Walnut Street, Kansas City, MO 64141, with a
copy to Goldman Sachs Asset Management, Attention: John
Perlowski, One New York Plaza, 42nd Floor, New York, NY 10004.
Any written notice to the Trustee referred to in this Agreement
shall be made by mailing such notice to the Trustee at his last
known address, or by any other means which is acknowledged by the
Trustee in writing.
8. This Agreement is subject to all of the terms contained in the
Plan as attached hereto and incorporated by reference herein.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
THE COMMERCE FUNDS
By: ___________________________
Title:_________________________
________________________, TRUSTEE
________________________________
(Signature of Trustee)
-4-
<PAGE>
THE COMMERCE FUNDS DEFERRED COMPENSATION PLAN
EFFECTIVE OCTOBER 28, 1998
TRUSTEE ACCOUNT ALLOCATION REQUEST
I hereby request to have my Account(s) under The Commerce Funds
Deferred Compensation Plan invested (or deemed to be invested) in the following
investment options, and in the percentages indicated, as soon as
administratively feasible. This request supersedes any prior requests I have
made with respect to such Plan, and applies to amounts deferred in the past
under the Plan as well as to future deferrals. I hereby agree to assume all
risks in connection with the investment performance of the amounts which are
invested (or deemed to be invested) in accordance with this election.
Percentage
Invested Investment Option
------------------ -------------------
------------------ Short-Term Government Fund
------------------ Balanced Fund
------------------ Growth Fund
100%
==================
DATED:______________ ____ ____________________________
Trustee
<PAGE>
THE COMMERCE FUNDS
DEFERRED COMPENSATION AGREEMENT
(FOR USE BY INDIVIDUAL BEFORE ELECTION AS TRUSTEE)
(SPECIAL ELECTION FORM OF AGREEMENT)
This Agreement is entered into this ______ day of ______, ____,
between The Commerce Funds (the "Trust") and ______________ (the "Trustee").
WHEREAS, the Trustee expects to be elected a member of the Board of
Trustees (the "Board") and, following such election, will be rendering valuable
services to the Trust as a member of such Board;
WHEREAS, the Trust is willing to accommodate the Trustee's desire to
be compensated for such services on a deferred basis;
NOW, THEREFORE, the parties hereto agree as follows:
1. With respect to services expected to be performed by the Trustee
for the Trust on and after ____________ __, ____, the Trustee
shall defer _____ percent [INSERT WHOLE NUMBER FROM ONE TO 100]
of the amounts otherwise payable to the Trustee for serving as a
Trustee. The deferred compensation shall be credited to a book
reserve maintained by the Trust in the Trustee's name, together
with credited amounts in the nature of income, gains, and losses
(the "Account"). The Account maintained for the Trustee shall be
paid to the Trustee on a deferred basis in accordance with the
terms of this Agreement.
2. The Trust shall credit the Trustee's Account as of the day such
amount would be paid to the Trustee if this Agreement were not in
effect. Such Account shall be valued on a daily basis, and the
Trustee shall receive a written accounting of his Account balance
at the end of each calendar quarter.
The Trustee may request that all or a portion of the amount in
his Account be allocated among one or more of the investment
options offered by the Board under The Commerce Funds Deferred
Compensation Plan (the "Plan"). The initial allocation request
may be made at the time of enrollment. Once made, an investment
allocation request shall remain in effect for all future amounts
allocated to the Trustee's Account until changed by the Trustee.
The Trustee may change his investment allocation for past
deferrals and future deferrals by submitting a written request to
the Treasurer of the Trust (the "Treasurer") (or his delegate) on
such form as may be required by the Treasurer or by telephoning
the Treasurer (or his delegate). Such changes shall become
effective as soon
<PAGE>
as administratively feasible after the Treasurer (or his
delegate) receives such request. Although the Trust intends to
invest the amounts in the Trustee's Account according to the
Trustee's requests, the Trust reserves the right to invest the
amounts in the Trustee's Account without regard to such requests.
However, the investment return on the amounts credited to the
Trustee's Account shall be the same as the investment return on
the investment option(s) in which he elects investment,
regardless of whether the Trustee's elections are actually
implemented. In the absence of any investment election by a
Trustee, amounts credited to the Trustee's Account will be
treated as having been invested in the _______________ Fund for
purposes of determining the investment return on the amounts.
Title to and beneficial ownership of any assets, whether cash or
investments, which the Trust may use to pay benefits hereunder,
shall at all times remain in the Trust, and the Trustee and any
designated beneficiary shall not have any property interest
whatsoever in any specific assets of the Trust.
3. As of January 31 of the calendar year immediately following the
calendar year in which the Trustee ceases to be a Trustee, the
Trust (subject to the terms of the Plan) shall: [CHECK ONE]
[ ] pay the Trustee (or his beneficiary) a single-sum amount
equal to the balance in the Trustee's Account on that date;
or
[ ] commence making annual payments to the Trustee (or his
beneficiary) for a period of ___ [INSERT A WHOLE NUMBER FROM
TWO THROUGH 10] years.
If the second box is selected, subsequent installments shall be
paid as of January 31 of each succeeding calendar year in
approximately equal annual installments as adjusted and computed
by the Trust in accordance with the terms of the Plan, with the
final payment equaling the then remaining balance in the
Trustee's Account.
4. In the event the Trustee dies before payments have commenced or
been completed under Section 3, the Trust shall make payment in
accordance with Section 3 to the Trustee's designated
beneficiary, whose name, address, and Social Security number are:
___________________________________
___________________________________
___________________________________
-2-
<PAGE>
___________________________________
If there is no beneficiary designation in effect at the Trustee's
death or the designated beneficiary predeceases the Trustee, any
amounts in the Trustee's Account shall be paid in a single sum to
the Trustee's estate. If the designated beneficiary dies after
beginning to receive installment payments, any amounts payable
from the Trustee's Account shall be paid in a single sum to the
beneficiary's estate at the beneficiary's death.
5. This Agreement shall remain in effect with respect to the
Trustee's compensation for services performed as a Trustee of the
Trust in all future years unless terminated on a prospective
basis in writing in accordance with the terms of the Plan. The
----------
Trustee may subsequently elect to defer his compensation by
executing a new Deferred Compensation Agreement. If a new
Agreement is entered into which changes the manner in which
deferred amounts will be distributed, a new Trustee's Account
will be established for purposes of crediting deferrals, income,
gains, and losses under the new Agreement. Any new Agreement
shall relate solely to compensation for services performed after
the new Agreement becomes effective and shall not alter the terms
of this Agreement with respect to the deferred payment of
compensation for services performed during any calendar year in
which this Agreement was in effect. Notwithstanding the
foregoing, the Trustee may at any time amend the beneficiary
designation hereunder by written notice to the Board.
6. This Agreement constitutes a mere promise by the Trust to make
benefit payments in the future, and the right of any person to
receive such payments under this Agreement shall be no greater
than the right of any unsecured general creditor of the Trust.
The Trust and Trustee intend for this Agreement to be unfunded
for tax purposes and for the purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended.
-3-
<PAGE>
7. Any written notice to the Trust referred to in this Agreement
shall be made by mailing or delivering such notice to the Trust
to the attention of the Treasurer, c/o Larry Franklin, The
Commerce Funds, 922 Walnut Street, Kansas City, MO 64141, with a
copy to Goldman Sachs Asset Management, Attention: John
Perlowski, One New York Plaza, 42nd Floor, New York, NY 10004.
Any written notice to the Trustee referred to in this Agreement
shall be made by mailing such notice to the Trustee at his last
known address, or by any other means which is acknowledged by the
Trustee in writing.
8. This Agreement is subject to all of the terms contained in the
Plan as attached hereto and incorporated by reference herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
THE COMMERCE FUNDS
By:_________________________
Title:______________________
__________________, TRUSTEE
___________________________
(Signature of Trustee)
-4-
<PAGE>
EXHIBIT 23(H)(4)
THE COMMERCE FUNDS
AMENDED AND RESTATED
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
(Institutional Shares)
Section 1. Upon the recommendation of Commerce Bank, N.A. the
---------
Trust's investment advisors (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 securities dealers, financial institutions and other industry professionals
that are shareholders or dealers of record or which have a servicing
relationship ("Service Organizations") with the beneficial owners of Series A-1,
Series B-1, Series C-1, Series D-1, Series E-1, Series F-1, Series G-1, Series
H-1 and Series I-1 shares of beneficial interest ("Institutional Shares") in 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 Institutional Shares in one or
more of the Funds 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 Institutional Shares of the Funds
beneficially owned by such clients. Expenses shall be allocated under this Plan
in the discretion of the Board of Trustees and pursuant to the provisions of
Rule 18f-3 under the Investment Company Act of 1940, as amended.
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
Institutional 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 the
---------
Institutional Shares of 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 indirect financial interest in the operation of this Plan or
in any Servicing Agreements or other agreements related to this Plan (the
"Disinterested Trustees"),
<PAGE>
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 with respect to Institutional Shares of each Fund as of September
28, 1994, as amended on November 3, 1995, September 19, 1996, December 12, 1996
and April 29, 1998.
-2-
<PAGE>
THE COMMERCE FUNDS
SERVICING AGREEMENT
UNDER AMENDED AND RESTATED
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
(INSTITUTIONAL SHARES)
Ladies and Gentlemen:
The Commerce Funds (the "Trust") wishes to enter into this Servicing
Agreement with you concerning the provision of recordkeeping and administrative
services to or on behalf of participants in pension and profit sharing plans
described in Section 401(a) of the Internal Revenue Code including 401(k) plans
("Plans"), who beneficially own Institutional Shares of beneficial interest
("Institutional Shares") in one or more of the Trust's portfolios (the "Funds")
which are listed on Appendix A.
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree, in coordination with the Trust and each
---------
Plan's sponsor, investment adviser or administrative committee ("Plan
Representative"), to establish and maintain Plan participant accounts and
provide related administrative services with respect to such accounts.
You may engage at your own expense one or more third parties to act as
your agent or agents for the purpose of providing the Plan participant
recordkeeping and administrative services described herein; provided, however,
that the appointment of any such agent shall not relieve you of your
responsibilities or obligations under this Agreement.
Section 2.(a) For balance forward recordkeeping, you and any duly
----------
appointed agent will provide one or more of the following support services to
Plans who may from time to time own Institutional Shares of the Funds: (i)
establishing and maintaining Plan participant accounts and records relating to
participants that invest in Institutional Shares of the Funds; (ii) recording
participant account balances and changes thereto, including debits and credits
to such accounts in the form of cash, dividends and Institutional Shares of the
Funds; (iii) aggregating and processing purchase, redemption and exchange
requests for Institutional Shares of the Funds from Plan participants and
placing net purchase, redemption and exchange orders with the Trust's
distributor; (iv) providing Plan participants with a service that invests the
assets of their accounts in Institutional Shares of the Funds pursuant to
specific or pre-authorized instructions; (v) providing information periodically
to Plan participants concerning their positions in Institutional Shares of the
Funds; (vi) arranging for bank wires; (vii) responding to routine inquiries from
Plan participants concerning their investments in Institutional Shares of the
Funds; (viii) 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 Plan participants;
(ix) providing such other similar services as the Trust may reasonably
<PAGE>
request to the extent you are permitted to do so under applicable statutes,
rules or regulations; and (x) furnishing necessary personnel and facilities in
order to provide the foregoing services.
(b) For daily recordkeeping, the Trust or its designee will furnish to
you, with respect to each Fund, (i) confirmed net asset value information as of
the close of regular trading (currently 4:00 P.M. Eastern Time) ("Close of
Trading") on each business day that the New York Stock Exchange is open for
business ("Business Day"), (ii) dividend and capital gains information as it
becomes available, and (iii) in the case of any income Fund, the daily accrual
for interest rate factor (mil rate). The Trust shall use its best efforts to
provide such information for each Fund to you by means of electronic
transmission or other mutually acceptable means by 7:00 P.M. (but no later than
9:00 P.M.) Eastern Time on each Business Day.
You or your duly appointed agent shall, on behalf of the Trust,
receive from the Plan Representatives or from participants for acceptance prior
to the Close of Trading on each Business Day: (1) orders for the purchase of
Institutional Shares of the Funds, and (2) redemption requests and redemption
and exchange directions with respect to Institutional Shares of the Funds held
by the Plans ("Instructions"). You or your agent shall, upon your acceptance of
any such Instructions, communicate your acceptance to the Plans.
You shall communicate to the Trust on each Business Day that you or
such agent are open for business, by means of electronic transmission or other
mutually acceptable means, by 9:00 A.M. Eastern Time a report of the trading
activity for the most recent Business Day for each Plan in any of the Funds. The
number of Institutional Shares to be purchased or redeemed will be determined
based upon the net asset value at the Close of Trading on the most recent
Business Day. You agree to give the Trust reasonable notice of any Business Day
on which you or, if appropriate, your duly appointed agent will not be open for
business.
In the event that the Trust receives the trading information called
for by the preceding paragraph of this Section 2 after 9:00 A.M. Eastern Time on
a Business Day, the Trust will use its best efforts to enter a Plan's orders at
the net asset value at the Close of Trading on the most recent Business Day, but
if the Trust is unable to do so, the transaction will be entered at the net
asset value determined after the Trust receives the trading information.
The Trust will send via electronic transmission or other mutually
acceptable means to you or your duly appointed agent a verification of each
Business Day's net purchase or net redemption, as the case may be, for each
affected Fund by the Close of Business on the next Business Day.
In the event there is a net purchase or a net redemption for a Plan in
any Fund on any Business Day that you or, if appropriate, your duly appointed
agent, are open for business, you or such agent will provide such information to
the Plan Representative for purposes of effecting wire payments to or receiving
wire payments from the Trust, as the case may be.
(c) You and any duly appointed agent will perform the recordkeeping
and administrative services described herein in accordance with any applicable
conditions set forth in each Fund's prospectus and will bear all expenses of
maintaining the facilities and personnel
-2-
<PAGE>
necessary to perform such services; provided, however, that the Trust will be
responsible for maintaining all applicable state and federal securities
registrations and for providing to you or your agent proxy statements,
shareholder reports, prospectuses and all other such materials as the Trust or
applicable law may require to be distributed to Plan participants.
Section 3. Subject to your compliance with the provisions of
-------
Section 2 hereof, you will be considered a limited agent for the Trust for the
purposes of receiving orders for purchases and redemptions of Institutional
Shares. The Business Day on which Instructions are received in proper form by
you or your duly appointed agent from participants or Plan Representatives by
the Close of Trading will be the date as of which Institutional Shares will be
purchased and redeemed as a result of such Instructions. Instructions received
in proper form by you or your agent from participants or Plan Representatives
after the Close of Trading on any given Business Day shall be treated as if
received on the next following Business Day. Dividends and capital gains
distributions will be issued in additional Institutional Shares of the
applicable Fund at net asset value in accordance with each Fund's then current
prospectus.
Section 4. Neither you nor any of your officers, employees or
---------
agents are authorized to make any representations concerning the Trust or the
Institutional Shares except those contained in the Trust's then current
prospectuses and statements of additional information for such Institutional
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. You agree to conduct your activities in accordance with any applicable
federal or state laws, including securities laws and any obligation thereunder
to disclose to Plan participants the receipt of fees in connection with their
beneficial ownership of Institutional Shares of the Funds.
Section 5. In consideration of the services and facilities
----------
described herein, you shall be entitled to receive such fees as are set forth in
Appendix B attached hereto. You understand that the payment of fees has been
authorized pursuant to a Shareholder Administrative Services Plan ("Services
Plan"). Such fees will be paid by the Trust only so long as the Services Plan
and this Agreement are in effect. You acknowledge that the Trust may enter into
similar agreements with others without your consent.
Section 6. You understand that the Trust's administrator will
----------
provide the Trust, and the trustees of the Trust will review, at least
quarterly, a written report of the amounts expended pursuant to this Agreement
and the purposes for which such expenditures were made. You will furnish the
Trust or its designees with such information as the Trust or its administrator
may reasonably request (including, without limitation, periodic certifications
confirming the provision to participants 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 pursuant hereto, as well as any other
reports or filings that may be required by law.
Section 7. By your written acceptance of this Agreement, you
----------
represent, warrant and agree that the compensation payable to you hereunder,
together with any other compensation you receive from participants for services
contemplated by this Agreement, will be disclosed by
-3-
<PAGE>
you to participants, will be authorized by participants and will not be
excessive or unreasonable under the laws and instruments governing your
relationship with participants.
Section 8. The Trust reserves the right, at its discretion and
----------
without notice, to suspend the sale of Institutional Shares or withdraw the sale
of Institutional Shares of any Fund.
Section 9. You agree to indemnify and hold the Trust and its
----------
adviser, custodian and transfer agent harmless from any losses, claims, damages,
liabilities or expenses to which an indemnitee may become subject insofar as
those losses, claims, damages, liabilities or expenses or actions in respect
thereof, arise out of or are based upon (i) negligence or willful misconduct in
the provision of recordkeeping and administrative services by you, your
employees or agents, (ii) any breach by you of any material provision of this
Agreement or (iii) any breach by you of any representation, warranty or covenant
made in this Agreement.
The Trust agrees to indemnify and hold you harmless from any losses,
claims, damages, liabilities or expenses to which you may become subject insofar
as those losses, claims, damages, liabilities or expenses or actions in respect
thereof, arise out of or are based upon (i) any breach by the Trust of any
material provision of this Agreement or (ii) any breach by the Trust of any
representation, warranty or covenant made in this Agreement.
This Section shall survive the termination of this Agreement. Nothing
in this Section shall require either party to indemnify the other for
consequential damages.
Section 10. This Agreement shall continue until September 28, 1996
----------
and thereafter shall continue automatically for successive annual periods,
provided such continuance is approved in connection with the approval of the
Services Plan at least annually by a vote 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 (the "Act")) of the Trust, and who have no direct
or indirect financial interest in the operation of the Services Plan and this
Agreement ("Disinterested Trustees"), by vote cast in person at a meeting called
for the purpose of voting on such approval. This Agreement is terminable with
respect to Institutional Shares of a Fund without penalty, at any time by the
Trust, by vote of (i) a majority of Disinterested Trustees, or (ii) a majority
of the outstanding Institutional Shares of such Fund (as defined in the Act), or
you, on not more than 60 days' written notice. Notwithstanding anything
contained herein, in the event that the Services Plan shall be terminated by the
Trust's Board of Trustees, or the Services Plan or any part thereof is found
invalid or is ordered terminated by any regulatory or judicial authority, or you
or your agents shall fail to perform the recordkeeping and administrative
services contemplated by this Agreement, such determination to be made in good
faith by the Trust, this Agreement shall be terminable effective upon receipt of
notice thereof by you.
Section 11. All notices, consents and other communications provided
----------
for in this Agreement to be given by one party to the other party will be deemed
validly given if in writing and delivered personally or sent by express delivery
or certified mail, return receipt requested, or confirmed facsimile transmission
to the address or telephone numbers provided herein.
Section 12. Each of us hereby represents and warrants to the other
----------
that the execution, delivery and performance of our respective obligations under
this Agreement have
-4-
<PAGE>
been duly and irrevocably authorized, and that this Agreement is valid, binding
and enforceable in accordance with its terms.
Section 13. This Agreement shall be subject to all applicable
----------
provisions of law, including, without being limited to, the applicable
provisions of the Act, the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended; and to the extent that any
provisions herein conflict with any such applicable provisions of law, the
latter shall control.
Section 14. This Agreement will be construed in accordance with the
----------
laws of the State of Delaware and is non-assignable by the parties hereto.
Section 15. The Trust Instrument establishing the Trust, dated
----------
February 7, 1994 a copy of which is on file in the office of the Secretary of
State 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.
-5-
<PAGE>
If you agree to be legally bound by the provisions of this Agreement, please
sign a copy of this Agreement where indicated below and promptly return it to W.
Bruce McConnel, III, Secretary of The Commerce Funds, 1345 Chestnut Street,
Suite 1100, Philadelphia, PA 19107.
Very truly yours,
THE COMMERCE FUNDS
Date: By:______________________________
Authorized Officer
Address:_________________________
_________________________________
Telephone:_______________________
Facsimile:_______________________
Accepted and Agreed to:
[Name of Service Organization]
Date: By:_______________________________
Authorized Officer
Address:__________________________
__________________________________
Telephone:________________________
Facsimile:________________________
-6-
<PAGE>
APPENDIX A
----------
Please check the appropriate boxes to indicate the Funds of The Commerce Funds
for which you wish to act as a Service Organization with respect to
Institutional Shares.
[ ] Short-Term Government Fund
[ ] Bond Fund
[ ] Balanced Fund
[ ] Growth Fund
[ ] MidCap Fund
[ ] International Equity Fund
[ ] National Tax-Free Intermediate Bond Fund
[ ] Missouri Tax-Free Intermediate Bond Fund
[ ] Growth and Income Fund
<PAGE>
APPENDIX B
----------
Fees Payable
Fees shall be payable to you, on a monthly basis, at the rate of 0.25% of each
Fund's average daily net assets attributable to the Institutional Shares
beneficially owned by participants of Plans for whom services under this
Agreement are being provided by you or your agent.
<PAGE>
THE COMMERCE FUNDS
SERVICING AGREEMENT
UNDER AMENDED AND RESTATED
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
(INSTITUTIONAL SHARES)
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
Institutional 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
("Institutional Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide one or more of the following support
---------
services to Clients who may from time to time beneficially own Institutional
Shares: (i) establishing and maintaining accounts and records relating to
Clients that invest in Institutional Shares; (ii) aggregating and processing
purchase, redemption and exchange requests for Institutional 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 Institutional 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 Institutional Shares; (vi) arranging for bank wires; (vii)
responding to routine inquiries from Clients concerning their investments in
Institutional Shares; (viii) responding to Client inquiries relating to the
services performed by you; (ix) providing subaccounting with respect to
Institutional 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 Institutional 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 your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned services to Clients.
<PAGE>
Section 3. Neither you nor any of your officers, employees or
----------
agents are authorized to make any representations concerning the Trust or
Institutional Shares except those contained in the Trust's then current
prospectuses for such Institutional 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 Institutional 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 Institutional Shares held of record by you from time to time
on behalf of Clients (the "Clients' Institutional 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'
Institutional 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 Institutional 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' Institutional 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 Institutional Shares, including
the sale of such Institutional Shares to you for the account of any Client or
Clients.
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.
-2-
<PAGE>
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
Institutional 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 for Institutional Shares 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.
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 Institutional 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
-3-
<PAGE>
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 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
-4-
<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 with respect to
Institutional Shares.
[ ] Short-Term Government Fund
[ ] Bond Fund
[ ] Balanced Fund
[ ] Growth Fund
[ ] MidCap Fund
[ ] International Equity Fund
[ ] National Tax-Free Intermediate Bond Fund
[ ] Missouri Tax-Free Intermediate Bond Fund
[ ] Growth and Income Fund
<PAGE>
EXHIBIT 23(H)(5)
THE COMMERCE FUNDS
AMENDED AND RESTATED SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
-------------------------------------------------------------
(Service Shares)
Section 1. Upon the recommendation of Commerce Bank, N.A. the Trust's
----------
investment advisors (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
securities dealers, financial institutions and other industry professionals that
are shareholders or dealers of record or which have a servicing relationship
("Service Organizations") with the beneficial owners of Series A-2, Series B-2,
Series C-2, Series D-2, Series E-2, Series F-2 and Series I-2 shares of
beneficial interest in the Trust's Short-Term Government, Bond, Balanced,
Growth, MidCap, International Equity and Growth and Income Funds (such shares
hereinafter called "Service Shares" and such funds hereinafter called the
"Funds"). Such Servicing Agreements shall require the Servicing Organization to
provide support services as set forth therein to their clients who beneficially
own Service Shares in one or more of the Funds 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 Service Shares of the Funds beneficially owned by such clients.
Expenses will be allocated under this Plan in the discretion of the Board of
Trustees and in accordance with the provisions of Rule 18f-3 under the
Investment Company Act of 1940, as amended.
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 Service 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 the
----------
Service Shares of 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, as amended (the "Act"), of the Trust and
have no direct or indirect financial interest in the operation of this Plan
1
<PAGE>
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 Post-Effective Amendment to the Trust's Registration
Statement on Form N-1A under the Securities Act of 1933, as amended, relating to
the Service Shares.
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 with respect to Service Shares of the Funds as of December 19,
1996, as amended April 29, 1998.
-2-
<PAGE>
THE COMMERCE FUNDS
AMENDED AND RESTATED 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 customers ("Clients") who may from time to time be the record or
beneficial owners of Service Shares of one or more of the Trust's investment
portfolios (the "Funds"), which are listed on Appendix A.
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide one or more of the following support
----------
services to Clients who may from time to time beneficially own Service Shares:
(i) establishing and maintaining accounts and records relating to Clients that
invest in Service Shares; (ii) aggregating and processing purchase, redemption
and exchange requests for Service 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 Service
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 Service
Shares; (vi) arranging for bank wires; (vii) responding to routine inquiries
from Clients concerning their investments in Service Shares; (viii) responding
to Client inquiries relating to the services performed by you; (ix) providing
subaccounting with respect to Service 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; (xi) assisting Clients in changing
dividend options, account designations and addresses; and (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 Service 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 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, a Fund or
Service Shares except those contained in the Trust's then current prospectus(es)
for such Service 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.
<PAGE>
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. You will not engage in activities
pursuant to this Agreement which constitute acting as a broker or dealer under
state law unless you have obtained the licenses required by law. 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 Service 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 Service Shares of each Fund owned of record or beneficially
by Clients from time to time for whom you are the dealer of record or holder of
record or with whom you have a servicing relationship (the "Clients' Service
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' Service 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 Service 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' Service 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 Service Shares, including the
sale of such Service Shares to you for the account of any Client or Clients.
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 15. The Trust may enter into other similar Servicing
----------
Agreements with any other person or persons without your consent.
-2-
<PAGE>
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
Service 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 for Service Shares 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 19, 1997,
and thereafter will continue automatically for successive annual periods ending
on September 19, 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 Trust.
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 below.
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, as
amended) 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 record or beneficial owners
of Service 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.
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<PAGE>
If you agree to be legally bound by the provisions of this Agreement, please
sign a copy of this letter where indicated below and promptly return it to the
Trust, c/o Goldman, Sachs & Co., 12th Floor - Legal Department, 85 Broad Street,
New York, New York 10004.
Very truly yours,
THE COMMERCE FUNDS
Date:___________________________ By: _________________________
Authorized Officer
Accepted and Agreed to:
[Name and Address of Service
Organization]
_____________________________
Date:__________________________ By:__________________________
Authorized Officer
This Agreement is effective _____________________, _________.
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<PAGE>
APPENDIX A
----------
Please check the appropriate boxes to indicate the Funds of The Commerce Funds
for which you wish to act as a Service Organization with respect to Service
Shares.
[ ] Short-Term Government Fund
[ ] Bond Fund
[ ] Balanced Fund
[ ] Growth Fund
[ ] MidCap Fund
[ ] International Equity Fund
[ ] Growth and Income Fund
<PAGE>
EXHIBIT 23(j)(1)
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 included
in Post-Effective Amendment No. 8 to the Registration Statement (1933 Act No.
33-80966; 1940 Act No. 811-8598) 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 LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
December 18, 1998
<PAGE>
EXHIBIT 23(j)(2)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of
The Commerce Funds:
We consent to the references to our firm under the headings, "Financial
Highlights" in the Prospectuses and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Kansas City, Missouri
December 15, 1998
<PAGE>
EXHIBIT 23(O)
THE COMMERCE FUNDS
(THE "TRUST")
AMENDED AND RESTATED PLAN
PURSUANT TO RULE 18F-3 FOR OPERATION OF
A MULTI-CLASS SYSTEM
----------------------------
I. INTRODUCTION
---------------
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") promulgated Rule 18f-3 under the Investment Company Act of 1940,
as amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution structure without the need to obtain an exemptive order
under Section 18 of the 1940 Act. Rule 18f-3, which became effective on April
3, 1995, requires an investment company to file with the Commission a written
plan specifying all of the differences among the classes, including the various
services offered to shareholders, the different distribution arrangements for
each class, the methods for allocating expenses relating to those differences
and any conversion features or exchange privileges. On September 19, 1996, the
Board of Trustees of the Trust authorized the Trust to implement a multi-class
distribution structure in compliance with Rule 18f-3. This Plan pursuant to
Rule 18f-3 for operation of a multi-class system shall become effective
immediately after the close of business on the business day immediately
preceding the day on which the Trust begins operation of its multi-class
distribution structure (the "Effective Date"), provided that such Plan has
previously been filed with the Commission.
II. ATTRIBUTES OF CLASSES
-------------------------
A. Generally
---------
The Trust shall offer two classes of shares - - Service Shares and
Institutional Shares - - in the Short-Term Government Fund, Bond Fund, Balanced
Fund, Growth Fund, MidCap Fund, International Equity Fund and Growth and Income
Fund (each a "Fund" and collectively, the "Funds").
In general, shares of each class shall be identical except for
different expense variables (which will result in different returns for each
class), certain related rights and certain shareholder services. More
particularly, the Service Shares and the Institutional Shares of each Fund shall
represent interests in the same portfolio of investments of the particular
<PAGE>
Fund, and shall be identical in all respects, except for: (a) the impact of (i)
expenses assessed to Service Shares pursuant to the Distribution Plan adopted
for that class, and (ii) any other incremental expenses identified from time to
time that should be properly allocated to one class so long as any subsequent
changes in expense allocations are reviewed and approved by a vote of the Board
of Trustees, including a majority of the independent Trustees; (b) the fact that
(i) the Service Shares shall vote separately on any matter submitted to holders
of Service Shares that pertains to the Distribution Plan and the Shareholder
Administrative Services Plan adopted for that class; (ii) the Institutional
Shares shall vote separately on any matter submitted to holders of Institutional
Shares that pertains to the Shareholder Administrative Services Plan adopted for
that class; and (iii) each class shall vote separately on any matter submitted
to shareholders that pertains to the class expenses borne by that class; (c) the
exchange privileges of each class of shares; (d) the designation of each class
of shares; and (e) the different shareholder services relating to a class of
shares. In addition, Service Shares of each Fund bear a sales charge, as
described below, whereas Institutional Shares of each Fund do not bear a sales
charge.
B. Distribution Arrangements, Expenses and Sales Charges
-----------------------------------------------------
1. SERVICE SHARES
Service Shares shall be offered to the general public and to certain
others and shall be subject to a front-end sales charge which shall not
initially exceed 3.50% of the offering price of Service Shares of the Funds
(2.00% of the offering price of Service Shares of the Short-Term Government
Fund). In addition, for purchases of $1,000,000 or more where no initial sales
charge has been paid, such shares will be subject to a deferred sales charge of
1.00% on the lesser of the offering price or the net asset value of the shares
on the redemption date for shares redeemed within 18 months after purchase.
Service Shares shall be further subject to (a) a distribution fee
payable pursuant to a Distribution Plan adopted for the class which shall not
initially exceed 0.25% (on an annual basis) of the average daily net asset value
of the Funds' respective outstanding Service Shares, and (b) a shareholder
servicing fee payable pursuant to a Shareholder Administrative Services Plan
adopted for the class which shall not initially exceed 0.25% of the average
daily net assets attributable to Service Shares of the respective Funds that are
owned of record or beneficially by customers of securities dealers, brokers,
financial institutions and other industry professionals ("Service
Organizations") that provide shareholder administrative support services with
respect to such customers' Service Shares.
-2-
<PAGE>
Shareholder administrative support services provided under the
Shareholder Administrative Services Plan may include, but are not limited to,
(i) establishing and maintaining accounts and records relating to customers that
invest in Service Shares; (ii) aggregating and processing purchase, redemption
and exchange requests for Service Shares from customers and placing net
purchase, redemption and exchange orders with the Trust's distributor; (iii)
providing customers with a service that invests the assets of their accounts in
Service Shares pursuant to specific or pre-authorized instructions; (iv)
processing dividend and distribution payments from the Trust on behalf of
customers; (v) providing information periodically to customers showing their
positions in Service Shares; (vi) arranging for bank wires; (vii) responding to
routine inquiries from customers concerning their investments in Service Shares;
(viii) responding to customer inquiries relating to the services performed by
you; (ix) providing subaccounting with respect to Service Shares beneficially
owned by customers 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 customers; and (xi)
assisting customers in changing dividend options, account designations and
addresses.
2. INSTITUTIONAL SHARES
Institutional Shares shall be offered to investors maintaining qualified
accounts in the trust departments of affiliated and correspondent banks of
Commerce Bancshares, Inc. ("Institutions") and to participants in employer-
sponsored defined contribution plans administered by Institutions and to
shareholders who have existing accounts in Institutional Shares of the Funds on
the Effective Date.
Institutional Shares of the Short-Term Government, Bond, Balanced,
Growth, Growth and Income, MidCap, International Equity, National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds shall not bear a
sales charge.
Institutional Shares shall be subject to a fee payable pursuant to a
Shareholder Administrative Services Plan which shall not initially exceed 0.25%
of the average daily net assets attributable to Institutional Shares of the
respective Funds that are owned of record or beneficially by Service
Organizations that provide shareholder administrative support services with
respect to such customers' Institutional Shares.
Shareholder administrative services provided under the Shareholder
Administrative Services Plan may include, but are not limited to, (i)
establishing and maintaining accounts and records relating to customers that
invest in Institutional Shares; (ii) aggregating and processing purchase,
redemption and
-3-
<PAGE>
exchange requests for Institutional Shares from customers and placing net
purchase, redemption and exchange orders with the Trust's distributor; (iii)
providing customers with a service that invests the assets of their accounts in
Institutional Shares pursuant to specific or pre-authorized instructions; (iv)
processing dividend and distribution payments from the Trust on behalf of
customers; (v) providing information periodically to customers showing their
positions in Institutional Shares; (vi) arranging for bank wires; (vii)
responding to routine inquiries from customers concerning their investments in
Institutional Shares; (viii) responding to customer inquiries relating to the
services performed by you; (ix) providing subaccounting with respect to
Institutional Shares beneficially owned by customers 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 customers; and (xi) assisting customers in changing dividend
options, account designations and addresses.
C. Exchange Privileges
-------------------
SERVICE SHARES
Holders of Service Shares generally shall be permitted to exchange
their shares for Service Shares of another Fund of the Trust. Exchanges may also
be made to or from the Institutional Liquid Assets Prime Obligation Portfolio
Service Class. No additional sales charge will be incurred when exchanging
Service Shares of a Fund for Service Shares of another Fund offered by the
Trust.
INSTITUTIONAL SHARES
Holders of Institutional Shares generally shall be permitted to
exchange their shares for Institutional Shares of another Fund or portfolio of
the Trust. Exchanges may also be made to or from the Institutional Liquid Assets
Prime Obligation Portfolio Service Class. No sales charge will be incurred when
exchanging Institutional Shares of a Fund for Institutional Shares of another
Fund or portfolio offered by the Trust.
-4-
<PAGE>
D. Shareholder Services
--------------------
1. Retirement Plans
----------------
SERVICE SHARES
The Trust shall initially make (1) individual retirement accounts
("IRAs"), including IRAs set up under a Simplified Employee Pension Plan ("SEP-
IRAs") or as Roth or SIMPLE 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 available to the holders
of Service Shares.
INSTITUTIONAL SHARES
The Trust shall initially offer the following plans which are
administered by affiliates of Commerce Bancshares, Inc. and non-affiliates of
Commerce Bancshares, Inc. which have existing accounts in the Institutional
Shares: (1) IRAs, including IRAs set up under SEP-IRAs or as Roth or SIMPLE
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.
2. Telephone Transaction Privilege
-------------------------------
SERVICE AND INSTITUTIONAL SHARES
The Trust shall initially offer a telephone transaction privilege to
holders of Service and Institutional Shares of the Funds whereby a shareholder
may make additional investments in or redeem shares from an established account
by telephone.
3. Dividend Reinvestment
---------------------
SERVICE AND INSTITUTIONAL SHARES
The Trust shall initially offer a dividend reinvestment option
whereby holders of Service or Institutional Shares may elect to have their
dividends, capital gain distributions, or both received from a non-retirement
Fund account automatically invested in additional Service or Institutional
Shares, as the case may be, of any other Fund or portfolio of the Trust in which
they currently maintain an open non-retirement account.
-5-
<PAGE>
4. Automatic Withdrawal Feature
----------------------------
SERVICE AND INSTITUTIONAL SHARES
The Trust shall initially offer an automatic withdrawal feature
whereby an investor may automatically redeem Service and/or Institutional Shares
on a monthly, quarterly, semi-annual or annual basis.
5. Automatic Investment Program
----------------------------
SERVICE AND INSTITUTIONAL SHARES
The Trust shall initially offer an automatic investment program
whereby an investor generally may purchase Service and/or Institutional Shares
of a Fund on a regular basis by having a specific amount of money debited from
his/her account at a financial institution.
E. Methodology for Allocating Expenses Between Classes
---------------------------------------------------
Expenses of the Funds are apportioned to each class of shares
depending upon the nature of the expense item.
1. General Expenses
----------------
General Expenses are expenses that are attributable to both classes
of shares and are allocated between the classes of shares based on the relative
values of their respective outstanding shares eligible for dividends at the end
of the day. General Expenses include advisory fees payable to the investment
adviser under the investment advisory agreement, basic administration fees paid
to the administrator under the administration agreement, fees payable under the
Shareholder Administrative Services Plans and other expenses such as transfer
agency, custody and professional fees.
2. Class-Specific Expenses
-----------------------
Class-Specific Expenses are expenses that are attributable to a
specific class of shares and are allocated to the class of shares to which they
relate. Such expenses include distribution expenses. Class-specific expenses
that are based on a percentage of average daily net assets are calculated by
multiplying the appropriate daily rate by the value of the outstanding shares of
the respective class. Other class-specific expenses, which may include transfer
agent fees and expenses, printing, postage, and other charges, are calculated
based upon daily accrual rates furnished by the administrator which are based
upon estimates of such expenses for the year.
-6-
